COTTAGE savings ASSOCIATION, Petitioner-Appellee,v.COMMISSIONER OF interior REVENUE, Respondent-Appellant.

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No. 89-1036.

United states Court the Appeals,Sixth Circuit.

Argued Sept. 18, 1989.Decided Dec. 4, 1989.Rehearing and also Rehearing En Banc denied March 14, 1990.

Dennis L. Manes (argued), Scott M. Slovin, Schwartz, Manes & Ruby, Cincinnati, Ohio, for petitioner-appellee.

Peter K. Scott, I.R.S., Gary R. Allen, acting Chief, william S. Rose, Richard Farber, Bruce R. Ellisen (argued), U.S. Dept. That Justice, Appellate ar Tax Div., Washington, D.C., because that respondent-appellant.

Before WELLFORD and also NORRIS, Circuit Judges, and also LIVELY, senior Circuit Judge.

LIVELY, senior Circuit Judge.



This appeal requires us to decision whether a savings association is entitled to a lose deduction under the inner Revenue Code1 as a result of "reciprocal sales" that depreciated mortgage loan to other thrift institutions. The Commissioner of inner Revenue disallowed the deductions and asserted deficiencies in corporate income tax for the years 1974 through 1980. ~ above petition because that redetermination the deficiencies, the taxes Court uncovered that the petitioner, head Savings Association, realized losses in the year under review and also that the losses room recognized and deductible for revenue tax purposes. The Commissioner appeals, and we reverse.


One that the troubles experienced by thrift institutions in current years resulted from their historic practice of making lengthy term mortgage loans at fixed interest rates. As interest prices rose in the late 1970s such institutions were captured in a cash squeeze. Your return native loans was low, however the existing market required them come pay interest at greater and higher rates in order to attract brand-new deposits. In addition, plenty of savings organizations lost substantial quantities of deposits to higher-yielding money industry funds and comparable investment vehicles. Even though Cottage started offering flexible rate mortgages in 1980, in common with other comparable institutions, it continued to experience a fall in brand-new loans and also deposits.

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The practice of generating casualty by method of "reciprocal sales" resulted from a readjust in accounting requirements promulgated in 1980 through the Federal home Loan financial institution Board (FHLBB) together "Memorandum R-49." before the issuance that R-49, the FHLBB"s regulatory bookkeeping principles compelled institutions to alleviate their network worth by the quantities of any losses continual in the sale of loan at much less than book value. Under R-49, the organizations no much longer were forced to document such losses. By observing R-49"s criteria, to save associations attempted come generate revenue tax refunds through entering right into "reciprocal sales" transactions that created deductible losses without impairing net worth. Based upon "reciprocal sales" transactions with 4 other Ohio savings establishments on December 31, 1980, Cottage claimed losses ~ above its 1980 corporate income tax return indigenous sales of mortgage loans at much less than publication value. However, under R-49 it videotaped no accident for audit purposes. The resulting income tax refunds claimed for 1980 and carry-back years exceeded $677,000.


R-49 lists ten criteria, every one of which must be satisfied, because that mortgage loans affiliated in mutual sales come be considered "substantially identical," and also thus to qualified for unique treatment. The sales must: