1 The "Other adjustments" related to respondent's determination of adjustments in the allowable depreciation and amortization deductions in each year.

After concessions by the parties in two stipulations of settled issues and a concession on brief by petitioners, the issues remaining for decision are: (1) Whether $6.7 million received from the Los Angeles Memorial Coliseum Commission during the period 1982 through 1986 constituted taxable income to the Los Angeles Raiders; (2) whether settlement payments received during 1988 and 1989 from the City of Oakland constituted taxable income to the Los Angeles Raiders; (3) whether $10 million received from the City of Irwindale constituted taxable income to the Los Angeles Raiders in 1987, 1988, or 1989; and (4) whether the Los Angeles Raiders were entitled to a bad debt deduction in 1986.

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. The use of the term "loan" in the Findings of Fact is for convenience and is not conclusive as to characterization for tax purposes.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference.

Sheldon R. and Phyllis Milenbach resided in Oakland, California, at the time their petition was filed. Sheldon R. Milenbach was a limited partner of the Los Angeles Raiders (the Raiders) during 1980 through 1982. Allen Davis is the tax matters partner for 1983 through 1986. A.D. Football, Inc., is the tax matters partner for 1987, 1988, and 1989.

The Raiders own and operate a professional football club and hold a franchise in and are a member of the National Football League (NFL). During the years in issue, the Raiders' principal places of business were Oakland, California, and Los Angeles, California, respectively. For many years prior to 1980, the Raiders played their professional football games at the Oakland-Alameda County Coliseum (Oakland Coliseum) in Oakland, California. The Raiders' lease of the Oakland Coliseum expired at the close of the 1979 NFL sea

son.

Los Angeles Coliseum Agreement

During 1979, the Raiders undertook negotiations with the management of the Oakland Coliseum to amend and extend the term of the then-about-to-expire lease. The Raiders were also negotiating with the Los Angeles Memorial Coliseum Commission (LAMCC) for a lease to play home games in the Los Angeles Memorial Coliseum (LA Coliseum). On March 1, 1980, the Raiders entered into a memorandum of agreement (1980 MOA) with the LAMCC. This agreement provided for a $16.5-million loan to the Raiders. Repayment was to be made in 30 equal annual payments with interest at 7 percent. Under the terms of the 1980 MOA, the Raiders were allowed to construct luxury suites (suites) that they would own. The Raiders agreed to begin playing their home games in the LA Coliseum at the start of the 1980 NFL season.

When the Raiders' move to Los Angeles was announced, the City of Oakland (Oakland) filed an action against the Raiders in eminent domain seeking to condemn for public use the Raiders' NFL franchise, business, and physical assets. Oakland obtained a temporary restraining order, and subsequently a preliminary injunction, prohibiting the Raiders from relocating the team and playing their home games anywhere but the Oakland Coliseum.

At approximately the same time the Oakland suit was filed, the NFL filed suit against the Raiders seeking enforcement of the NFL constitution and bylaws. The NFL claimed the Raiders were required to obtain the necessary votes of the other NFL members before the team could be relocated. The NFL obtained a temporary restraining order, and subsequently a preliminary injunction, prohibiting the Raiders

from relocating the team and playing their home games anywhere but the Oakland Coliseum.

Due to the Oakland injunction and the NFL injunction, the Raiders played their 1980 and 1981 home games at the Oakland Coliseum pursuant to individually negotiated 1-year extensions of the previous lease. The Oakland injunction was dissolved on June 9, 1980; reinstated on January 3, 1983; and ultimately dissolved on August 10, 1984. The NFL injunction was dissolved on May 21, 1982. The 1980 MOA was never implemented.

On July 5, 1982, the Raiders entered into a memorandum of agreement (1982 MOA) with the LAMCC. The 1982 MOA provided that the Raiders would begin playing their home games at the LA Coliseum in 1982 and that the LAMCC would loan the Raiders $6.7 million, at 10 percent interest, to be advanced as follows: $675,000 per year for the first 4 years and $4 million no more than 5 years from July 5, 1982. The $4 million advance was to come from one or more sources, including potential damages from an antitrust suit against the NFL or from rental payments from the 1984 Summer Olympic Games. The loan was to be repaid with 12 percent of net receipts from operations of suites to be constructed by the Raiders at the LA Coliseum. As to the construction of the suites, the 1982 MOA provided:

4. The Partnership [Raiders] shall construct or cause to be constructed the following:

(a) In the Coliseum-approximately 150 private suites, together with all appurtenant and related improvements; ***

*

Construction of such improvements shall commence as soon as practicable as determined by the Partnership in its reasonable discretion, having in mind pending and potential litigation involving the parties hereto, or either of them, financial considerations, and other considerations reasonably deemed important or significant to the Partnership. *** [Emphasis added.]

