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Preslar v. Commissioner

167 F.3d 1323 (1999)

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Preslar v. Commissioner

United States Court of Appeals for the Tenth Circuit

167 F.3d 1323 (1999)

Facts

In 1983, Layne and Sue Preslar (plaintiffs) purchased a large ranch in New Mexico for $1 million, intending to develop it as a sportsman’s resort. Moncor Bank (Moncor) financed the sale, issuing a $1 million promissory note secured by a mortgage on the ranch. Moncor allowed the Preslars to repay the loan by assigning installment sales contracts for cabin lots at the ranch to Moncor, although there was no reference to that arrangement in the loan documents. Between 1983 and 1985, the Preslars sold and assigned the contracts for 19 cabin lots, and Moncor credited the Preslars’ principal balance with approximately $200,000. In August 1985, Moncor became insolvent. The Federal Deposit Insurance Corporation (FDIC), as receiver, refused to allow further repayment in the form of assignment of sales contracts. The Preslars made no further repayment and sued the FDIC for breach of contract. In December 1988, the parties settled the lawsuit, with the FDIC agreeing to accept $350,000 in full satisfaction of the debt. As a result, the Preslars’ debt was reduced by approximately $450,000. The Preslars did not report the $450,000 as discharge-of-indebtedness income on their tax return, treating it instead as a purchase-price adjustment. As a result, the commissioner of internal revenue (defendant) assessed a deficiency. The tax court held that the settlement did not create taxable income to the Preslars under the contested-liability (or disputed-debt) doctrine. The commissioner appealed.

Rule of Law

Issue

Holding and Reasoning (Briscoe, J.)

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