COMMISSIONER OF INTERNAL REVENUE, PETITIONER V. SAN ANTONIO SAVINGS
ASSOCIATION AND SUBSIDIARIES (RESOLUTION TRUST CORPORATION, RECEIVER)

   No. 89-1928

   In The Supreme Court Of The United States

   October Term, 1989

   The Acting Solicitor General, on behalf of the Commissioner of
Internal Revenue, petitions for a writ of certiorari to review the
judgment of the United States Court of Appeals for the Fifth Circuit
in this case.

   Petition For A Writ Of Certiorari To The United States Court Of
Appeals For The Fifth Circuit

            TABLE OF CONTENTS
   Question Presented
   Opinions below
   Jurisdiction
   Statutory provisions and regulation involved
   Statement
   Reasons for granting the petition
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (App., infra, 1a-38a) is
reported at 887 F.2d 577.  The opinion of the Tax Court (App., infra,
39a-50a) is reported at 55 T.C.M. (CCH) 813.

                             JURISDICTION

   The judgment of the court of appeals was entered on November 2,
1989.  A petition for rehearing was denied on January 18, 1990 (App.,
infra, 51a-52a).  On April 10, 1990, Justice White extended the time
within which to file a petition for a writ of certiorari to and
including May 18, 1990.  On May 4, 1990, Justice White further
extended that time to and including June 8, 1990.  The jurisdiction of
this Court is invoked under 28 U.S.C. 1254(1).

             STATUTORY PROVISIONS AND REGULATION INVOLVED

   The relevant portions of Sections 165 and 1001 of the Internal
Revenue Code of 1954 (26 U.S.C. (1982)) and Section 1.1001-1(a) of the
Treasury Regulations on Income Tax (26 C.F.R.) are set out in a
statutory appendix (App., infra, 53a-55a).

                          QUESTION PRESENTED

   Whether a financial institution realizes a deductible loss for
income tax purposes when it exchanges a group of mortgage loans for a
substantially identical group of mortgage loans held by another
financial institution.

                               STATEMENT

   1. Respondent is a savings and loan association formerly regulated
by the Federal Home Loan Bank Board.  In 1980, respondent's mortgage
loan portfolio was partially comprised of fixed-rate, long-term home
mortgage loans that had been issued in the late 1960s at interest
rates significantly lower than those charged on more recent loans.  As
a result of the high interest rates of the early 1980s, the fair
market value of these older, low-interest loans fell far below their
face amount.  App., infra, 3a.

   For respondent, like other savings institutions holding older,
low-interest loans, this situation created a tax incentive for
disposing of its depreciated mortgage loans.  A disposition of the
loans would enable respondent to realize for tax purposes the loss
that resulted from these market changes;  it could then utilize the
resulting loss deductions to offset current taxable income and produce
loss carrybacks that would generate tax refunds from prior years.
There was, however, a catch.  Many of these institutions were in such
precarious financial condition that a sale of the loans and consequent
recognition of the losses -- however beneficial for tax purposes --
would for regulatory accounting purposes have caused them to fail to
meet the Bank Board's minimum reserve and liquidity requirements,
raising the prospect of closure by the Bank Board.  See App., infra,
3a-4a.

   On June 27, 1980, the Bank Board's Office of Examination and
Supervision (OES) issued Memorandum R-49, a regulatory accounting
principle that adopted the rule that savings institutions could make
"reciprocal sales" of depreciated "substantially identical mortgage
loans" without having to record a loss for regulatory accounting
purposes.  Memorandum R-49 established a list of criteria that would
render loans "substantially identical," including that the mortgages
be of similar type with the same terms and interest rates.  /1/ The
admitted objective of Memorandum R-49 was to allow savings
institutions to engage in transactions that would generate deductible
losses for federal income tax purposes, but that would not be treated
as giving rise to losses for financial reporting and regulatory
purposes.  See App., infra, 4a-6a.  /2/

   2. On September 30, 1980, respondent and two other savings
institutions entered into a three-cornered transaction designed to
exchange interests in mortgages that satisfied the requirements of
Memorandum R-49.  Respondent transferred to Farm and Home Savings
Association (Farm and Home) a package of 90% participation interests
in a group of mortgage loans.  Farm and Home transferred to Dallas
Federal Savings and Loan Association (Dallas Federal) a package of 90%
participation interests in a group of mortgage loans.  Dallas Federal
transferred to respondent a package of 90% participation interests in
a group of mortgage loans.  /3/ Thus, respondent in effect exchanged
interests in a group of residential mortgage loans for interests in a
group of residential mortgage loans held by Dallas Federal.  The
participation interests exchanged were in loan packages having almost
identical face and market value, and the loans involved were
"substantially identical" under the criteria of the Bank Board's
Memorandum R-49.  App., infra, 6a-7a, 41a-42a.

