Cottage Savings Association v. Commissioner of Internal Revenue

PETITIONER: Cottage Savings Association
RESPONDENT: Commissioner of Internal Revenue
LOCATION: Ray Brook Federal Correctional Institution

DOCKET NO.: 89-1965
DECIDED BY: Rehnquist Court (1990-1991)
LOWER COURT: United States Court of Appeals for the Sixth Circuit

CITATION: 499 US 554 (1991)
ARGUED: Jan 15, 1991
DECIDED: Apr 17, 1991

ADVOCATES:
John G. Roberts, Jr. - for respondent
Dennis L. Manes - Argued the case for the petitioner

Facts of the case

For tax purposes, Cottage Savings Association exchanged its interests in the mortgages of 252 single family homes with several other savings and loan associations, receiving in return 305 mortgages that, taken together, had the same market value. The fair market value of the mortgages it gave away, however, were worth $2.5 million less than their original value. In accordance with the accounting procedures of the federal regulatory body of savings and loan corporations, the Federal Home Loan Bank Board (FHLBB), Cottage Savings recorded the exchanged properties as "substantially identical" (because they had the same fair market value).

When Cottage Savings filed its federal income tax return, however, it claimed a $2.5 million loss - the difference between the original value of the mortgages it gave away and the current value of the mortgages it received in return. The IRS refused to recognize the difference as a deductible loss, however, because under section 1001(a) of Title 26 of the tax code, the change in a property's value is only taken into consideration when it is realized through the "sale or disposition of [the] property." An exchange of property only constitutes a "disposition" if there is a "material difference" between the properties exchanged. Because Cottage Savings had reported the properties exchanged as "substantially identical," the IRS ruled, a "disposition" could not have taken place and the loss in value could not be deducted. Cottage savings took the issue to a federal Tax Court, which disagreed with the IRS and ruled the deduction permissible. The Sixth Circuit Court of Appeals reversed, however, siding with the IRS.

Question

Can the exchange of properties considered "substantially identical" for accounting purposes under Federal Home Loan Bank Board regulations be considered a "disposition of property" for IRS tax purposes, given that properties exchanged must be materially different to constitute a "disposition" under section 1001(a) of Title 26 of the tax code?

Media for Cottage Savings Association v. Commissioner of Internal Revenue

Audio Transcription for Oral Argument - January 15, 1991 in Cottage Savings Association v. Commissioner of Internal Revenue

Audio Transcription for Opinion Announcement - April 17, 1991 in Cottage Savings Association v. Commissioner of Internal Revenue

Thurgood Marshall:

The third case, Cottage Savings Association versus the Commissioner, No. 89-1965, is here on certiorari to the Court of Appeals for the Sixth Circuit.

The question in this case is whether a lending institution may realize tax deductible losses by exchanging its mortgage loans for mortgage loans held by other financial institutions.

In an opinion filed with the clerk today, we hold that such transaction does give rise to realized losses.

Accordingly, we reverse the judgment of the Fifth Circuit.

Justice Blackmun has filed a dissenting opinion in which Justice White joins.