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(i) for purposes of determining any loss, be equal
to the lesser of the adjusted basis of such asset or
the fair market value of such asset as of such date,
and
(ii) for purposes of determining any gain, be
equal to the higher of the adjusted basis of such asset
or the fair market value of such asset as of such date.
* * * * * * *
(5) Adjusted basis.--For purposes of this
subsection, the adjusted basis of any asset shall be
determined under part II of subchapter O of the
Internal Revenue Code of 1954.
In computing the gain or loss from its foreclosure sales,
petitioner determined its adjusted basis pursuant to DEFRA
section 177(d)(2) for mortgages acquired before, and held on,
January 1, 1985. In determining its adjusted basis under these
transition rules, petitioner included in its regular adjusted
cost basis the amounts of unpaid interest which it had accrued
from the date of acquisition of each mortgage to the date of
foreclosure on the underlying real estate. These amounts of
accrued interest included certain interest which had accrued
before January 1, 1985.
Petitioner used its regular adjusted cost basis in
determining the amount of any gain realized, or loss incurred, on
the foreclosure of real estate securing mortgages that petitioner
owned on January 1, 1985. During the taxable year 1985,
petitioner foreclosed on 2,735 mortgages which it had held on
January 1, 1985, and petitioner included in its adjusted cost
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