   The transaction was arranged as "reciprocal sales" of the mortgage
interests among the parties;  it was consummated by conveyance of the
participation interests together with simultaneous (and largely
offsetting) wire transfers of cash.  Respondent conveyed participation
interests having a face value of $74,774,495 to Farm & Home in
exchange for $59,817,597 in cash.  At the same time, respondent
obtained from Dallas Federal participation interests having a face
value of $74,802,167 in exchange for $60,925,730 in cash.  In effect,
respondent exchanged loans with a face amount (and cost basis) of
$74,774,495, but a lower value, for participation interests held by
Dallas Federal with a value of $60,925,730.  On its federal income tax
return for the year ending September 30, 1980, respondent claimed a
deduction for a loss on the transaction of $14,956,898, which
corresponded to the reduction in value of the mortgage interests
originally held by respondent.  App., infra, 6a-7a, 41a-42a.  Pursuant
to Memorandum R-49, however, respondent did not report any loss for
financial and regulatory accounting purposes.  Doc. 18, at 2.

   3. On audit, the Commissioner determined that respondent was not
entitled to its claimed deduction for a loss on the mortgage exchange
transaction.  Respondent sought redetermination of the resulting
income tax deficiencies in the Tax Court.  While respondent's motion
for summary judgment was pending, the Tax Court decided Cottage
Savings Ass'n v. Commissioner, 90 T.C. 372 (1988), rev'd, 890 F.2d 848
(6th Cir. 1989), in which the Tax Court allowed a loss deduction on a
mortgage swap transaction similar to the transaction in issue here.
In ruling on respondent's motion for summary judgment in the instant
case, the Tax Court stated that, when the facts here were construed
most favorably for the Commissioner, they were essentially the same as
those found by the court in Cottage.  App., infra, 40a-41a.
Accordingly, in deciding the case, the Tax Court assumed that
respondent, like the taxpayer in Cottage, "did not investigate
individual loan files, employment histories of the individual
borrowers, or the underlying value of the real estate securing the
individual loans" (90 T.C. at 382), and that the transaction was
"motivated solely by the desire of (respondent) and its trading
partners to recognize for tax purposes (but not for regulatory
purposes) the losses in market values of the loan portfolios" (90 T.C.
at 384).  See also App., infra, 45a;  Cottage, 90 T.C. at 388 n.9.

   The Commissioner's primary argument was that a loss is "realized"
for tax purposes on an exchange of property only if the exchanged
properties are "materially different" and that mortgages that were
"substantially identical" under the Memorandum R-49 criteria were not
materially different.  Relying on its decision in Cottage, the Tax
Court concluded that the loans transferred by respondent were
"materially different" from the loans it received because the loans
had different borrowers and different collateral.  App., infra,
45a-49a.  The court also rejected the government's argument that,
because the mortgage exchange lacked economic substance, deduction of
the loss was not authorized by Section 165 of the Internal Revenue
Code (id. at 44a).

   4. The court of appeals affirmed (App., infra, 1a-38a).  The court
agreed with the government's position that a loss is realized on an
exchange only if the properties exchanged are "materially different"
(887 F.2d at 581-587).  The court then agreed with the Tax Court,
however, that the mortgages exchanged in an R-49 transaction are
"materially different" because the mortgages have different borrowers
and different collateral, even though the Bank Board had identified
the mortgages as "substantially identical" (id. at 587-592).  The
court also rejected the government's additional argument that the
exchange lacked economic substance, and therefore no loss could be
deducted under Section 165 of the Code (id. at 592-593).

