Washington Mut. Inc. v. United States

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

WASHINGTON MUTUAL INC., as 

successor in interest to H.F.

Ahmanson & Co. and No. 09-36109

Subsidiaries,

Plaintiff-Appellant,  D.C. No.

2:06-cv-01550-JCC

v. OPINION

UNITED STATES OF AMERICA,

Defendant-Appellee.



Appeal from the United States District Court

for the Western District of Washington

John C. Coughenour, District Judge, Presiding

Argued and Submitted

November 1, 2010—Seattle, Washington

Filed March 3, 2011

Before: Betty B. Fletcher, Ferdinand F. Fernandez, and

Jay S. Bybee, Circuit Judges.

Opinion by Judge B. Fletcher;

Concurrence by Judge Fernandez

3055

3058 WASHINGTON MUTUAL v. UNITED STATES

COUNSEL

Alan I. Horowitz, Steven R. Dixon, and Maria O’Toole Jones,

Miller & Chevalier, Chartered, Washington, D.C., Thomas D.

WASHINGTON MUTUAL v. UNITED STATES 3059

Johnston, Shearman & Sterling, Washington, D.C., for the

plaintiff-appellant.

Arthur Thomas Catterall, Henry C. Darmstadter, David N.

Geier, Teresa E. McLaughlin, and James E. Weaver, U.S.

Department of Justice, Washington, D.C., Helen J. Brunner,

Office of the U.S. Attorney, Seattle, Washington, for the

defendant-appellee.

OPINION

B. FLETCHER, Circuit Judge:

This is yet another case arising in the aftermath of the Gov-

ernment’s efforts to contain the savings and loan crisis of the

late 1970’s and the early 1980’s. In 1981, Home Savings of

America, FSB (“Home Savings”), agreed to acquire three fail-

ing savings and loan associations, or thrifts. In exchange, the

Federal Savings and Loan Insurance Corporation gave Home

Savings a generous package of incentives that included,

among other items, the right to maintain branches in other

states (the “branching rights”) and the right to use the pur-

chase method of accounting for regulatory capital reserve pur-

poses (the “RAP rights”) (together, “the Rights.”).

Washington Mutual, Inc. (“Washington Mutual”), as suc-

cessor in interest to Home Savings and its parent company,

H.F. Ahmanson & Co. (“Ahmanson”), filed amended tax

returns with the Internal Revenue Service (IRS), seeking

refunds for 1990, 1992, and 1993 based on the amortization

of the RAP rights and the abandonment of the branching

rights. After the IRS denied the claims, Washington Mutual

sued in district court. The district court ruled on summary

judgment that Home Savings did not have a cost basis or a

fair market value basis in the RAP rights and the branching

rights and rejected Washington Mutual’s amortization and

loss deduction-related refund requests.

3060 WASHINGTON MUTUAL v. UNITED STATES

Washington Mutual appeals. We hold that Home Savings

had a cost basis in the RAP rights and the branching rights

equal to some part of the excess of the three acquired thrifts’

liabilities over the value of their assets. In light of our ruling,

we do not address Washington Mutual’s alternative theory,

that Home Savings had a fair market value basis in the Rights

pursuant to 26 U.S.C. § 597 (Supp. V 1981) and 12 U.S.C.

§ 1729(f) (Supp. V 1981). Accordingly, we reverse and

remand.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Savings and Loan Crisis

The savings and loan crisis of the late 1970’s and early

1980’s has been chronicled in detail in United States v. Win-

star Corp., 518 U.S. 839 (1996).

The savings and loan, or thrift, industry is one of the busi-

nesses most highly regulated by the Government. 518 U.S. at

844. The modern regulatory regime emerged after the Great

Depression, when Congress created the Federal Home Loan

Bank Board (“the Bank Board”), vested with authority to

charter and regulate federal thrifts, and the Federal Savings

and Loan Insurance Corporation (“FSLIC”), under the Bank

Board’s authority, which was given responsibility to insure

thrift deposits and regulate all federally-insured thrifts. See id.

In the late 1970’s and early 1980’s, high interest rates and

inflation left many thrifts in distress. See id. at 845. Many

thrifts found themselves holding long-term, fixed-rate mort-

gages created when interest rates were low; when market rates

rose, the thrifts had to raise the rates they paid to depositors

in order to attract funds. See id. When the costs of short-term

deposits overtook the revenues from long-term mortgages,

hundreds of thrifts became insolvent. See id.