Beginning with the 1982 NFL season and throughout the years in issue, the Raiders played their home games at the LA Coliseum. The Raiders and the LAMCC did not enter into a formal lease (1984 lease) until December 8, 1984. The 1984 lease was made effective, however, as of the beginning of the 1982 NFL season. The 1984 lease included provisions for the

$6.7 million loan to the Raiders on essentially the same terms as the 1982 MOA and contained a repayment provision that was essentially the same as the 1982 MOA repayment provision; i.e., 12 percent of net revenues from operations of suites to be constructed by the Raiders. All physical improvements to the LA Coliseum and the surrounding premises, i.e., the practice facilities, were to revert to the LAMCC upon the termination of the lease. As to the construction of the suites, the 1984 lease provided:

7.05 Construction of the Suites and the Press Box Improvements shall commence as soon as practicable as determined by the Lessee [Raiders] in its reasonable discretion, having in mind pending and potential litigation involving the parties hereto, or either of them, financial considerations, and other considerations reasonably deemed important or significant to the Lessee. Lessee shall use its best efforts to begin and complete Suite construction as soon as possible and upon completion subject to the terms hereof, to use its best efforts to rent, lease, license, grant or otherwise deal with the same so as to maximize their use and obtain the reasonable rental value thereof. The plans and specification for the Press Box Improvements and Suites and the timing and manner of all construction at the Stadium must be approved by Lessor, which approval will not be unreasonably withheld or delayed. [Emphasis added.]

** ** *

The 1980 MOA, the 1982 MOA, and the 1984 lease were the result of arm's-length bargaining between the Raiders and the LAMCC.

The $6.7 million loan was represented by a promissory note dated November 30, 1984, the terms of which were as provided in the 1982 MOA and the 1984 lease. The Raiders were to commence repayment of the $6.7 million loan 3 years after the completion of construction of the suites. The loan was nonrecourse against the Raiders, secured solely by the improvements to be made. The $6.7 million loan was funded with a $4 million advance in 1984 and by the following credits against the rent due from the Raiders:

During these years, the Raiders took corresponding deductions for their rent expenses.

Due to the concern of the Los Angeles Olympic Committee over the timing of construction, plans to construct the suites prior to the 1984 Summer Olympics were abandoned. In 1985 and 1986, the Raiders worked with architects and contractors on the design and planning of the suites. The construction of the suites began in early 1987 but was halted on or about February 18, 1987. Construction was stopped due to a dispute between the Raiders and the LAMCC over the obligations of the LAMCC to perform certain improvements to the LA Coliseum.

The Raiders made no payments on the LAMCC loan. The Raiders did not construct the suites at the LA Coliseum.

The LAMCC did not seek repayment of the $6.7 million until after the Raiders signed a memorandum of agreement with the City of Irwindale (Irwindale MOA), discussed infra. The LAMCC filed a lawsuit against the Raiders on September 30, 1987, claiming that the Raiders were in breach of their lease and demanding repayment of the $6.7 million. In the Raiders' answer to the LAMCC complaint, the Raiders alleged:

That Raiders has not constructed the suites or the press box improvements referred to in the lease agreement because, by reason of considerations reasonably deemed important and significant to Raiders, including plaintiff's [LAMCC's] breach of its commitment to modernize and reconfigure the stadium as hereinafter alleged, Raiders was never under any obligation to construct the suites or press box improvements, and, Raiders has not obtained a building permit or the surety bonds referred to in the lease agreement *** [Emphasis added.]

The lawsuit was settled on September 11, 1990, with the parties entering into a mutual release.

Respondent, in the notice of deficiency for 1982 and in the FPAA's for 1983, 1984, 1985, and 1986, disallowed the Raiders' rent deductions because the rent was not currently payable and was considered part of the "loan" from the LAMCC. In the alternative, if the rent deductions were allowed, respondent determined that the amount advanced under the "loan" was includable in gross income. For 1984, respondent determined that the additional $4 million advance was includable in the Raiders' gross income.