# Appendix — Philip Morris Inc. v. Commissioner

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1996
- **Citation:** 517 U.S. 1220

## Text

la

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

At a Stated Term of the United States Court of
Appeals for the Second Circuit, held at the United States
Courthouse, Foley Square, in the City of New York, on the
8th day of December, one thousand nine hundred and ninety-
five.

PRESENT: HON. AMALYA L. KEARSE
HON. RALPH K. WINTER
HON. JOSE A. CABRANES,
Circuit Judges.

Docket no.(s): 95-4084

PHILIP MORRIS INCORPORATED,
Petitioner-Appellant,

¥.

COMMISSIONER OF INTERNAL REVENUE,
Respondent - Appelle.

Filed December 8, 1995
George Lange III, Clerk

Appeal from the United States Tax Court.

This cause came on to be heard on the transcript of
record from the United States Tax Court and was argued by
counsel.

ON CONSIDERATION WHEREOF, it is now hereby
ORDERED, ADJUDGED and DECREED that the judgment

2a

of said Tax Court be and it hereby is affirmed in accordance
with the opinion of this Court, with costs to be taxed against
the appellant.

For the Court
GEORGE LANGE III, Clerk

By:

Arthur M. Heller
Administrative Attorney

judmnt_frm

3a

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

No. 508—August Term, 1995

(Argued: November 7, 1995
Decided: December 8, 1995)

Docket No. 95-4084

PHILIP Morris INC.,
Petitioner-Appellant,
alia
COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

Before:

KEARSE, WINTER, and CABRANES,
Circuit Judges.

Appeal from a judgment of the United States Tax
Court determining deficiencies in appellant’s income tax.
Appellant argues that it should be permitted to consider the
repayment of certain foreign loan obligations in depreciated
currency as a "discharge of indebtedness,” rendering the net
gain from the transactions eligible for tax deferral. We
disagree and affirm.

—

4a

JEROME B. LIBIN, Sutherland, Asbill &
Brennan, Washington, D.C. (William
S. Corey, David A. Golden, of
counsel), for Petitioner-Appellant.

CHARLES BRICKEN, United States Department
of Justice, Washington, D.C. (Assistant
Attorney General Loretta C. Argrett,
Gary R. Allen, Richard Farber, of
counsel), for Respondent-Appellee.

WINTER, Circuit Judge:

Philip Morris Inc. appeals from a Tax Court decision
(Theodore Tannenwald, Jr., Judge) rejecting its claim that
income realized from the repayment of a foreign currency
loan after the currency has depreciated qualifies as "income
by reason of the discharge of indebtedness." Under earlier
caselaw, the income in question would have been considered
as resulting from such a discharge within the meaning of
Section 108 of the Internal Revenue Code in effect for the
relevant tax years. We agree with the Tax Court that the
Supreme Court’s decision in United States v. Centennial
Savings Bank FSB, 499 U.S. 573 (1991), undermined that
caselaw. We therefore affirm.

BACKGROUND

The facts are essentially undisputed. During the
period 1980 through 1984, Philip Morris (taxpayer) borrowed
and repaid foreign currency in six separate transactions. In
four of these transactions, the taxpayer immediately converted
the borrowed funds into U.S. dollars. The proceeds from the

5a

remaining two loans were used to purchase certain machinery
abroad. In all of the transactions the foreign currency had
declined in value against the U.S. dollar by the time of
repayment. The taxpayer thus repaid all of the loans in
foreign currency with a lower U.S. dollar value than the U.S.
dollar value of the currency when borrowed.

The specific transactions were as follows. On
November 24, 1980, the taxpayer borrowed 100 million
Swiss francs (SF) from Union Bank of Switzerland (UBS),
repayable with interest on December 1, 1987. The funds
were converted into U.S. dollars on the date they were
borrowed at a rate of US $1 per SF 1.72038, for a total of
$58,126,693. On September 1, 1983, the taxpayer prepaid
the loan principal plus accrued interest, taking advantage of
an exchange rate of US $1 per SF 2.1875.Y The dollar
value of the principal payment was thus $45,714,286.7

On December 22, 1980, the taxpayer borrowed an
additional SF 125 million from UBS, repayable with interest
on December 31, 1985. The proceeds of this loan were also
converted to U.S. dollars on the date of borrowing, at the rate
of US $1 per SF 1.81308, for a total of $68,943,455. The
taxpayer prepaid the principal and accrued interest and paid
a prepayment penalty on May 31, 1983. On that date the

The taxpayer conceded in the Tax Court that the repayments of its
Swiss franc borrowings had been calculated erroneously using the dollar
cost of the Swiss francs used for repayment instead of their dollar value
on the date of repayment. This error was reflected in its tax returns.

~ On this appeal, we consider the facts as stipulated by the parties and
reflected in the Tax Court’s decision. We have not independently verified
the stipulated figures.

6a

exchange rate was US $1 per SF 2.1005.* The U.S. dollar
value of the principal payment was therefore $59,509,641.

The final Swiss franc borrowing occurred on
December 23, 1980. On that date, the taxpayer borrowed
SF 75 million from Swiss Bank Corporation (SBC), to be
repaid on December 23, 1985. The proceeds were converted
on the same day to U.S. dollars at a rate of US $1 per SF
1.81310, for a total of $41,365,587. On January 7, 1983, the
taxpayer prepaid the SF 75 million principal. The exchange
rate on the date of repayment was US $1 per SF 1.9340,*
giving the repayment a U.S. dollar value of approximately
$38,799,731.2

On December 1, 1981, the taxpayer financed, in
pounds sterling, 80 percent of the contract value of certain
manufacturing equipment to be purchased by the taxpayer,
with the financed amount to be repaid in 10 equal semi-
annual installments with interest. The exchange rate between
the pound sterling and the U.S. dollar on the dates the
machinery was shipped generated a dollar value for 20
percent of the financed amount (representing two semi-annual
installments) of $256,592. The taxpayer made two semi-
annual installment payments in 1983 and two in 1984, with

iv

See supra note 1.

* See supra note 1.

5

= The Tax Court appears to have figured the repayment value using an
exchange rate of U.S. $1 per SF 2.0150. That was the governing rate on
December 22, 1982, when the taxpayer acquired the Swiss francs used for
repayment. The taxpayer concedes that the dollar value at repayment is
the appropriate measure. See supra note 1.

Ta

total U.S. dollar values of $215,633 and $188,410,
respectively.

On September 2, 1982, the taxpayer entered into a
similar transaction, again financing, in pounds sterling, 80
percent of the contract value of manufacturing equipment to
be purchased by taxpayer, with the financed amount to be
repaid in 10 equal semi-annual installments plus interest. On
the date of shipment, 10 percent of the financed amount was
equivalent to US $1,063,367. In 1983, the taxpayer made
one semi-annual installment payment in pounds sterling
having a U.S. dollar value of $981,144, based on the
exchange rate on the date of payment. In 1984, the taxpayer
made two semi-annual installment payments in pounds
sterling having a total U.S. dollar value of $1,759,735, also
based on the exchange rate on the dates of payment.