The crisis was exacerbated by initial efforts to resolve it,

especially by thrift deregulation, weakening the capital

WASHINGTON MUTUAL v. UNITED STATES 3061

reserve requirement, and replacing generally accepted

accounting principles with new “regulatory accounting princi-

ples” for the purpose of determining thrifts’ compliance with

their capital requirements. See id. at 845-46. Combined, these

measures encouraged expansion by thrifts into new and riskier

fields of investment without a corresponding increase in their

capital base, and, in many cases, resulting in weaker institu-

tions. See id.

While the regulators tried to mitigate the crisis generally

through deregulation, the liabilities of the numerous already-

failed thrifts threatened to exhaust FSLIC’s insurance

reserves. See id. at 846. To avoid further insurance liability,

the Bank Board decided to induce healthy financial institu-

tions to take over troubled thrifts in a series of “supervisory

mergers.” See id. at 847-48. Such transactions, in which the

acquiring parties assumed the obligations of thrifts with liabil-

ities that far outstripped their assets, were not intrinsically

attractive to healthy institutions; nor did FSLIC have suffi-

cient cash to promote such acquisitions through direct subsi-

dies alone. See id. at 848. Instead, the principal inducement

for these supervisory mergers was an understanding that the

acquisitions would be subject to a particular accounting

treatment—the “purchase method”—that would help the

acquiring institutions meet their capital reserve requirements

imposed by federal regulations. See id.

The critically appealing aspect of the purchase method of

accounting is that it permits the acquiring entity to designate

the excess of the purchase price over the fair value of all iden-

tifiable assets acquired as an intangible asset called “good-

will.” 518 U.S. at 848-49. Goodwill recognized under the

purchase method as the result of an FSLIC-sponsored supervi-

sory merger was generally referred to as “supervisory good-

will.” Id. at 849. Supervisory goodwill was attractive to

healthy thrifts, and thus an essential element in FSLIC’s

efforts to promote supervisory mergers, because thrift regula-

tors let the acquiring thrifts count supervisory goodwill

3062 WASHINGTON MUTUAL v. UNITED STATES

toward their regulatory reserve requirements and, conse-

quently, enabled the thrift to leverage more loans. Id. at

850-51. Supervisory goodwill was also attractive because the

regulators allowed acquiring thrifts to amortize it over long

periods, up to the 40-year maximum permitted by the gener-

ally accepted accounting practices. Id. at 851. In conjunction

with increases in the value of the thrift’s loans over the life

of the loans (as redemption of the loan approaches), amortiza-

tion of goodwill resulted in net profits during the initial years

following the acquisition, thus allowing acquiring thrifts to

seem more profitable than they in fact were. Id. at 851-53.

B. The Savings and Loan Crisis—Further Developments

In 1989, unsatisfied with the results of the regulatory

response to the thrift industry crisis and in an effort to prevent

the collapse of the industry, Congress enacted the Financial

Institutions Reform, Recovery, and Enforcement Act of 1989,

Pub. L. No. 101-73, 103 Stat. 183 (“FIRREA”). Among other

significant changes, FIRREA required thrifts to “maintain

core capital in an amount not less than 3 percent of the sav-

ings association’s total assets” and defined “core capital” to

exclude “unidentifiable intangible assets” such as supervisory

goodwill. Winstar, 518 U.S. at 857 (quoting 12 U.S.C.

§§ 1464(t)(2)(A), (9)(A)). These new capital requirements

had swift and severe impact upon institutions that had

acquired failed thrifts, as they had relied on supervisory good-

will and capital forbearance granted them at acquisition. See

id.

Three thrift institutions created by way of supervisory

mergers sued for damages on both contractual and constitu-

tional theories. Id. at 858. They argued that the Bank Board

and FLSIC had promised them that the supervisory goodwill

created in their merger transactions could be counted toward

regulatory capital reserve requirements. Id.

After reviewing the transactions, the Court agreed with the

lower courts that “the realities of the transaction favored read-

WASHINGTON MUTUAL v. UNITED STATES 3063

ing those documents as contractual commitments, not mere

statements of policy . . . .” Id. at 863. The Court therefore had

“no reason to question the Court of Appeals’s conclusion that

the government had an express contractual obligation to per-

mit [the plaintiff thrifts] to count supervisory goodwill gener-

ated as a result of [their supervisory] merger[s] . . . as a capital

asset for regulatory capital purposes.” Id. at 864 (internal quo-

tation marks omitted). The Court also “accept[ed] the Federal

Circuit’s conclusion that the Government breached these con-

tracts when, pursuant to the new regulatory capital require-

ments imposed by FIRREA, 12 U.S.C. § 1464(t), the federal

regulatory agencies limited the use of supervisory goodwill

and capital credits” as acceptable regulatory capital. Id. at

870.

