Background Cottage Savings Ass'n v. Commissioner

cottage savings association savings & loan association (s&l) serving greater cincinnati area. many other s&l s, cottage savings had large number of long-term, low-interest mortgages on books, declined in value interest rates increased during late 1970s.

these s&ls have achieved tax savings selling these mortgages @ loss, dissuaded doing because accounting regulations of federal home loan bank board (fhlbb) have required them report these losses on books, possibly putting them insolvency. hoping find way these s&ls realize tax losses, fhlbb promulgated new regulation called memorandum r-49 , under s&ls not have show loss on books if exchanged mortgages substantially identical mortgages held other lenders.

cottage savings made transaction pursuant regulation exchanging 90% participation interests in 252 mortgages 4 other s&ls, receiving in return 90% participation interests in 305 mortgages. mortgages involved in transaction homes in greater cincinnati region. fair market value of interests exchanged each side approximately $4.5 million. face value of interests cottage savings relinquished approximately $6.9 million. on 1980 federal income tax return, cottage savings claimed loss of $2,447,091, adjusted difference between face value of participation interests gave , fair market value of interests received.

the commissioner of internal revenue disallowed cottage savings deduction, s&l filed petition redetermination in united states tax court, reversed commissioner s decision , permitted deduction. commissioner appealed united states court of appeals sixth circuit, reversed decision of tax court, holding though cottage savings realized loss in transaction, had not realized loss during 1980 tax year. u.s. supreme court granted certiorari.