Finally, on February 10, 1982, a wholly owned
subsidiary of the taxpayer sold to a German bank, for
ultimate sale to the public, 150 million German deutsche
marks (DM) of 9 1/2 percent seven-year bearer bonds, which
were guaranteed by the taxpayer. The net proceeds of the
bearer bond issue amounted to DM 147,888,333 after
underwriting fees and other expenses. Those funds were
transferred from the subsidiary to the taxpayer on a discount
basis on February 16, 1982, and the taxpayer converted the
marks into $62,581,611 on the same day at an exchange rate
of US $1 per DM 2.36313. From March 12, 1984 through
May 3, 1984, the subsidiary repurchased in the market bearer
bonds with a total par value of DM 10 million, for a
purchase price of DM 10,924,825 pius accrued interest. At
the exchange rates prevailing on the dates of prepayments,
the value of DM 10 million was $3,762,505.

8a

The taxpayer treated the foreign exchange gain from
each of these six transactions as income from "the discharge
. of indebtedness" on its federal income tax returns. It
elected to exclude those amounts from its gross income under
I.R.C. § 108 and to reduce the basis of its depreciable assets
under I.R.C. § 1017. The Commissioner disallowed the
elections and determined deficiencies in taxpayer’s income
tax for both years. After an unsuccessful petition in the Tax
Court for a redetermination of the deficiencies, the taxpayer
took the instant appeal.

DISCUSSION

In the hands of a U.S. taxpayer, foreign currency is
considered property. See Federal Nat'l Mortgage Ass’n v.
Commissioner, 100 T.C. 541, 582 (1993). When engaging in
a transaction in a foreign currency, therefore, a taxpayer
ordinarily must translate the foreign currency into U:S.
dollars for the purposes of calculating the U.S. tax
consequences of the transaction. See, e.g., Bernuth Lembcke
Co. v. Commissioner, 1 B.T.A. 1051, 1054 (1925); Rev. Rul.
78-281, 1978-2 C.B. 204. One consequence of this rule is
that a taxpayer may satisfy a foreign currency loan with the
exact sum of foreign currency stipulated and yet realize a
gain or loss when the foreign currency is translated into U.S.
dollars. The question presented on this appeal is whether a
gain from such borrowing and repayment in depreciated
foreign currency is entitled to deferral under the pre-1986
Internal Revenue Code.*

* The Tax Reform Act of 1986 provides that, for tax years beginning
after December 31, 1986, foreign currency borrowings such as those
involved in this case are governed by I.R.C. § 988, which treats foreign

(continued...)

9a

During the tax years at issue, I.R.C. § 108 provided
in pertinent part that

[g]ross income does not include any amount
which (but for this subsection) would be
includible in gross income by reason of the
discharge (in whole or in part) of indebtedness
of the taxpayer if...

(C) the indebtedness discharged is qualified
business indebtedness.

The statutory definition of "qualified business indebtedness"
includes "indebtedness . . . incurred or assumed .. . by a
corporation," I.R.C. § 108(d)(4)(A), and we assume for the
purposes of this appeal that the six loans at issue would so
qualify. The core of this dispute is whether the taxpayer’s
repayments of foreign currency loans are "discharges" within
the meaning of the statute, and, if they are, whether the
foreign exchange gain produced is by reason of "the
discharge of indebtedness."

Under the only court of appeals decision directly on
point, the foreign exchange transactions in this case would
each have been considered a discharge of indebtedness, and
the income produced would have been "by reason of" that
discharge. See Kentucky & Indiana Terminal R.R. v. United
States, 330 F.2d 520, 523 (6th Cir. 1964). In that case, the
taxpayer sold bonds denominated in pounds sterling and, after

©“ (...continued)

currency gain as ordinary income, I.R.C. § 988(a). See also Pub. L. No.
99-514, § 822(a), 100 Stat. 2373 (1986 amendment limiting Section 198
to situations in which the taxpayer is insolvent or in bankruptcy at the
time of the discharge of indebtedness).

10a

the pound had been devalued, repurchased those bonds in a
combination of dollars and pounds for less than face value.
The differential between the face value of the bonds and the
purchase price thus consisted of two elements: first, the
portion attributable to the repurchase of bonds at less than
face value and, second, the portion attributable to the decline
in the value of the pound sterling. The government urged the
Sixth Circuit to construe only the first of these elements as
income from the discharge of indebtedness under I.R.C.
§ 22(b)(9), Section 108’s predecessor. The court refused,
holding that the taxpayer would not have realized any of the
second type of gain "except for the discharge of the
indebtedness incurred." 330 F.2d at 523.

The Sixth Circuit noted that Section 22(b)(9) was a
congressional reaction to the Supreme Court’s decision in
United States v. Kirby Lumber Co., 284 U.S. 1 (1931), which
held that a taxpayer realized taxable income when it
purchased some of its outstanding bonds at a discount from
the issuing price. The court pointed out that Section 22(b)(9)
responded to the possibility that, under Kirby Lumber, a
corporation might realize a taxable gain without receiving
cash in hand to pay the resultant tax. Kentucky & Indiana,
330 F.2d at 524. The court thus held that

[tlo require the taxpayer in the instant case
to include any part of the gain realized from
the purchase of its outstanding bonds here
involved as taxable income for the year when
such bonds were acquired, would defeat the
underlying purpose of Section 22(b)(9).
Neither the language of this statute nor its
egislative history indicate a Congressional

lla

intent to exclude from the benefits of the
Statute any of the income attributable to the
discharge of taxpayer’s indebtedness, for any
reason whatsoever.

Id. The Commissioner does not dispute the taxpayer’s
assertion that, until Centennial Savings Bank, Kentucky &
Indiana was generally accepted as governing law.”

However, we agree with the Commissioner and the
Tax Court that the Supreme Court’s decision in Centennial
Savings Bank, while not expressly addressing foreign
exchange transactions or the continued viability of Kentucky
& Indiana, effectively undermined the latter decision. The
issue in Centennial Savings Bank was whether a bank could
treat funds received as penalties for customers’ early
withdrawal of certificates of deposit as "income by reason of
the discharge . . . of indebtedness" eligible for exclusion from
gross income and reduction in basis. 499 U.S. at 575. The
Supreme Court responded in the negative on the ground that
the depositors who withdrew their deposits and paid the
penalties did not discharge Centennial from any obligation of

7/

Other decisions have relied upon Kentucky & Indiana in holding that
foreign exchange gains or losses associated with repaying an obligation
in foreign currency are not long-term capital gains or losses, but rather
are ordinary income or losses. See National-Standard Co. v. Commis-
sioner, 749 F.2d 369, 372 (6th Cir. 1984) (loss realized in paying an
obligation in foreign currency as a result of a change in exchange rates
is attributable to paying the debt); Gillin v. United States, 423 F.2d 309,
314 (Ct. Cl. 1970) ("The [currency] conversions were not independent of,
or separate from, the debt but were integral to the arrangement and
formed a necessary part of it .... [T]here was an assumption and
repayment of a debt for less than face value, resulting in ordinary gain

l2a

the debt. /d. at 579. The Court explained that "[a]s used in
§ 108, the term ‘discharge . . . of indebtedness’ conveys
forgiveness of, or release from, an obligation to repay.”
Id. at 580 (footnote omitted) (emphasis in original). To
determine whether a release of an obligation has occurred,
Centennial Savings Bank suggested scrutiny of both the end
result of the transaction and the repayment terms agreed to at
the outset of the lender-borrower relationship. /d at 581.
Because, in Centennial’s case, the prepayment penalty income
was an original term of the certificate of deposit and not the
result of the release of any legal obligation, the Supreme
Court held that the prepayment penalty did not constitute
income by reason of a discharge. Jd.

