Centennial Sav. Bank FSB v. U.S., 88-1297

• Decision Date: 02 November 1989
• Docket Number: No. 88-1297,88-1297
• Citation: 887 F.2d 595
• Parties: -5684, 89-2 USTC P 9612 CENTENNIAL SAVINGS BANK FSB, Plaintiff-Appellant, Cross-Appellee, v. UNITED STATES of America, Defendant-Appellee, Cross-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 595

887 F.2d 595

64 A.F.T.R.2d 89-5684, 89-2 USTC P 9612

CENTENNIAL SAVINGS BANK FSB, Plaintiff-Appellant, Cross-Appellee, v. UNITED STATES of America, Defendant-Appellee, Cross-Appellant.

No. 88-1297.

United States Court of Appeals, Fifth Circuit.

Nov. 2, 1989.

Edward S. Koppman and Kathleen J. St. John, Akin, Gump, Strauss, Hauer & Feld, Dallas, Tex., for plaintiff-appellant cross-appellee.

Richard L. Bacon, Sp. Tax Counsel, U.S. League of Sav. Institutions, Washington, D.C. and Thomas A. Pfeiler, Gen. Counsel, Chicago, Ill., for amicus curiae, U.S. League of Sav. Institutions.

Bruce R. Ellisen, Asst. Atty. Gen., Gary R. Allen, Chief, Appellate Section, Tax

Div., Dept. of Justice, William S. Rose, Jr., and Richard Farber, Asst. Attys. Gen., Washington, D.C., for defendant-appellee cross-appellant.

Appeals from the United States District Court for the Northern District of Texas.

Before BROWN, WILLIAMS and JOLLY, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

Centennial Savings Bank appeals the district court's decision that the bank's exchange of 90% interests in depreciated mortgages with the Federal National Mortgage Association for a separate set of 90% interests in depreciated mortgages did not result in a loss for tax purposes. Centennial also challenges the district court's holding that the statute of limitations did not bar the IRS from assessing taxes owed. On a wholly separate issue the government cross appeals. It claims that the district court incorrectly ruled that income the bank had earned from penalties on the early withdrawal of certificates of deposit was to be treated for tax purposes as income from the discharge of indebtedness. We uphold the district court's rulings on the statute of limitations and the certificate of deposit issues. We overturn the district court's ruling that the mortgage exchange did not result in a realizable loss.

Centennial Savings Bank ("Centennial") is a savings and loan association regulated by the Federal Home Loan Bank Board (FHLBB). ¹ On April 13, 1981, pursuant to the FHLBB's Memorandum R-49 Centennial engaged in a transaction in which it essentially exchanged a package of 90% participation interests in conventional and Federal Housing Administration and Veterans Administration (FHA/VA) mortgages. Centennial made this exchange with the Federal National Mortgage Association ^MA. The participation interests exchanged were in conventional and FHA/VA mortgage packages having almost identical face and market value.

This transaction was styled "a reciprocal sale". Centennial received mortgage participation interests with a face value of $8,481,263.56. It paid $5,662,044.57 for these participation interests. Similarly, FNMA received participation interests with a face value of $8,481,261.47 from Centennial and paid Centennial $5,662,043.04 for these mortgages. Centennial Savings Bank FSB v. United States, 682 F.Supp. 1389, 1391 (N.D.Tex.1988).

Although this transaction is styled as a sale, the mortgages were carefully selected so as to meet the criteria of Memorandum R-49 and the monetary difference in the packages ostensibly sold was in fact approximately $2. We have already dealt with the issue of how to characterize a R-49 transaction and found that such a transaction, although characterized as a reciprocal sale, was in fact an exchange. San Antonio Savings Association v. United States, 887 F.2d 577 (5th Cir.1989) ("SASA "). We therefore consistently refer to Centennial's R-49 transaction with FNMA as an exchange.

This case comes to us consolidated with two other cases dealing with R-49 transactions, SASA, cited immediately above, and First Federal Savings & Loan Assoc. of Temple v. United States, 887 F.2d 593 (5th Cir.1989) ("Temple "). Because the details and history of the development of Memorandum R-49 by the FHLBB has already been dealt with in our opinion in SASA, we do not repeat that history here. The only significant difference between the facts of this case and those of SASA and Temple is that Centennial's transaction involved a straight swap of 90% participation interests in home mortgage loans, whereas SASA involved a triangular exchange of 90% participation interest, and Temple involved a straight swap of complete mortgages. These factual variations are of no consequence. The law as applied in SASA and Temple applies to these circumstances as well, and we so hold.

