United States v. Centennial Savings Bank FSB - Oral Argument - January 15, 1991

United States v. Centennial Savings Bank FSB

Media for United States v. Centennial Savings Bank FSB

Audio Transcription for Opinion Announcement - April 17, 1991 in United States v. Centennial Savings Bank FSB

Audio Transcription for Oral Argument - January 15, 1991 in United States v. Centennial Savings Bank FSB

William H. Rehnquist:

We'll hear argument next in No. 89-1926, United States v. Centennial Savings Bank.

Mr. Roberts.

John G. Roberts, Jr.:

Thank you, Mr. Chief Justice, and may it please the Court:

This case is here on certiorari to the United States court of appeals for the Fifth Circuit.

That court issued two rulings adverse to the Commissioner of Internal Revenue.

First, on the mortgage swap issue as just discussed in the Cottage Savings case, the Fifth Circuit agreed with the United States that there was a materially different requirement in the tax law.

It then disagreed with the United States on application of that requirement, concluding that these mortgage... these pools of substantially identical mortgage loans were in fact an exchange of property that is materially different.

The second, unrelated issue, the Fifth Circuit held that when Centennial's depositors incurred a penalty under Federal law for early withdrawal of their savings from certificates of deposit and Centennial deducted that penalty from the savings before turning them over, that the depositors were actually discharging their savings and loan of part of its obligation to them.

That meant that the income to Centennial was entitled to special deferred treatment under section 108 of the Code.

The Fifth Circuit was wrong with its... in its conclusion with respect to the mortgage swap issue, and it was wrong in its conclusion with respect to the section 108 issue, and the judgment below should be reversed.

The facts with respect to the mortgage swap issue are not, to coin a phrase, materially different from the facts in the Cottage Savings case.

In April of 1981 Centennial and a trading partner decided to enter into one of these swaps.

They plugged their mortgage loan portfolios into the computer, came up with $8.5 million in book value of loans that matched.

Centennial then sold its loans to its partner for $5,662,045, and its partner sold its loan to Centennial for $5,662,043.

Conducted no independent valuation of the loans, applied a common discount factor.

If the loans matched up, they were worth the same.

Antonin Scalia:

How do you feel about this one, Mr. Roberts?

John G. Roberts, Jr.:

This one comes out the same way as the Cottage Savings case, Your Honor.


Centennial, because--

Antonin Scalia:

You're sure there's not a material difference between the two?

John G. Roberts, Jr.:

--There's not a material difference in the two cases on this issue.

Centennial reported no loss to the bank board, deducted a $2.8 million loss on its tax return, which the Commissioner disallowed for failure to satisfy the materially different requirement.

For reasons I have already stated, the Commissioner's decision is correct.

The R-49 match-up ensured that the loans that were given up were substantially identical to those that Centennial got back.

The differences in borrowers and collateral were not a material difference because the parties to this transaction in this market didn't consider those significant.

In fact, Centennial conducted no credit checks, performed no appraisals of property.

It didn't even know who the borrowers were at the time of the transaction.

It didn't get the files on the loans until 6 years later.

The market also regarded these now-claimed differences as not material.