In the instant case, the Tax Court held that the
rationale of Centennial Savings Bank applied and that the
taxpayer's gains from the foreign currency transactions were
not the result of a discharge of indebtedness within the
meaning of Section 108. Philip Morris Inc. v. Commissioner,
104 T.C. 61, 73 (1995). In the Tax Court’s view, although
a satisfaction of indebtedness in depreciated currency may be
the occasion for the realization of income, the income is not
realized "by reason of the discharge . . . of indebtedness”
under Section 108 unless there is a forgiveness or release of
an obligation imposed in connection with the underlying debt.
Id.

The taxpayer argues that the Supreme Court did not
have foreign exchange transactions in mind when it decided
Centennial Savings Bank. This may be true. Indeed, the
Court’s opinion appears predicated, in part, on a desire to
avoid a tax windfall to those who are relieved of a debt in
circumstances that generate current income. Here, in

l3a

contrast, the taxpayer has taken advantage of favorable
market conditions to eliminate preexisting debt by a payment
that fulfills the terms of the original debt but is functionally
less than that debt. Unlike Centennial Savings Bank, the
facts of this case are similar to those presented in Kirby
Lumber. It therefore appears to be just the type of situation
that Congress sought to ameliorate by "“establish[ing] the
tax-deferral mechanism in § 108 so that the prospect of
immediate tax liability would not discourage businesses from
taking advantage of opportunities to repurchase or liquidate
their debts at less than face value.” Centennial Savings Bank,
499 U.S. at 582-83 (citations omitted). The legislative
history of Sections 22(b)(9) and 113(b)(3), the progenitors of
Sections 108 and 1017, provides some support for this
argument. See S. Rep. No. 1631, 77th Cong., 2d Sess. 77
(1942). Nevertheless, we are not at liberty to entertain the
taxpayer’s position in light of the Supreme Court’s clear
holding in Centennial Savings Bank that Section 108(a)
requires a forgiveness or release of an obligation of the
underlying debt to constitute the requisite discharge of
indebtedness. 499 U.S. at 583.

One final matter remains. The taxpayer argues that if,
as we have determined, the rationale of Centennial Savings
Bank governs the disposition of this case, four of the
transactions—the three Swiss franc loans and the German
mark loan—fall within the requirements of Centennial
Savings Bank because the taxpayer took affirmative action to
prepay those borrowings. We d’sagree. In each case, the
prepayment represented the fulfillment of the original
obligation to repay the amount borrowed. While the
repayment may have been accelerated and may have entailed
negotiation over the prepayment fee and other ancillary

l4a

matters, the foreign exchange gains here resulted not from the
forgiveness of an obligation to pay but from the performance
of that obligation. They thus fall outside the scope of
Section 108 as interpreted by Centennial Savings Bank.

We therefore affirm

17
e

lSa
UNITED STATES TAX COURT

Received May 22, 1995

PHILIP MORRIS INCORPORATED,
Petitioner,
Docket No. 28279-92

V.

COMMISSIONER OF
INTERNAL REVENUE,

Respondent.

i

NOTICE OF APPEAL

Notice is hereby given that petitioner, Philip Morris
Incorporated, hereby appeals to the United States Court of
Appeals for the Second Circuit from that part of the decision
of this Court entered in the above-captioned proceeding on
April 7, 1995, relating to the proper treatment of certain
gains resulting from foreign currency borrowings.

May 22, 1995

Jerome B. Libin
Tax Court No. LJ0518

SUTHERLAND, ASBILL & BRENNAN
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404

(202) 383-0100

Counsel for Petitioner

l6a

UNITED STATES TAX COURT

PHILIP MORRIS INCORPORATED, )
)
Petitioner. )
)
v. \Docket No. 28279-92

COMMISSIONER OF
INTERNAL REVENUE
)
)

Respondent.

DECISION

Pursuant to the opinion of the Court filed January 23,
1995, and incorporating herein the facts recited in
respondent’s computation as the findings of the Court, it is

ORDERED AND DECIDED: That there are deficien-
cies in income tax due from the petitioner for the taxable
years 1982, 1983 and 1984 in the amounts of $365,554,
$8,445,426 and $1,900,758 respectively.

(Signed) THEODORE TANNENWALD JR.

Judge.

Entered: April 7, 1995

17a

Docket No. 28279-92

The parties stipulate that the foregoing decision is in

accordance with the opinion of the

Court and the

respondent’s computation, and that the Court may enter this
decision without prejudice to the night of either party to
contest the correctness of the decision entered herein.

JEROME B. LIBIN

Counsel for Petitioner

Tax Court No. LJ0518
Sutherland, Asbill & Brennan
1275 Pennsylvania Ave., N.W.
Washington, D.C. 20004-2404
(202) 383-0100

Date: April 4. 1995

STUART L. BROWN
Chief Counsel
Internal Revenue Service

LEWIS R. MANDEL
Special Trial Attorney
Tax Court No. ML0032
1600 Stewart Avenue
Suite 601

Westbury, New York 11590
(516) 832-2400

Date: April 5, 1995

18a

PHILIP MORRIS INCORPORATED, PETITIONER
V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 28279-92. Filed January 23, 1995.

P borrowed in foreign currencies which it converted
into U.S. dollars and later repaid the borrowings in the same
foreign currency which it had purchased with U.S. dollars.
P reported its gain, represented by the difference in U.S.
dollars between the value of the foreign currencies at the time
of the borrowings and the U.S. dollar cost of the currencies
used for repayment, as income from the discharge of
indebtedness and elected to exclude such income from gross
income under sec. 108, I.R.C., and reduce the basis in its
assets under sec. 1017, I.R.C. Held: P’s gain does not
constitute income by reason of the discharge of indebtedness
eligible for exclusion from gross income under sec. 108,
I.R.C. Kentucky & Ind. Terminal R.R. v. United States, 330
F.2d 520 (6th Cir. 1964), has been sapped of its vitality by
United States v. Centennial Sav. Bank FSB, 499 U.S. 573
(1991).

