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Cottage Sav. Ass'n v. Commissioner - 499 U.S. 554, 111 S. Ct. 1503 (1991)


Because Congress has delegated to the Commissioner of Internal Revenue the power to promulgate all needful rules and regulations for the enforcement of the Internal Revenue Code, 26 U.S.C.S. § 7805(a), the courts must defer to his regulatory interpretations of the Code so long as they are reasonable. 


Petitioner exchanged participation interests in various mortgages with another lender pursuant to Federal Home Loan Bank Board Memorandum R-49 in order to realize tax-deductible losses sustained as a result of holding long-term, low-interest loans when interest rates surged. The IRS disallowed these deductions. Although the tax court allowed them, the appellate court reversed. 


Is the petitioner entitled to take the tax-loss deduction in the year the transaction occurred?




The court reversed the order, since the mortgages were materially different, in that they had different mortgagors and were secured by different properties, and transactions were bona fide. Thus, petitioner actually sustained a loss and was entitled to take the tax-loss deduction in the year the transaction occurred. The court held that because the mortgages had different mortgagors, and because they were secured by different properties, the loans were materially different with legally distinct entitlements. Thus petitioner was realized a loss under 26 U.S.C.S. § 1001(a) as a result of the exchange of participation interests. Since the transaction was completed and bona fide, the court held that the loss was actually sustained for the purposes of 26 U.S.C.S. § 165(a)

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