The Court rejected all special defenses advanced by the

Government in its effort to prevent enforcement of the con-

tracts at issue, see id. at 860, and affirmed the Federal Cir-

cuit’s ruling that the United States was liable to the thrifts for

breach of contract. Id. at 910.

C. Home Savings’ Acquisition of Security Federal Savings

and Loan Association, Hamiltonian Federal Savings and

Loan Association, and Southern Federal Savings and

Loan Association

One of the supervisory mergers undertaken pursuant to the

Bank Board’s strategy to mitigate the savings and loan crisis

involved H.F. Ahmanson & Co. and its wholly-owned subsid-

iary, Home Savings of America, FSB. On November 5, 1981,

Home Savings, at the time a California-chartered thrift, sub-

mitted a proposal to acquire Southern Federal Savings and

Loan Association (“Southern”), an ailing federally-chartered

mutual thrift located in Florida. Home Savings subsequently

offered to acquire two other struggling thrifts: Hamiltonian

Federal Savings and Loan Association (“Hamiltonian”) and

Security Federal Savings and Loan Association (“Security”),

both located in Missouri. Although other institutions had

3064 WASHINGTON MUTUAL v. UNITED STATES

expressed interest in acquiring the three thrifts, FSLIC recom-

mended that the Bank Board approve the acquisitions by

Home Savings as the proposals least costly to FSLIC.1

Following negotiations, FSLIC and Home Savings agreed

that the acquisition was to be structured as two separate merg-

ers. First, Hamiltonian and Security was merged into South-

ern. Southern was then merged into Home Savings, upon

which event Home Savings was reorganized into a federally

chartered thrift. This second merger was subject to several

conditions. Among them was the Bank Board’s approval of

the transactions accomplished by the two mergers and, addi-

tionally, that “FSLIC shall have entered into an agreement

with Home [Savings] in form and substance satisfactory to

Home [Savings].”

On December 17, 1981, FSLIC and Home Savings entered

into an “Assistance Agreement.” The agreement referenced

the two mergers and stated that FSLIC “has decided, pursuant

to § 406(f) of the [National Housing] Act, 12 U.S.C. § 1729(f)

(Supp. III 1979), to provide indemnification and/or financial

assistance as set forth in this Agreement having determined

that each MERGING ASSOCIATION is in danger of default

and that the amount of such assistance would be less than the

losses [FSLIC] would sustain upon the liquidation of each

such MERGING ASSOCIATION through a receivership

accompanied by the payment of insurance of accounts.”2 The

1

The Bank Board had to approve all mergers involving thrifts. See 12

U.S.C. §§ 1467a(e)(1)(A)-(B), 1817(j)(1) (Supp. V 1981).

According to FSLIC, Home Savings’ proposal to acquire Southern,

Hamiltonian, and Security would cost FSLIC $2.5 million. This was

$252.2 million less than the cost to FSLIC of liquidating the three thrifts

and $167.3 million less than the cost to FSLIC of a controlled payout of

the thrifts over fifteen years.

2

The Assistance Agreement’s reference to the 1979 supplement of the

United States Code, as opposed the 1981 supplement (applicable at the

time of the agreement) has no particular relevance. At both times, 12

U.S.C. § 1729(f) read identically. Compare 12 U.S.C. § 1729(f) (Supp. III

1979) with 12 U.S.C. § 1729(f) (Supp. V 1981).

WASHINGTON MUTUAL v. UNITED STATES 3065

Assistance Agreement recited that the Home Savings-

Southern merger was to be “a tax free reorganization pursuant

to Section 368(a)(1)(G) of the Internal Revenue Code . . . .”

The Assistance Agreement contemplated a complex system

of assistance to be provided to Home Savings. It included,

among other items: indemnification against losses resulting

from unreserved-for liabilities or losses arising out of legal

challenges to the mergers or the Assistance Agreement; cash

contributions equal to the negative net worth, if any, of each

merging thrift, with the negative net worth including the

amounts by which appraised losses exceeded appraised gains

on real estate owned by the merging thrifts as of the effective

date of the mergers; and indemnification for indicated losses

on “problem loans” of the merging thrifts identified as such

during the initial audit.

The obligations of Home Savings and FSLIC under the

Assistance Agreement were subject, among other conditions,

to the merger of Hamiltonian and Security into Southern, and

then of the new Southern into Home Savings. Home Savings’

obligations were subject to satisfaction of several additional

conditions, among them the Bank Board’s issue of the federal

charter to Home Savings, a supervisory forbearance letter in

approved form, and a letter containing “certifications that

grounds specified in 12 U.S.C. § 1464 (d)(6)(A)(i) or (iii)

exist or will exist with respect to each MERGING ASSOCIA-

TION. . . .”

