## Facts

- Individual taxpayers and the Los Angeles Raiders partnership were involved in federal tax disputes arising from transactions connected to the Raiders’ attempted and actual relocations in the 1980s.
- The Commissioner issued deficiency notices for the Milenbachs’ 1980–1982 tax years and issued FPAAs for the Raiders partnership for 1983–1989.
- The Tax Court sustained the Commissioner on three disputed transaction groups:
  - Payments from the Los Angeles Memorial Coliseum Commission (LAMCC) tied to an arrangement for luxury-suite construction and related rent provisions; the Tax Court treated the amounts as taxable income upon receipt and disallowed associated rent deductions as not currently payable and part of the financing.
  - A $4 million settlement payment from the City of Oakland following litigation triggered by Oakland’s efforts to prevent the team’s relocation; the Tax Court treated the settlement as taxable lost profits.
  - A $10 million advance from the City of Irwindale connected to a proposed stadium project that failed; the Tax Court found cancellation-of-indebtedness income occurred in 1988.
- The taxpayers and partnership appealed, contesting the characterization of the LAMCC payments and Oakland settlement and the year of discharge for the Irwindale advance.

## Issues

1. Whether LAMCC payments were taxable upon receipt because the Raiders’ repayment obligation was illusory, or excludable as bona fide loan proceeds supported by a genuine obligation to repay.
2. Whether the $4 million Oakland settlement was taxable as lost profits (ordinary income) or treated as a non-taxable return of capital/compensation for harm to a capital asset (e.g., goodwill or franchise rights).
3. Whether the Tax Court correctly determined that the Irwindale advance produced cancellation-of-indebtedness income in 1988, or whether the discharge year required a more fact-specific determination.

## Decision

- The court reversed the Tax Court on the LAMCC transaction, holding the arrangement created a non-illusory, enforceable obligation to repay; the amounts were loan proceeds and not taxable income when received.
- The court affirmed the Tax Court on the Oakland settlement, holding the settlement was properly characterized as taxable lost profits.
- The court reversed the Tax Court’s 1988 cancellation-of-indebtedness timing determination for the Irwindale advance and remanded for a practical, fact-based determination of when (if at all) the debt was effectively discharged.

## Legal Principles

- Amounts received subject to a genuine, enforceable obligation to repay are loan proceeds and are not included in gross income upon receipt; treating an advance as income requires a finding that the repayment obligation lacks economic reality.
- Settlement proceeds are characterized by the nature of the underlying claim; recoveries that substitute for expected income are taxable as lost profits rather than treated as a return of capital.
- Cancellation-of-indebtedness income arises when, as a practical matter, the debtor’s obligation is discharged; identifying the taxable year requires examining facts showing effective forgiveness or abandonment of collection efforts, not merely formal or external developments.

## Conclusion

The Ninth Circuit held that LAMCC payments were excludable loan proceeds because the Raiders had a real repayment obligation, upheld taxation of the Oakland settlement as lost profits, and required remand for a fact-intensive determination of the year any cancellation-of-indebtedness income arose from the Irwindale advance.


Milenbach v. Commissioner, 318 F.3d 924 (9th Cir. 2003)