19a

Jerome B. Libin, William S. Corey, and David A.
Golden, for petitioner.
Lewis R. Mandel, for respondent.

OPINION

TANNENWALD, Judge: Respondent determined
deficiencies in petitioner’s Federal income taxes for the 1982,
1983, and 1984 taxable years in the amounts of $4,594,256,
$11,217,945, and $6,111,795, respectively. The parties have
settled all but one issue involving the proper treatment of
gains resulting from the use of foreign currency, the value of
which changed in relation to the U.S. dollar between the
dates of borrowings and repayments in the same currency.

All the facts have been stipulated and are so found.
The stipulation of facts and the exhibits attached thereto are
incorporated herein by this reference.

Petitioner is a corporation organized and existing
under the laws of the Commonwealth of Virginia with its
principal office in New York, New York. During the taxable
years in issue, petitioner was the common parent of a group
of affiliated corporations. At all relevant times, petitioner
used the accrual method of accounting and filed consolidated
Federal income tax returns for the taxable years before us
with the Internal Revenue Service, Holtsville, New York.

Petitioner engaged in the following six transactions:

(1) On November 24, 1980, petitioner borrowed 100
million Swiss francs (SF) from Union Bank of Switzerland
(UBS). The loan bore interest at 6/2 percent per annum and
was repayable on December 1, 1987. The proceeds were
converted into U.S. dollars on the date of borrowing, at
the rate of US$1 equals SF1.72038, for a total of

20a

$58,126,692.94. On September 1, 1983, petitioner prepaid
the principal plus accrued interest, without incurring a
prepayment penalty. On that date, the spot rate was US$1
equals SF2.1875 so that the U.S. dollar value of the principal
payment was $45,714,286. The source of the SF100 million
prepayment was: (a) SF85,229,861 acquired by petitioner on
May 31, 1983, and placed on deposit with UBS until the date
of prepayment, which amount was part of the proceeds of six
forward contracts purchased by petitioner on May 10, 1983,
at a weighted average rate of exchange of US$1 equals
SF2.03045218; (b) accrued interest income of SF981,250 on
said deposit, converted at an exchange rate of US$1 equals
SF2.1433; and (c) SF13,788,889 acquired by petitioner on
September 1, 1983, which amount was part of the proceeds
of a forward contract purchased by petitioner on August 18,
1983, at an exchange rate of US$1 equals SF2.1433.

(2) On December 22, 1980, petitioner borrowed
SF125 million from UBS. The loan bore interest at 7 percent
per annum and was repayable on December 31, 1985. The
proceeds were converted on the date of borrowing at the rate
of US$1 equals SF1.81308, for a total of $68,943,455.34.
On May 31, 1983, petitioner prepaid to UBS the principal
and accrued interest plus a prepayment penalty. On that date
the spot rate was US$1 equals SF2.1005, so that the U.S.
dollar value of the principal payment was $59,509,641. The
SF125 million was acquired on May 31, 1983, as part of the
proceeds of the SF280.6 million in aggregate forward
contracts purchased by petitioner on May 10, 1983, at a
weighted average exchange rate of US$1 equals
SF2.03045218.

2la

(3) On December 23, 1980, petitioner borrowed SF75
million from Swiss Bank Corp. (SBC). The loan bore
interest at 7 percent per annum and was repayable on
December 23, 1985. The proceeds were converted on the
date of borrowing at the rate of US$1 equals SF1.81310, for
a total of $41,365,586.86. On January 7, 1983, petitioner
prepaid the SF75 muilion principal. On that date, the spot
rate was US$1 equals SF1.9340. The source of the SF75
million was a SF100 million private placement issue by
petitioner on December 22, 1982, when the spot rate was
US$1 equals SF2.0150, so that the U.S. dollar value of the
repayment was $37,220,844.

(4) On January 13, 1982, petitioner financed, in
pounds sterling, 80 percent of the contract value of certain
rotary tobacco-cutting machines purchased by petitioner, with
the financed amount (including a 2.6-percent finance charge
equivalent) to be repaid in 10 equal semiannual installments
with interest at 8.5 percent per annum on the unpaid balance.
The pound sterling/dollar exchange rate of the 80 percent of
the contract value plus the finance charge equivalent was
US$1,282,959 and of two semiannual installments was
US$256,592. In 1983, two semiannual installments were
paid in pounds sterling having U.S. dollar value of $215,633
based on the exchange rate on the dates of payment. In
1984, two semiannual installments were paid in pounds
sterling, the U.S. dollar value of such repayment being
US$188,410.

(5) On September 28, 1982, petitioner financed, in
pounds sterling, 80 percent of the contract value of certain
cigarette manufacturing machinery to be purchased by
petitioner, with the financed amount (including a 2.6-percent

22a

~~

finance charge equivalent) to be repaid in 10 equal
semiannual installments and interest at 11 percent per annum
on the unpaid balance. The contemporaneous pound
sterling/dollar exchange rate of the 80 percent of the contract
value plus the finance charge equivalent was US$10,633,669,
and one semiannual installment was equivalent to
US1,063,367, and of two semiannual installments was
equivalent to US$2,126,734. In 1983, petitioner made one
semiannual installment payment in pounds sterling having a
U.S. dollar value of $981,144, based on the exchange rate on
the date of payment. In 1984, petitioner made two
semiannual installment payments in pounds sterling having a
total U.S. dollar value of $1,759,735 based on the exchange
rate on the dates of payment.

(6) On February 10, 1982, a wholly owned subsidiary
of petitioner sold to a German bank, for ultimate sale to the
public, 150 million German marks (DM) of 9'4-percent,
7-year bearer bonds, which were guaranteed by petitioner.
The net proceeds of the bearer bond issue amounted to
DM147,888,333.33 after underwriting and other expenses.
The net proceeds were transferred from the subsidiary
to petitioner on a discount basis at a 10'4-percent
interest rate on February 16, 1982. Petitioner received
DM147,888,333.33 and was obligated to repay DM150
million. The net proceeds of DM147,888,333.33 were
converted by petitioner into US$62,581,611.08 on
February 16, 1982, at an exchange rate of US$1 equals
DM2.36313. From March 12 through May 3, 1984, the
subsidiary purchased in the market bearer bonds with an
aggregate par value of DM10 million, at an aggregate
purchase price of DM10,924,824.92 plus accrued interest. A
portion of the funds for the repurchase of bonds was supplied

23a

by petitioner through a series of prepayments by it
aggregating DM10 million of its intercompany indebtedness
to the subsidiary, plus accrued interest. At the exchange rates
on the dates of prepayments, the cost of DM10 million was
US$3,769,505.

In each transaction, the value of the foreign currency
had decreased in value relative to the U.S. dollar between the
date the borrowings were incurred and the date of repayment,
so that fewer dollars were necessary to acquire the foreign
currency for repayment than the U.S. dollar value of the
borrowings at the time they were created.