The Assistance Agreement contained an integration clause

that incorporated by reference “the merger agreement

between SOUTHERN and HOME and any resolutions or let-

ters issued contemporaneously herewith by the Federal Home

Loan Bank Board or [FSLIC] . . . .” Unless otherwise agreed

by the parties, the Assistance Agreement was to terminate

after five years.

3066 WASHINGTON MUTUAL v. UNITED STATES

Also on December 17, 1981, the Bank Board issued Reso-

lution 81-803. The resolution stated that the Bank Board

determined that the merger of Southern into Home Savings3

was “pursuant to an action by the FSLIC to prevent the failure

of Southern” and “the insurance liability or risk of the FSLIC

will be reduced as a result of” the merger. The resolution

explained that these findings constituted certification that the

grounds specified in 12 U.S.C. § 1464(d)(6)(A)(i) or (iii)

existed and were necessary to ensure that the merger of

Southern into Home Savings would qualify as a tax-free reor-

ganization under 26 U.S.C. § 368(a)(1)(G). See 26 U.S.C.

§ 368(a)(3)(D)(ii)(III) (Supp. V 1981).

Also in Resolution 81-803, the Bank Board approved the

establishment of Home Savings’ Florida and Missouri

branches resulting from Home Savings’ acquisition of the

merging thrifts, and conditionally approved Home Savings’

establishment of two more branches in each of those states.

As a result, “future applications of Home . . . for permission

to establish or maintain branch offices in the State of Florida

and Missouri shall be processed . . . as if the home office of

Home were located in Florida or Missouri, respectfully [sic].”

The resolution authorized the issuance of a letter to Home

Savings, also dated December 17, 1981, confirming these

branching rights. These rights were valuable to Home Savings

because until 1981, Bank Board regulations prohibited thrifts

from opening branches outside of the state in which they had

their home office.4

3

When referring to the Home Savings-Southern merger, we refer to

Southern as it existed after the merger of Security and Hamiltonian into

it.

4

In September 1981, the Bank Board issued regulations that made

branching rights available, but only if the first branch in the non-home

state was acquired in a supervisory merger. See 12 C.F.R.

§ 556.5(a)(3)(ii)(a) (1982 ed.); Statement of Policy Regarding Supervisory

Mergers and Acquisitions, 46 Fed. Reg. 45120-1, 45,120 (Sept. 10, 1981).

WASHINGTON MUTUAL v. UNITED STATES 3067

Resolution 81-803 further approved the purchase method of

accounting for the acquisition of Southern by Home Savings,

and stated that

the Bank Board hereby determines that it does not

object to (1) the amount of any resulting intangible

assets being first assigned to the acquired savings

deposit base in the amount of .5 percent of the

acquired savings balances and .05 percent of the

acquired certificate balances, which will have a life

of ten (10) years, and (2) any excess being assigned

to goodwill and initially amortized, in accordance

with generally accepted accounting principles, over

forty (40) years . . . .

The parties refer to these rights, cumulatively, as the “RAP

rights.”

Finally, Resolution 81-803 authorized the issuance of a

supervisory forbearance letter. The letter, also dated Decem-

ber 17, 1981, represented that, during the five-year term of the

Assistance Agreement, the regulators would waive violations

by Home Savings of regulatory reserve and net worth require-

ments attributable to the merger of Southern into Home Sav-

ings. The letter also represented that losses of Southern shall

not be deemed to reduce Home Savings’ net worth for the

purpose of regulations of the Bank Board or for FSLIC’s per-

mitting the waiver of net worth requirements.

The merger of Hamilton and Security into Southern, and

then Southern into Home Savings proceeded as planned, on

the same day as the Assistance Agreement, December 17,

1981.