                   REASONS FOR GRANTING THE PETITION

   This case was heard by the court of appeals together with two other
cases involving mortgage exchanges that satisfied the criteria of
Memorandum R-49, and all three cases were decided by the same panel on
the same day.  See Centennial Savings Bank v. United States, 887 F.2d
595 (5th Cir. 1989);  First Federal Savings & Loan Ass'n v. United
States, 887 F.2d 593 (5th Cir. 1989).  We are today also filing
certiorari petitions in those two cases, presenting the same question
regarding the tax treatment of mortgage exchanges under Memorandum
R-49 that is presented in this case.  As we explain in detail in our
petition in Centennial, review of this question by this Court is
warranted because there exists a square conflict in the circuits and
the issue is of considerable importance to the administration of the
federal tax laws.  /4/

   Although the Fifth Circuit treated this case as the lead case, we
do not urge the Court to grant plenary review here.  In July 1989, the
Bank Board found that respondent was insolvent and appointed the
Federal Savings and Loan Insurance Corporation (FSLIC) as receiver.
The Resolution Trust Corporation (RTC) later became the receiver.  The
RTC has advised us that, in its view, respondent does not have (and
never will have) sufficient assets to allow collection of any part of
the tax deficiency at issue here in the event the Commissioner
ultimately were to prevail in the instant case.  /5/ The Fifth
Circuit, in a case involving a claim by a private creditor against a
savings institution that was under FSLIC receivership, recently took
the position that a case could be dismissed as moot if there will
never be any assets from which to satisfy a judgment.  Triland
Holdings & Co. v. Sunbelt Service Corp., 884 F.2d 205, 208 (5th Cir.
1989).  In light of the uncertainty regarding collection here and the
question of possible mootness, we believe that the Centennial case,
which also presents a second issue warranting the attention of this
Court, and the First Federal case are more suitable vehicles for
resolving the conflict in the circuits on the issue that is presented
in all three cases.  Accordingly, we believe it would be appropriate
for the Court to hold this petition pending the outcome of Centennial
and First Federal.

                              CONCLUSION

   The petition for a writ of certiorari should be disposed of as
appropriate in light of this Court's disposition of United States v.
Centennial Savings Bank (Resolution Trust Corporation, Receiver), No.
89 . . . , and United States v. First Federal Savings & Loan Ass'n,
No. 89 . . . .

   Respectfully submitted.

   JOHN G. ROBERTS, JR.

      Acting Solicitor General /6/

   SHIRLEY D. PETERSON

      Assistant Attorney General

   LAWRENCE G. WALLACE

      Deputy Solicitor General

   ALAN I. HOROWITZ

      Assistant to the Solicitor General

   RICHARD FARBER

   BRUCE R. ELLISEN

      Attorneys

   JUNE 1990

   /1/ Memorandum R-49 specifically provided in part (App., infra,
4a-5a):

         A loss resulting from a difference between market value and
      book value in connection with reciprocal sales of substantially
      identical mortgage loans need not be recorded.  Mortgage loans
      are considered substantially identical only when each of the
      following criteria is met.  The loans involved must:

         1. involve single-family residential mortgages,

         2. be of similar type (e.g., conventionals for
         conventionals),

         3. have the same stated terms to maturity (e.g., 30 years),

         4. have identical stated interest rates,

         5. have similar seasoning (i.e., remaining terms to
         maturity),

         6. have aggregate principal amounts within the lesser of 2
      1/2% or $100,000 (plus or minus) on both sides of the
      transaction, with any additional consideration being paid in
      cash,

         7. be sold without recourse,

         8. have similar fair market values,

         9. have similar loan-to-value ratios at the time of the
      reciprocal sale, and

         10. have all security properties for both sides of the
      transaction in the same state.

   /2/ A memorandum from the Director of OES to an officer of the Bank
Board described the "objective" of Memorandum R-49 as "to structure a
transaction which was as close as possible to the IRS 'materially
different' definition which would still not change the economic
position of the association after it engaged in the swap." See App.,
infra, 5a.

   /3/ Transactions designed to take advantage of Memorandum R-49
often involved exchanges of 90% participation interests, rather than
the entire loan, so that the original mortgages could maintain its
relationship with the obligor on the loans.  See Cottage Savings Ass'n
v. Commissioner, 90 T.C. 372, 381 (1988), rev'd, 890 F.2d 848 (6th
Cir. 1989).

   /4/ We are supplying respondent's counsel with a copy of our
petition in Centennial.

   /5/ The question of collectibility is not addressed in the record
in this case.

   /6/ The Solicitor General is disqualified in this case.

   APPENDIX