In its consolidated returns for 1983 and 1984,
petitioner treated its gain from the aforesaid use of foreign
currency (hereinafter referred to as exchange gain),
representing the difference between the U.S. dollar value of

the foreign currency on the date of borrowing and the dollar
cost of the currency used for repayment, as income from the
discharge of indebtedness under section 108” and reduced its
basis under section 1017 by the same amount.

In the notice of deficiency, respondent disallowed
petitioner’s elections under section 108 and treated the
amounts of gain reported by petitioner as section 61 ordinary
income and not income from discharge of indebtedness
eligible for such election.

Section 108 provides in pertinent part:

’ Unless otherwise indicated, all statutory references are to the Internal
Revenue Code in effect for the years at issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure.

24a

SEC. 108(a). EXCLUSION FROM GROsS INCOME.—

(1) IN GENERAL.—Gross income does not
include any amount which (but for this
subsection) would be includible in gross
income by reason of the discharge (in whole
or in part) of indebtedness of the taxpayer if—

* * * *€* * * *

(C) the indebtedness discharged is qualified
business indebtedness.

"{I]ndebtedness of the taxpayer" means any
indebtedness for which the taxpayer is liable or subject to
which the taxpayer holds property. Sec. 108(d)(1).
Indebtedness is treated as "qualified business indebtedness"
where it is incurred or assumed by a corporation which elects
to treat it as such indebtedness. Sec. 108(d)(4).4 The
amount excluded as qualified business indebtedness "shall be
applied to reduce the basis of the depreciable property of the
taxpayer", as provided by section 1017. Sec. 108(c)(1).
Thus, section 108 does not exempt income from taxation, but
defers the payment of tax.

Petitioner initially argues that: (1) For purposes of
determining their U.S. tax consequences, the borrowings must
be accounted for as if they were U.S. dollar borrowings; (2)
it satisfied its indebtedness for fewer dollars than it originally
borrowed; and (3) in this context, the classic test of income
from the discharge of indebtedness has been satisfied, and
consequently such income is eligible for exclusion from gross

» Respondent does not dispute that petitioner made a timely and proper
form of election.

25a

income under section 108 and reduction of basis under
section 1017. Petitioner further asserts that its exchange gain
should be recomputed so as to represent the difference
between the U.S. dollar value of the foreign currency on the
date of the borrowings and the U.S. dollar value of that
currency on the date or repayment. Petitioner also suggests,
without explanation or argument, that it is entitled to
recognize gain or loss on the difference between the U.S.
dollar value of the foreign currency used to repay the
borrowings at the date that currency was acquired and such
value at the time of repayment.

Respondent argues that, because the foreign currency
obligations were paid in full in the same currency, there was
no "discharge of indebtedness" within the meaning of section
108 and therefore petitioner is not entitled to exclude the
exchange gain from income under that section. Respondent
further contends that, in any event, the exchange gain was not
income from discharge of indebtedness within the meaning of
section 61(a)(12), and that we should overrule our decision
in National-Standard Co. v. Commissioner, 80 T.C. 551
(1983), affd. 749 F.2d 369 (6th Cir. 1984), and hold that the
exchange gain constituted short-term capital gain measured
by the difference between the U.S. dollar value of the foreign
currency on the date the indebtedness was incurred and the
U.S. dollar value of the foreign currency used in repayment
on the date it was acquired (not the date of repayment) and
based upon a holding period measured from the date the
foreign currency used for repayment was acquired and the
date of repayment. Respondent does not address the question
of how we should treat the difference between the U.S. dollar
value on the date of acquisition of the foreign currency and
such value of the date of repayment.

26a

Initially, we note that neither party disputes the
proposition that exchange gain arises as a result of a
transaction separate from the underlying transaction in respect
of which the foreign currency or its proceeds in U.S. dollars
were used, e.g., to acquire property. See, e.g., Church's
English Shoes, Ltd. v. Commissioner, 229 F.2d 957 (2d Cir.
1956), affg. per curiam 24 T.C. 56 (1955); FNMA vy.
Commissioner, 100 T.C. 541, 583 (1993); Levin vy.
Commissioner, 87 T.C. 698, 729 n.19 (1986), affd. 832 F.2d
403 (7th Cir. 1987); National Standard Co. v. Commissioner,
80 T.C. at 555; Willard Helburn, Inc. v. Commissioner, 20
T.C. 740 (1953), affd. 214 F.2d 815 (1st Cir. 1954); H. Conf.
Rept. 99-841 (Vol. II), 1986-3 C.B. (Vol. 4) 1, 662.% Nor
do the parties disagree that foreign currency in the hands of
a U.S. taxpayer is considered property. FNMA v. Commis-
sioner, 100 T.C. at 582.

We deal first with petitioner’s assertion that we should
treat the transactions involved herein as borrowings and
repayments in U.S. dollars. Admittedly, there is language in
the decided cases which lends support to this position. Thus,
in America-Southeast Asia Co. v. Commissioner, 26 T.C. 198
(1956), the taxpayer borrowed pounds sterling to purchase

* Under Bowers v. Kerbaugh Empire Co., 271 U.S. 170 (1926), it was
once uncertain whether borrowing, such as is involved herein, produced
taxable gain, see, e.g., B.F. Goodrich Co. v. Commissioner, 1 T.C. 1098
(1943); Coverdale v. Commissioner, a Memorandum Opinion of this
Court dated June 28, 1945, but that line of cases now holds little validity,
Vukasovich, Inc. v. Commissioner, 790 F.2d 1409 (9th Cir. 1986), affg.
in part and revg. in part T.C. Memo. 1984-611; National-Standard Co. v.
Commissioner, 80 T.C. 551, 568-569 (Tannenwald, J. dissenting) (1983),
affd, 749 F.2d 369 (6th Cir. 1984); Willard Helburn, Inc. v.
Commissioner, 20 T.C. 740 (1963), affd. 214 F.2d 815 (1st Cir. 1954);
Ravenscroft, Taxation and Foreign Currency 214 (1973).

27a

burlap, of which it was a dealer, and realized exchange gain
on the repayment of its obligation with the same amount of
pounds sterling. In the course of deciding that the gain
should be treated as ordinary income from the taxpayer’s
business of dealing in burlap and not as capital gain arising
from speculation in foreign exchange separate from that
business, we stated at 200:

The end result of petitioner’s purchase of
burlap with borrowed pounds sterling was
that it was able to purchase burlap worth
$96,013.33 and subsequently settle the debt
which it owed for $66,603.32. We are
satisfied that the resulting gain, while
measured by the difference in the value of
pounds sterling at the time they were
borrowed and the value when they were
repaid, is a gain arising directly out of
petitioner's trade or business from the
settlement of a debt incurred therein for less
than its face amount. * * * [Emphasis added. }

We think our translation of the transaction into dollars was
for the limited purpose of deciding the issue of capital gain
versus ordinary income from a trade or business. In this
connection, we note that there is no reference in our opinion
to the question whether the ordinary income constituted
income from the discharge of indebtedness that could be
excluded from gross income under the then-applicable
sections 22(b)(9) and 113(b)(3) of the Internal Revenue Code
of 1939 (the predecessors of sections 108 and 1017, involved
herein). Similar reasoning disposes of Rev. Rul. 74-122,
1974-1 C.B. 21, and Rev. Rul. 78-281, 1978-2 C.B. 204,

28a

cited by petitioner, which dealt with the measurement of
foreign currency income received for the performance of
services and the purchase price of property acquired with
foreign currency.