In the wake of the Supreme Court’s decision in Winstar,

Ahmanson and Home Savings filed their own Winstar-like

damage suit. The lawsuit concerned several supervisory merg-

ers, including the Southern-Home Savings merger. See Home

3068 WASHINGTON MUTUAL v. UNITED STATES

Sav. of Am. v. United States, 50 Fed. Cl. 427, 430-31 (2001)

(“Home I”), aff’d 399 F.3d 1341 (Fed. Cir. 2005). Although

Home Savings “tacitly acknowledge[d] the lack of explicit

language regarding the inclusion of supervisory goodwill in

regulatory capital,” id. at 434, the court concluded based on

its analysis of the Assistance Agreement and the FHLBB Res-

olution 81-803 that “the [Bank Board] and . . . FSLIC prom-

ised that plaintiffs would be able to count supervisory

goodwill acquired in the Florida/Missouri . . . transaction[ ] in

meeting their regulatory capital requirements until such good-

will was completely amortized.” Id. at 438. The court then

held that “the limitation imposed by FIRREA on plaintiffs’

ability to count supervisory goodwill in meeting their regula-

tory capital requirements constituted a breach of the contracts

entered into by plaintiffs and the government in the Flori-

da/Missouri . . . transaction[ ].” Id. at 439. In Home Sav. of

Am. v. United States, 57 Fed. Cl. 694 (2003), aff’d 399 F.3d

1341, and Home Sav. of Am. v. United States, 70 Fed. Cl. 303

(2006), the court awarded Home Savings a total of

$90,360,000 in damages and grossed up the awards for taxes,

resulting in a total award of $149,951,000.

D. Current Litigation

In 1992 and 1993, Home Savings sold its Missouri

branches.

In 1998, Washington Mutual acquired Ahmanson and its

wholly-owned subsidiaries, including Home Savings. In 2005,

Ahmanson filed amended income tax returns, claiming

refunds for the years 1990, 1992 and 1993. Ahmanson con-

tended that, for those years, the Internal Revenue Service

failed to allow Home Savings amortization deductions for the

RAP rights and abandonment loss deductions for its abandon-

ment of the Missouri branching rights. Ahamanson claimed

refunds of $91,442,362 each for the years 1990 and 1992 and

$8,935,369 for the year 1993. The Service denied the refund

requests.

WASHINGTON MUTUAL v. UNITED STATES 3069

Washington Mutual, as successor in interest to Ahamanson

and Home Savings, brought this refund lawsuit. Washington

Mutual alleged that Home Savings’ tax basis in the RAP

rights was $46,809,000 under 26 U.S.C. § 1012, the general

cost-basis rule, $63,000,000 under 26 U.S.C. § 362(b), the

carryover-basis rule applicable to tax-free reorganizations, or

$63,000,000 under 26 U.S.C. § 597, regarding assistance

received from FSLIC under 12 U.S.C. § 1729(f). Based on

those figures, Washington Mutual alleged that Home Savings

was entitled to amortization deductions for the RAP rights for

each year of either $6,436,238 or $8,662,500 (based on the

accelerated five-year phase-out under FIRREA), or

$1,170,225 or $1,575,000 (based on the initial 40-year life

under the Assistance Agreement). Alternatively, Washington

Mutual alleged that, if there were separate RAP rights associ-

ated with Home Savings’ Missouri branches, then it was enti-

tled to abandonment loss deductions for the years 1992 and

1993 equal to any remaining unamortized basis in those

rights, pursuant to 26 U.S.C. § 165.

Washington Mutual further alleged that Home Savings’ tax

basis in the Missouri branching rights was $25,605,000 under

26 U.S.C. § 1012 or $35,000,000 under § 362(b) or § 597. It

therefore argued that Home Savings was entitled to an aban-

donment loss deduction for 1992 in an unspecified amount

with respect to the branching rights associated with the

branches divested in that year and an abandonment loss

deduction for 1993 of either $25,605,000 or $35,000,000.

Finally, Washington Mutual argued that, to the extent

Home Savings was not entitled to recover its alleged basis in

the Missouri branching rights or in any separate RAP rights

associated with the Missouri branches through loss or amort-

ization deductions, those amounts should be added to Home

Savings’ basis in those branches in computing its gain or loss

on its sales of the branches in 1992 and 1993.

Based on the above figures, Washington Mutual sought a

total minimum refund of $15,542,584.

3070 WASHINGTON MUTUAL v. UNITED STATES

Both Washington Mutual and the United States filed

motions for partial summary judgment on the issue of Home

Savings’s tax basis in the RAP rights and the Missouri

branching rights.

Washington Mutual contended that, under the doctrine of

collateral estoppel, the Winstar-type litigation between Home

Savings and the United States conclusively established that

“(1) Home contracted with FSLIC; (2) Home received the

Branching Rights and RAP Right as consideration or induce-

ment from FSLIC; and (3) Home’s consideration for the

Rights was the assumption of FSLIC’s liability.” Therefore,

Washington Mutual argued, Home Savings had a cost basis in

the Rights equal to FSLIC’s liability on account of and to the

extent of the three acquired thrifts’ inability to satisfy its

depositors, that is, an amount equal to “the excess of the total

liabilities over the current fair market value of the failed

thrifts’ assets.” Washington Mutual argued alternatively that

Home Savings had a fair market value basis in the Rights

because they were granted as an inducement to enter into the

supervisory merger. Thus, Washington Mutual reasoned, the

Rights qualified as “assistance” under 12 U.S.C. § 1729(f)

and no reduction in the tax basis of Home Savings’ assets was

to be taken by reason of that assistance, pursuant to 26 U.S.C.

