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Petitioner's reliance on Cottage Sav. Association v.
Commissioner, 499 U.S. 554 (1991), likewise is misplaced.
Petitioner contends that the disputed CINS transactions must be
respected for tax purposes inasmuch as they were structured and
carried out in strict compliance with the requirements of
sections 1001 and 453.
In Cottage Sav. Association v. Commissioner, supra, the
taxpayer, a savings and loan association, owned participation
interests in mortgages that had declined in value due to a surge
in interest rates during the late 1970s. After holding the
participation interests for a number of years, the taxpayer sold
them to several savings and loan associations and purchased from
them participation interests in mortgages of approximately equal
fair market value. The taxpayer claimed a $2.4 million loss
deduction equal to the excess of its bases in the participation
interests that it sold over the fair market value of the
participation interests that it purchased.
The Commissioner disallowed the claimed loss on alternative
grounds: (1) The taxpayer had not realized the losses within the
meaning of regulations promulgated under section 1001; and (2)
the transactions lacked economic substance. However, the Supreme
Court sustained the taxpayer's loss deduction, holding that the
taxpayer had realized a loss pursuant to section 1001 because the
participation interests exchanged were "materially different"
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