In Gillin v. United States, 191 Ct. Cl. 172, 423 F.2d
309 (1970), the taxpayer borrowed Canadian dollars which he
immediately converted into U.S. dollars for the payment of
personal expenses and investments. He repaid these
borrowings in the same amount of Canadian dollars which he
had purchased with U.S. dollars at the time or repayment. In
the interval between the borrowing and the repayment, the
Canadian dollar had depreciated in value vis-a-vis the U.S.
dollar. The Court of Claims held that the gain should be
treated as income from the discharge of indebtedness under
section 61(a)(12) and not as capital gain. In so holding, the
Court of Claims stated at 423 F.2d 313: "In effect, the
taxpayer borrowed United states funds, and the source of his
gain was a decline in the value of the debt in terms of
American dollars, enabling him to retire it for less United
States currency than he received in incurring it." Here again,
the issue involved the characterization of the exchange gain
between two types of income for purposes of inclusion in
gross income; the issue of excludability under section 108
was not involved, presumably because the borrowings did not
meet the requirement of qualified business indebtedness.
Moreover, we note that the Court of Claims did not say there
was borrowing and repayment in U.S. dollars but merely
stated that this is in effect what happened. Our view that this
difference in expression should be accorded significant
impact is reinforced by the fact that the court’s immediately
preceding sentence referred to the proximity of the
conversions to the loan and repayment as making "clear that

29a

plaintiff's intent in borrowing the Canadian dollars was to
acquire United States money at once and that currency, in
turn, was to be used later to buy back Canadian Funds to
repay the debt, if possible at an exchange profit." /d. Thus,
we are Satisfied that the language of the Court of Claims does
not inhibit our analysis of the issue of the exclusion from
gross income under section 108.

Finally, we address National-Standard Co. v.
Commissioner, 80 T.C. 551 (1983). In that case, the taxpayer
borrowed Luxembourg francs to acquire a 50-percent stock
interest in a Luxembourg corporation. Later, the taxpayer
refinanced the loan with Belgian francs, which had the same
dollar value as Luxembourg francs. After selling the stock
in the Luxembourg corporation, the taxpayer purchased
sufficient Belgian francs, with U.S. dollars, to repay the debt.

At each step, the value of the U.S. dollar had decreased
compared to both the Luxembourg and Belgian francs. In
holding there was no sale or exchange of foreign currency,
we stated:

Likewise, when petitioner purchased francs to
repay the Societe Generale loan, the purchased
francs were transferred the same day to
Societe Generale in satisfaction of the debt.
Consequently, under the rationale of Kenan v.
Commissioner [, 114 F.2d 217 (2d Cir. 1940),]
no loss was realized.*

And yet, petitioner certainly realized an
economic loss upon the repayment of each of
the loans herein as a result of the currency
fluctuations, which loss is recognized for tax
purposes. This [exchange] loss * * * was due

30a

to the fact that the amount of the debt itself
had increased, in terms of U.S. dollars.

In short, the losses incurred herein
were the result of the repayment of an
indebtedness with more U.S. dollars than were
originally borrowed. * * *

12

* * * However, the amount petitioner
"realized" was not the U.S. dollar value of
francs when borrowed. Rather, it was the
extinguishment of a debt at a time that debt
had a U.S. dollar value equal to the cost of
the francs used to pay off such debt.

13

= This is not to say that the amount repaid
was in fact more than the face amount of the
debt. To the contrary, exactly what was owed,
was paid, to wit, BF250 million. Rather the
U.S. dollar cost of repaying that loan had
increased.

[ National-Standard Co. v. Commissioner,
80 T.C. at 563-564; emphasis added. ]

We think petitioner’s reliance on the first italicized
language is misplaced particularly since, although it quotes
the second italicized language constituting footnote 13, it fails
to discuss the impact of footnote 13. Clearly, we were
attempting to reconcile the fact that there was no loss realized
upon the actual satisfaction of the debt with the fact that
there was an economic loss from the combined transactions.
Discussion of paying the debt with more U.S. dollars was
used merely to explain there was an economic loss, despite

3la

paying back the face value of the debt. Footnote 13
specifically explains that, despite exchange loss, the face
amount of the debt was paid, thus indicating that our
discussion of U.S. dollars should not be interpreted as
applying in a different context such as is involved herein.

In view of the foregoing, we are not disposed to deem
the borrowings and repayments herein as representing only
U.S. dollar transactions and ignore the fact that they were
undertaken and implemented in accordance with their terms;
i.e., in foreign currencies. See Miller, "Foreign Currency
Transactions: A Review of Some Recent Developments", 33
Tax Law. 825, 838 (1980). But see Newman, "Tax
Consequences of Foreign Currency Transactions: A Look at
Current Law and an Analysis of the Treasury Department
Discussion Draft", 36 Tax Law. 223, 232 (1983).

In the final analysis, our disposition of the issue
before us turns upon whether we should apply Kentucky &
Ind. Terminal R.R. v. United States, 330 F.2d 520 (6th Cir.
1964) (Kentucky & Indiana), as petitioner contends, or
United States v. Centennial Sav. Bank FSB, 499 U.S. 573
(1991) (Centennial Savings), as respondent contends.

In Kentucky & Indiana, the taxpayer, in 1911, issued
bonds in pounds sterling. In 1951, it purchased 438 of these
bonds in the open market, paying for most of them in U.S.
dollars and the remainder in pounds sterling. The excess of
the face value of the bonds over the purchase price consisted
of two elements: (1) The discount between the face value of
the bonds in U.S. dollars and the acquisition price, and (2)
the difference between the 1911 and 1951 values of the
pounds sterling. The taxpayer elected to exclude such excess
from gross income and reduce its basis in its assets under

32a

sections 22(b)(9) and 113(b)(3) of the Internal Revenue Code
of 1939 (the predecessors of sections 108 and 1017).
Respondent allowed the election to the extent of the first
element of the excess but disallowed the amount represented
by the second element. The Court of Appeals for the Sixth
Circuit held for the taxpayer on the ground that the exchange
gain represented by the second element would not have been
realized "except for the discharge of the indebtedness
incurred". 330 F.2d at 523. It reasoned that the taxpayer
"would derive no funds with which to pay the tax" on such
gain and went on to state:

To require the taxpayer in the instant
case to include any part of the gain realized
from the purchase of its outstanding bonds
here involved as taxable income for the year
when such bonds were acquired, would defeat
the underlying purpose of Section 22(b)(9).
Neither the language of this statute nor its
legislative history indicate a Congressional
intent to exclude from the benefits of the
statute any of the income attributable to the
discharge of taxpayer’s indebtedness, for any
reason whatsoever. [330 F.2d at 524.]