Centennial conducted its exchange on April 13, 1981. It then filed for a tax refund and claimed that it sustained a loss of $2,819,218.43. This amount was derived from the difference in the face value of the mortgages it held and the market value which it received from FNMA for the mortgages it received. Centennial filed for the tentative allowance of refund on February 4, 1982, and applied its loss through the carryback mechanism to the taxable years of 1969 through 1980 (1971 excluded). The IRS refunded the tax money Centennial claimed it was owed at that time from the loss and under the carryback. That amount was $788,633.67.

Also during 1981, Centennial received $258,019 as a result of premature withdrawals of certificates of deposit (CDs), a matter unrelated to the exchange of mortgage participation. Centennial characterized the income received from premature withdrawal of the CDs as income from discharge of indebtedness under Sec. 61(a)(12) of the Internal Revenue Code. The government challenges that characterization, arguing that the money received for early withdrawal of the certificates of deposit constituted gross income.

On September 14, 1983, the IRS informed Centennial that the deduction resulting from the R-49 transaction would be disallowed and the CD penalties must be treated as ordinary income. On December 6, 1984, Centennial executed Form 872, entitled "Consent to Extend the Time to Assess Tax," which extended the time of assessment through December 31, 1985. On June 12, 1985, the IRS issued a notice of deficiency and on November 5, 1985, the IRS made its assessment that Centennial owed the full amount of the refund it had then received pursuant to the loss it claimed from the R-49 transaction.

I. The Statute of Limitations

Before dealing with the merits of the lower court's characterization of the R-49 transaction and the CD penalties, we first examine Centennial's claim that the IRS assessment was unenforceable because the statute of limitations had run. Section 6501 of the Code ² provides the general rule that the statute of limitations as applied to tax assessment is ordinarily three years. 26 U.S.C. Sec. 6501(a) (1982). But, in an exception to the three year limit, the taxpayer can consent to later assessment.

Where, before the expiration the time prescribed in this section for the assessment of any tax imposed by this title, except the estate tax provided in chapter 11, both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.

26 U.S.C. Sec. 6501(c)(4) (1982). The dispute in this case concerns the interrelationship between Sec. 6501(c)(4) and Sec. 6501(h), which deals with the period allowing for the assessment of carrybacks.

On December 6, 1984, Centennial's corporate officers signed Form 872, entitled "Consent to Extend the Time to Assess Tax." That agreement stated in part "[t]he amount of any Federal Income tax due on any return(s) made by or for the above taxpayer(s) for the period(s) ended December 31, 1981 may be assessed at any time on or before December 31, 1985."

The district court denied Centennial's motion for summary judgment which asserted that the federal government's assessment of taxes and interest were barred by limitations. Centennial Savings Bank FSB v. United States, 670 F.Supp. 195 (N.D.Tex.1987) (order denying summary judgment). Centennial now appeals that ruling on two grounds.

First, Centennial contends that the form it signed constituted a "waiver" rather than an "extension" of the statute of limitations. Centennial cites two Supreme Court cases as support for this distinction, Florsheim Bros. Drygoods Co. v. United States, 280 U.S. 453, 50 S.Ct. 215, 74 L.Ed. 542 (1930), and Stange v. United States, 282 U.S. 270, 51 S.Ct. 145, 75 L.Ed. 335 (1931). In both of these cases the Court did conclude that the early analogies of Form 872 were waivers instead of contracts. The courts, however, drew no distinction between waivers and extensions.

Centennial contends that because Form 872 never contained the term "waiver" it constitutes an illegal "extension," which only Congress has the power to grant. This is too slender a semantic thread to support Centennial's argument, particularly since Form 872 parallels the language of Sec. 6501(c)(4), which explicitly allows for assessment after the normal statutory period when both parties consent to it. This language is broad enough to incorporate either the concept of "extension" or "waiver".

Furthermore, this semantic hairsplitting seems at best to create a distinction without a difference. Even if one accepts Centennial's premise that only Congress can "extend" the statute of limitations, nevertheless waiving the ability to raise that defense in effect extends the period of limitations for however long a party contracts not to employ the defense. Whether such an agreement is characterized as a extension or a waiver, Congress has clearly provided for such agreements within the Tax Code. Hence it is not a usurpation of Congress' role for two parties to agree to allow assessment after the normal statute of limitations has run.

Centennial's second contention is that the assessment was barred by the statute of limitations because the assessment was for amounts attributable to the carryback years, 1960-1980 (ex...