UNITED STATES OF AMERICA, PETITIONER V. CENTENNIAL SAVINGS BANK FSB (RESOLUTION TRUST CORPORATION, RECEIVER) No. 89-1926 In The Supreme Court Of The United States October Term, 1990 On Petition For A Writ Of Certiorari To The United States Court Of Appeals For The Fifth Circuit Reply Brief For The United States Respondent's primary objection (Br. in Opp. 9-17) is to the description of the first question presented in the government's petition. Respondent asserts that, rather than presenting the broad question of the deductibility of losses claimed by financial institutions upon the exchange of substantially identical mortgage loans, the petition should have presented only the much narrower question of whether Section 165 of the Code precludes such a deduction (see Br. in Opp. 16-17). Respondent then argues that the narrower question that it would substitute lacks sufficient importance to warrant certiorari (see id. at 21-25). This objection plainly is misconceived. As we explained in our petition (at 11-13), the issue presented in this case (and in the other "mortgage swap" cases that have been decided by the courts of appeals) is whether the mortgage exchanges give rise to deductible losses. There is a direct conflict in the circuits on this question, with the Fifth and District of Columbia Circuits holding that the exchanges do give rise to a deductible loss and the Sixth Circuit holding that they do not. The courts addressing this question have been required to consider alternative theories -- arising under both Section 165 and Section 1001 of the Code -- for denying or upholding the claimed loss deductions, and they have reached divergent conclusions. See, e.g., Pet. App. 47a-54a (deduction disallowed because mortgages do not satisfy "materially different" requirement of Section 1001), rev'd, Pet. App. 8a-9a; San Antonio Savings Ass'n v. Commissioner, 887 F.2d 577, 578 (5th Cir. 1989) (deduction allowed because mortgages do satisfy "materially different" requirement of Section 1001), petition for cert. pending, No. 89-1928; First Federal Savings & Loan Ass'n v. United States, 694 F. Supp. 230, 238 (W.D. Tex. 1988) (deduction allowed because Section 1001 does not have "materially different" requirement), aff'd on other grounds, 887 F.2d 593 (5th Cir. 1989), petition for cert. pending, No. 89-1927; Cottage Savings Ass'n v. Commissioner, 890 F.2d 848 (6th Cir. 1989) (deduction disallowed because no loss sustained under Section 165), rev'g 90 T.C. 372 (1988), petition for cert. pending, No. 89-1965. There is no logic to respondent's contention that this Court should limit its review here to determining the correctness of the Sixth Circuit's interpretation of Section 165 in Cottage Savings, because that is the analytical source of the conflict in the circuits on the deductibility issue, while leaving open the other sub-issues that have been litigated in the lower courts. /1/ That approach would lead to an incomplete resolution of the question presented here, with the possibility that other courts in the future would reach a result contrary to that reached by this Court because all of the relevant arguments would not have been presented to this Court. Accordingly, we submit that the petition correctly presents for this Court's consideration the ultimate issue that is the subject of considerable litigation in the lower courts, and on which the courts of appeals are in conflict -- namely, whether the mortgage exchange transactions give rise to a deductible loss. As explained in our petition (at 13; see also U.S. League of Savings Institutions Amicus Br. 4), that issue is being litigated in many cases involving large sums of money, and it warrants this Court's attention. /2/ For the foregoing reasons, and those stated in our petition, the petition for a writ of certiorari should be granted. Respectfully submitted. JOHN G. ROBERTS, JR. Acting Solicitor General /3/ SEPTEMBER 1990 /1/ Even the premise of respondent's suggestion -- namely, that the interpretation of Section 165 is the only point on which the Sixth Circuit disagreed with the Fifth Circuit -- is erroneous. The Sixth Circuit noted that it departed from the view of other courts on the interpretation of Section 1001 as well, agreeing instead with the concurring judges in the Tax Court that Section 1001(c) does not require that exchanged property be materially different in order to allow recognition of gain or loss upon the exchange. See 890 F.2d at 852; 90 T.C. at 403-404 (Cohen, J., concurring). And, while the Fifth Circuit explicitly held that the mortgages exchanged in Memorandum R-49 transactions were "materially different," the Sixth Circuit indicated its view that there was a "lack of a material difference" between the exchanged mortgages (890 F.2d at 855). Thus, contrary to respondent's suggestion, the courts of appeals are in disarray on the correct interpretation of the realization rules of Section 1001. In any event, there is no reason for this Court to restrict the government to arguing only the theory that was accepted by the Sixth Circuit; the confusion in the lower courts with respect to the treatment of these mortgage exchange transactions can best be alleviated by this Court's consideration of all the relevant arguments. /2/ Respondent states that a change in the accounting standards for the savings and loan industry has rendered mortgage exchanges "obsolete" (Br. in Opp. 18) because there is no longer any "regulatory accounting advantage to engaging in a reciprocal mortgage loan sale rather than a straight sale for cash" (id. at 19-20); hence, respondent argues, the question presented does not merit review by this Court. Respondent appears to overstate the effect of this accounting change: first, the change contains an exception for mortgages guaranteed by a government or government-sponsored agency (see id. at 19 n.14); second, respondent assumes that, apart from regulatory accounting, there will never be any advantage to proceeding by way of a mortgage exchange rather than a sale. We recognize, however, that, in light of changes in the economy and in the savings and loan industry, the extent to which this issue will arise for future years is a matter of speculation. Rather, as we stated in our petition (at 13), the demonstrable importance of this issue lies primarily in the abundance of cases that are already being litigated all over the country, with hundreds of millions of dollars at stake. Whether or not the issue will be important in the future, it plainly is important now. /3/ The Solicitor General is disqualified in this case.