In United States v. Centennial Sav. Bank FSB, supra,
the issue was whether a penalty for early withdrawal of time
deposits, in accordance with restrictions in the agreements
governing the deposits, constituted income from the discharge
of indebtedness eligible for exclusion and reduction in basis
under sections 108 and 1017. The Supreme Court held that
it was not so eligible on the ground that the withdrawal,
consisting of the face amount of the deposit less the penalty

33a

for early withdrawal, was in accordance with the terms of the
deposit, i.e., at the agreed face value under such
circumstances. Petitioner argues that Centennial Savings did
not involve foreign currency transactions, that the Supreme
Court made no reference to Kentucky & Ind. Terminal R_R.
v. United States, supra, or any other cases involving foreign
currency transactions, and that it held only that a payment of
a dollar indebtedness at less than its original amount in
accordance with terms of repayment (a situation that did not
exist in Kentucky & Indiana) does not give rise to income
from the discharge of indebtedness within the meaning of
section 108. Consequently, petitioner asserts that Kentucky
& Indiana retains its vitality and controls our decision herein.

Petitioner unduly narrows the scope of Centennial
Savings when it seeks to confine its impact to situations
where the amount of the repayment of an indebtedness at less
than its face value is "determinable under the express terms
of the original borrowing documentation." The Supreme
Court’s articulation of the scope of section 108 goes beyond
the factual context of that case. We think that the
articulation rests upon a broad fundamental premise, namely:

As used in §108, the term "discharge * * * of

indebtedness" conveys forgiveness of, or

release from an obligation to repay.®

* "Discharge" can be used to signify various
means of extinguishing a legal duty. See
generally Black’s Law Dictionary 463 (6th ed.
1990). Thus, a debtor might be said to
“discharge” his debt by satisfying it. But
§ 108 uses "income by reason of the discharge

34a

* * * of indebtedness" to refer to the change
in the debtor’s financial condition when the
debtor is no longer legally required to satisfy
his debt either in part or in full. "Discharge"
in this sense can occur only if the creditor
cancels or forgives a repayment obligation.

[United States v. Centennial Savings Bank
FSB, 449 U.S. at 580-581.]

In footnote 7, it concludes that "Centennial’s reliance on
§108 fails for a * * * fundamental reason—the absence of a
‘discharge’ for purposes of the statute." Jd. at 582 n.7.

Granted that Centennial Savings did not expressly
overrule Kentucky & Indiana, it cannot be gainsaid that the
rationale of the Supreme Court is inconsistent with that of the
Court of Appeals for the Sixth Circuit. We are satisfied that,
at least as far as this case is concerned, Kentucky & Indiana
has been sapped of its vitality. See Vukasovich, Inc. v.
Commissioner, 790 F.2d 1409, 1416 (9th Cir. 1986), affg. in
part and revg. in part T.C. Memo 1984-611 (where the
impact of a Supreme Court opinion is not clearly discernible,
it is up to the lower court to decide the case before it
according to its reasoned "view of the way the Supreme
Court would decide the pending case today"); see also Hicks
v. Commissioner, 47 T.C. 71, 74 (1966).* In the same vein,
we are satisfied that, if our analysis of the language of
America-Southeast Asia Co. v. Commissioner, 26 T.C. 198

*' We note that, in any event, we would not necessarily be bound by

Kentucky & Ind. Terminal R.R. v. United States, 330 F.2d 520 (6th Cir.
1964), since an appeal in this case would not lie to the Court of Appeals
for the Sixth Circuit. Golsen v. Commissioner, 54. T.C. 742 (1970),
affd., 445 F.2d 985 (10th Cir. 1971).

35a

(1956); Gillin v. United States, 191 Ct. Cl. 172, 423 F.2d 309
(1970); and National-Standard Co. v. Commissioner, 80 T.C.
551 (1983), is incorrect, Centennial Savings deprives
petitioner of any support therefrom. Moreover, the Supreme
Court concluded "that Congress did not intend to extend the
benefits of §108 beyond the setting in which a creditor agrees
to release a debtor from an obligation assumed at the outset
of the relationship." United States v. Centennial Sav. Bank
FSB, 499 U.S. at 584. This statement directly conflicts with
that of the Court of Appeals for the Sixth Circuit in Kentucky
& Ind. Terminal R.R. v. United States, supra, as to legislative
intention (see supra p. 71).

We think the teaching of Centennial Savings is clear,
namely that the discharge of an indebtedness may be the
occasion for the realization of income but, unless there is a

cancellation or forgiveness of a portion of the indebtedness
not reflected in the terms of the indebtedness, such income is
not realized "by reason of the discharge * * * of
indebtedness of the taxpayer" (emphasis added) as required
by section 108(a). See Ravenscroft, Taxation and Foreign
Currency 215-216 (1973).

The conclusion that the occasion may differ from the
reason for realization finds support in the fact that petitioner
would have had no taxable gain absent its conversion of the
proceeds of the borrowings to, and the obtaining of the
means of repayment from, U.S. dollars. If the foreign
currency had not been exchanged, and instead held in its
borrowed form, petitioner would have had a loss (albeit
unrealized) on the value of its currency in hand exactly
offsetting the economic gain (albeit unrealized) from
repayment in a devalued currency, and thus no gain or loss

36a

for tax purposes. Willard Helburn, Inc. v. Commissioner, 20
T.C. 740, 743 (1953), affd. 214 F.2d 815 (1st Cir. 1954); see
National-Standard Co. v. Commissioner, 80 T.C. at 569 n.4
(Tannenwald, J., dissenting) ("the value at the time of
borrowing and the cost of acquisition would be the same").
Petitioner has taxable gain on the occasion of the discharge
of its indebtedness but only because it exchanged the foreign
currency for U.S. dollars (the reason). -

Our interpretation of section 108 finds support in the
legislative history of section 22(b)(9) of the Internal Revenue
Code of 1939 (the predecessor of section 108). At the time
of its initial enactment, in the Revenue Act of 1939, ch. 247,
sec. 215, 53 Stat. 862, 875, the report of the House Ways and
Means Committee made clear that the purpose of the section
was to provide relief to a corporate taxpayer which acquired
its evidences of indebtedness "at less than their fact value".
H. Rept. 855, 76th Cong., Ist Sess. 7 (1939), 1939-2 C.B.
504, 507; see Colonial Sav. Association v. Commissioner, 854
F.2d 1001, 1005 (7th Cir. 1988), affg. 85 T.C. 855 (1985)
and 87 T.C. 665 (1986); see also S. Rept. 1631, 77th Cong.,
2d Sess. 77 (1942), 1942-2 C.B. 504, 564, referring to the
repurchase of a corporation’s "own bonds at a discount”;
Report of the Staff of the Joint Committee on Internal
Revenue Taxation 23 (1951), referring to a corporation which
"buys back its own bonds at less than their face value". We
are unimpressed with petitioner’s effort to find sustenance in
the fact that, in enacting section 988,” the legislative history

5

- For tax years beginning after Dec. 31, 1986, foreign currency
borrowings, such as are involved herein, are subject to sec. 988. The
borrowings are considered "section 988 [transactions]", sec.
(continued...)