§ 597.5

The United States attacked both Washington Mutual’s the-

ories as an effort to get “double recovery.” It argued that rec-

ognizing Home Savings a cost basis in the Rights based on

the assumption of FSLIC’s liabilities requires characterizing

some of the acquired thrifts’ liabilities as FSLIC’s liabilities,

because Home Savings did not pay FSLIC or the Bank Board

separate consideration for the Rights. In the United States’

view, that would be inconsistent with the supervisory merg-

er’s treatment as a tax-free “G” reorganization, which

5

Washington Mutual’s partial summary judgment motion did not

address its third tax basis theory, premised on 26 U.S.C. § 362(b).

WASHINGTON MUTUAL v. UNITED STATES 3071

requires, among other conditions, that Home Savings assume

“substantially all” of Southern’s liabilities as a result of the

merger. See 26 U.S.C. § 368(a)(3)(D)(ii)(II) (Supp. V 1981).

The United States also argued that neither the branching

rights nor the RAP rights qualified for tax-free treatment

under 26 U.S.C. § 597 because, in its view, that section con-

cerns financial assistance provided by FSLIC pursuant to 12

U.S.C. § 1729(f) and not non-financial intangibles.

The district court granted partial summary judgment in

favor of the United States. Preliminarily, the district court

held that neither Winstar nor the decisions issued in the

Winstar-type lawsuit between Home Savings and the United

States decided the precise issues raised by this case.

The district court rejected Washington Mutual’s cost basis

theory. The court first rejected the distinction drawn by Wash-

ington Mutual between the acquired thrifts’ liabilities and

FSLIC’s insurance liabilities with respect to those thrifts,

holding that they were “one and the same” and that the

merger did not relieve FSLIC of its insurance obligations, but

only that those obligations were “simply less likely to come

to fruition.” It further held that Home Savings received the

Rights as part of the same transaction encompassing the

merger, and not as a separate transaction. Finally, the district

court reasoned that Home Savings did not bargain for the

right to assign a basis to the Rights and that whatever tax ben-

efits were conferred were limited to the tax-free “G” reorgani-

zation, for which the parties specifically bargained.

The district court also rejected Washington Mutual’s fair

market value theory. The court held that the Rights do not

qualify as assistance under 26 U.S.C. § 597, which the district

court determined is limited to financial assistance received

under 12 U.S.C. § 1729(f).

After the parties settled Washington Mutual’s other claims,

the district court entered judgment in favor of the United

3072 WASHINGTON MUTUAL v. UNITED STATES

States with respect to Washington Mutual’s claim that it had

a cost basis or a fair market value basis in the Rights and

rejected Washington Mutual’s amortization and loss

deduction-related refund requests.

Washington Mutual appeals.

DISCUSSION

We review de novo a district court’s grant of partial sum-

mary judgment. United States v. $100,348.00 in U.S. Cur-

rency, 354 F.3d 1110, 1116 (9th Cir. 2004). Summary

judgment is warranted when “there is no genuine dispute as

to any material fact and the movant is entitled to judgment as

a matter of law.” Fed. R. Civ. P. 56(a). Where, as here, the

case turns on a mixed question of fact and law and the only

disputes relate to the legal significance of undisputed facts,

the controversy is a question of law suitable for disposition on

summary judgment. Thrifty Oil Co. v. Bank of America Nat.

Trust and Sav. Ass’n, 322 F.3d 1039, 1046 (9th Cir. 2003).

Before turning to the merits, we address Washington Mutu-

al’s argument that the doctrine of collateral estoppel precludes

relitigating the two underlying issues presented by this case:

(1) whether Home Savings received the Rights in exchange

for its assumption of FSLIC’s liabilities on account of and to

the extent of the three failing thrifts’ inability to satisfy their

liabilities to their depositors; and (2) whether Home Savings

received the Rights from FSLIC as an inducement to the

supervisory merger, pursuant to 12 U.S.C. § 1729(f).

Collateral estoppel, or issue preclusion, bars the relitigation

of both issues of law and issues of fact actually adjudicated

in previous litigation between the same parties. Steen v. John

Hancock Mut. Life Ins. Co., 106 F.3d 904, 910 (9th Cir.