37a

indicates that section 988 "reverses the result in the Kentucky
& Indiana Terminal Railroad case" and that business
taxpayers "rely on this decision". S. Rept. 99-313 (1986),
1986-3 C.B. (Vol. 3) 1, 435, 461; Staff of Joint Comm. on
Taxation, General Explanation of the Tax Reform Act of
1986, at 1, 1070, 1098 (J. Comm. Print 1987). Leaving aside
the impact of the later opinion of the Supreme Court in
United States v. Centennial Sav. Bank FSB, supra, on the
1986 legislative history, we think petitioner gives it too broad
a reading. There is nothing in that history to indicate that
Congress was approving public understanding or the judicial
resolution of the issue before us; Congress only said that it
was establishing a new set of rules, irrespective of the
correctness of preexisting case law.

In sum, we hold that petitioner’s exchange gain was
not "includible in gross income by reason of the discharge"
of its indebtedness within the meaning of section 108, and
therefore petitioner is not entitled to elect to exclude such
income under section 108 and reduce the basis in its assets
under section 1017. Under the circumstances of this case,
where, as far as we can determine, the amount to be included
does not depend upon its characterization as ordinary income
or short-term capital gain, we have no need to address
respondent’s argument in this respect. Discussion of
respondent’s argument would require us to revisit National-
Standard Co. v. Commissioner, supra, a path which we are
not inclined to travel under the circumstances herein. In this
connection, we note that it does not necessarily follow, as

+ (...continued)
988(c)(1)(A)i) and (B)i), and the foreign currency gain is treated as
ordinary income, sec. 988(a).

38a

respondent appears to assert, that a holding that income does
not arise "by reason of the discharge * * * of indebtedness"
(emphasis added) requires the conclusion that it is not
"income from discharge of indebtedness" under section
61(a)(12). Similarly, we find it unnecessary to consider
petitioner’s suggestion, see supra pp. 65-66, that we break
the exchange gain into two parts.®

In order to reflect our holding herein and the
disposition of the settled issues,

Decision will be entered under Rule 155.

6

If we are in error as to the lack of necessity to deal with these
arguments, they can be dealt with under Rule 155.

39a

STATUTORY PROVISIONS
INTERNAL REVENUE CODE OF 1939

Section 22. * * * (b) EXCLUSIONS FROM GROSS
INCOME — The following items shall not be included in
gross income and shall be exempt from taxation under this
chapter:

** *

(9) INCOME FROM DISCHARGE OF INDEBTED-
NESS — In the case of a corporation, the amount of any
income of the taxpayer attributable to the discharge, within
the taxable year, of any indebtedness of the taxpayer or for
which the taxpayer is liable evidenced by a security (as
hereinafter in this paragraph defined) if —

(A) it is established to the satisfaction of the
Commissioner, or

(B) it is certified to the Commissioner by any
Federal agency authorized to make loans on
behalf of the United States to such
corporation or by any Federal agency
authorized to exercise regulatory power
over such corporation,

that at any time of such discharge, the taxpayer was in an
unsound financial condition, and if the taxpayer makes and
files at the time of filing the return, in such manner as the
Commissioner, with the approval of the Secretary, by
regulations prescribes, its consent of the regulations
prescribed under section 113(b)(3) then in effect. In such
case, the amount of any income of the taxpayer attributable
to any unamortized premium (computed as of the first day of
the taxable year in which such discharge occurred) with

40a

respect to such indebtedness, shall not be included in gross
income and the amount of the deduction attributable to any
unamortized discount (computed as of the first day of the
taxable year in which such discharge occurred) with respect
to such indebtedness shall not be allowed as a deduction. As
used in this paragraph, the term "security" means any body,
debenture, note, or certificate, or other evidence of
indebtedness, issued by any corporation, in existence on June
1, 1939. This paragraph shall not apply to any discharge
occurring before the date of the enactment of the Revenue
Act of 1939, or in a taxable year beginning after December
31, 1942.

INTERNAL REVENUE CODE OF 1954

Section 61. (a) GENERAL DEFINITIONS. —
Except as otherwise provided in this subtitle, gross income
means all income from whatever source derived, including
(but not limited to) the following items: * * *

(12) Income from discharge of indebtedness.

Section 108. (a) EXCLUSION FROM GROSS
INCOME.

(1) In GENERAL — Gross income does not
include any amount which (but for this subsection)
would be includible in gross income by reason of the
discharge (in whole or in part) of indebtedness of the
taxpayer if —

(A) the discharge occurs in a title 11 case,

(B) the discharge occurs when the tax-
payer is insolvent, or

4la

(C) the indebtedness discharged is quali-
fied business indebtedness.

(2) COORDINATION OF EXCLUSIONS —

(A) Title 11 Exclusion Takes Precedence
— Subparagraphs (B) and (C) of paragraph (1)
shall noi apply to a discharge which occurs in a
title 11 case.

(B) Insolvency Exclusion Takes
Precedence Over Qualified Business Exclusion —
Subparagraph (C) of paragraph (1) shall not
apply to a discharge to the extent that the
taxpayer is insolvent.

(3) INSOLVENCY EXCLUSION LIMITED
TO AMOUNT OF INSOLVENCY — In the case of
a discharge to which paragraph (1)(B) applies, the
amount excluded under paragraph (1)(B) shall not
exceed the amount by which the taxpayer is insolvent.

Section 1017. (a) GENERAL RULE — If —

(1) an amount is excluded from gross income
under subsection (a) of section 108 (relating to
discharge of indebtedness), and

(2) under subsection (b)(2)(D), (b)(5), or
(c)(1)(A) of section 108, any portion of such amount
is to be applied to reduce basis,

then such portion shall be applied in reduction of the basis of
any property held by the taxpayer at the beginning of the
taxable year following the taxable year in which the
discharge occurs.

42a
JUDICIARY AND JUDICIAL PROCEDURE,
28 U.S.C. (1994)

Section 1254. Courts of appeals; certiorari; certified
questions

Cases in the courts of appeals may be revised by the
Supreme Court by the following methods:

(1) By writ of certiorari granted upon the
petition of any party to any civil or
criminal case, before or after rendition of
judgment or decree.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386006_1178%3A2. Public record. Not legal advice.