1997). Collateral estoppel applies not only against actual par-

ties to prior litigation, but also against a party that is in privity

to a party in previous litigation. Id.

WASHINGTON MUTUAL v. UNITED STATES 3073

In Home I, the Court of Federal Claims held, in relevant

part, that: (1) the Bank Board Resolution 81-803, incorporated

by reference in the Assistance Agreement, contained an

enforceable promise that supervisory goodwill would count in

Home Savings’ meeting regulatory capital requirements until

such goodwill was completely amortized; and (2) the limita-

tions imposed by the government in FIRREA constituted a

breach of that promise. Home I, 50 Fed. Cl. at 434-39. This

holding does not reach the issues raised in the current litiga-

tion. Collateral estoppel therefore does not apply. We now

turn to the merits.

Washington Mutual’s main theory on appeal is that the

Assistance Agreement, the Bank Board Resolution 81-803,

and the December 17, 1981, supervisory forbearance and

branching rights letters memorialized a three-party transaction

in which Home Savings agreed to acquire Hamilton, Security,

and Southern, and thereby relieve FSLIC of its impending

insurance liability to the depositors of those ailing thrifts, in

exchange for the branching rights and the RAP rights. Wash-

ington Mutual contends that the cost to Home Savings to

acquire the Rights was the amount by which the acquired

thrifts’ liabilities exceeded the value of their assets, also

referred to as “excess liability.” Washington Mutual therefore

concludes that Home Savings took a tax basis in the Rights

equal to that excess liability, pursuant to 26 U.S.C. § 1012.

The United States counters that, although Home Savings

lessened FSLIC’s insurance risks by engaging in the supervi-

sory merger, the only liabilities it assumed through the merger

were those belonging to the three failing thrifts. The United

States also argues that Washington Mutual’s theory presup-

poses that Home Savings acquired some of the failing thrifts’

liabilities outside the merger. This, the United States further

argues, is inconsistent with the supervisory merger’s treat-

ment as a tax-free “G” reorganization, which requires that

Home Savings had assumed “substantially all” of Southern’s

liabilities as a result of the merger.

3074 WASHINGTON MUTUAL v. UNITED STATES

I

[1] This case requires us to return to the very basics of tax

law. The term “basis” is a fundamental concept and refers to

a taxpayer’s capital stake in an asset for tax purposes. See In

re Lilly, 76 F.3d 568, 572 (4th Cir. 1996). It is taken into

account as an offset to the amount realized (or a measurement

of loss) upon the disposition of the asset, or, in the case of

certain business and investment assets, in the form of depreci-

ation or amortization deductions over the life of the asset. See

id.

[2] Generally, a taxpayer’s basis in an asset is equal to the

cost to the taxpayer of acquiring the asset. 26 U.S.C. § 1012.6

See also, e.g., Peracchi v. Comm’r, 143 F.3d 487, 490 (9th

Cir. 1998). The term “cost” generally includes any assump-

tion of the seller’s liabilities. See Comm’r v. Oxford Paper

Co., 194 F.2d 190, 192 (2d Cir. 1952). See also Oxford Life

Ins. Co. v. United States, 790 F.2d 1370, 1374 (9th Cir. 1986)

(“Where a taxpayer acquires all the assets of another in a

transaction, the amount of liability assumed is treated as part

of the cost of acquiring the tangible and intangible assets

received.”). The cost-basis rules apply equally to tangible and

intangible property. See Tenneco, Inc. v. United States, 433

F.2d 1345, 1346 (5th Cir. 1970).

As an overarching principle, absent specific provisions, the

tax consequences of any particular transaction must reflect the

economic reality. Kraft, Inc. v. United States, 30 Fed. Cl. 739,

766 (Fed. Cl. 1994). See also Winstar, 518 U.S. at 863.

6

That section provides: “The basis of property shall be the cost of such

property, except as otherwise provided in this subchapter and subchapters

C (relating to corporate distributions and adjustments), K (relating to part-

ners and partnerships), and P (relating to capital gains and losses).” 26

U.S.C. § 1012 (emphasis added). Neither Washington Mutual nor the

United States argue, on this appeal, that any of the exceptions provided for

in 26 U.S.C. § 1012 applies.

WASHINGTON MUTUAL v. UNITED STATES 3075

[3] The documentary evidence, as well as the economic

realities of the transaction, compel the conclusion that the

Home Savings-Southern supervisory merger and the Assis-

tance Agreement between FSLIC and Home Savings com-

prise one, all-encompassing transaction wherein the branching

rights and the RAP rights were part of the consideration

received by Home Savings. The merger agreement between

Home Savings and Southern was conditioned upon Home

Savings and FSLIC having entered into the Assistance Agree-

ment. Conversely, the Assistance Agreement was conditioned

upon the merger having been accomplished. The Assistance

Agreement was also conditioned upon several actions by the

Bank Board, which issued Resolution 81-803, the letter

regarding branching rights, and the supervisory forbearance

letter. The Assistance Agreement explicitly integrated the

Home Savings-Southern merger agreement, Resolution 81-

803, and the two Bank Board letters into the agreement, pro-

viding:

This Agreement, together with any interpretation

thereof or understanding agreed to in writing by the

parties, constitutes the entire agreement between the

parties hereto and supersedes all prior agreements

and understandings of the parties in connection here-

with, excepting only the merger agreement between

SOUTHERN and HOME and any resolutions or let-

ters issued contemporaneously herewith by the Fed-

eral Home Loan Bank Board or [FSLIC], provided,

however, that in the event of any conflict, variance,

or inconsistency between this Agreement and the

merger agreement, the provisions of this Agreement

shall govern and be binding on all parties insofar as

the rights, privileges, duties, obligations, and liabili-

ties of [FSLIC] are concerned.

The Home Savings-Southern merger, the Assistance Agree-

ment, Resolution 81-803, and the Bank Board letters confirm-

3076 WASHINGTON MUTUAL v. UNITED STATES

ing the branching rights and the supervisory forbearance were

all signed or issued on December 17, 1981.

[4] The conditioning of the Home Savings-Southern

merger and the Assistance Agreement each upon the other,

their synchronized timing, and, most importantly, the integra-

tion of the merger agreement into the Assistance Agreement,

conclusively establish that Home Savings and FSLIC

intended that the two transactions be integrated. The depen-

dence of the merger and the assistance agreement each upon

the other conforms to the economic realities. FSLIC had no

interest in offering Home Savings any incentives without the

guarantee of an immediate return. In the context of the sav-

ings and loan crisis, that return was the assimilation of three

failing thrifts by a healthy one, thereby considerably reducing

FSLIC’s own insurance liability exposure on account of the

failing thrifts’ deposit liabilities and contributing to the effort

to stabilize the thrift industry. See Winstar, 518 U.S. at 846-47

(“[T]he multitude of already-failed savings and loans con-

fronted FSLIC with deposit insurance liabilities that threat-

ened to exhaust its insurance fund. . . . Realizing that FSLIC

lacked the funds to liquidate all of the failing thrifts, the Bank

Board chose to avoid the insurance liability by encouraging

healthy thrifts and outside investors to take over ailing institu-

tions in a series of ‘supervisory mergers.’ ”). On its part,

Home Savings had no interest in acquiring the three failing

thrifts absent incentives from the government to compensate

for the assumption of liabilities well in excess of the value of

the thrifts’ assets. See id. at 848 (“Such transactions, in which

the acquiring parties assumed the obligations of thrifts with

liabilities that far outstripped their assets, were not intrinsi-

cally attractive to healthy institutions . . . . Instead, the princi-

pal inducement for these supervisory mergers was an

understanding that the acquisitions would be subject to a par-

ticular accounting treatment that would help the acquiring

institutions meet their reserve capital requirements imposed

by federal regulations.”).

WASHINGTON MUTUAL v. UNITED STATES 3077

Home Savings, indeed, received a generous incentive pack-

age, reflected in the Assistance Agreement, Resolution 81-

803, the Bank Board letter regarding the branching rights, and

the supervisory forbearance letter. That package included,

among other items, cash contributions from FSLIC equal to

the negative worth of the three acquired thrifts; various

indemnities; and the branching rights and the RAP rights. Fur-

thermore, FSLIC and Home Savings negotiated that the Home

Savings-Southern merger be structured as a tax-free “G” reor-

ganization, to which purpose the Bank Board made, in Reso-

lution 81-803, the necessary determinations in order for the

transaction to so qualify. See 26 U.S.C. § 368(a)(3)(D)(ii)(III)

(Supp. V 1981).

[5] The cost to Home Savings for acquiring these various

incentives and benefits was the excess of the three failing

thrifts’ liabilities over the value of their assets.7 Home Sav-

ings, therefore, received a cost basis in the branching rights

and the RAP rights equal to some part of the total amount of

that excess liability.8

7

According to a December 16, 1981, FSLIC memorandum to the Bank

Board, Home Savings estimated at that time that the supervisory goodwill

arising from the mergers would be approximately $150 million. Goodwill,

of course, is “the excess of the purchase price over the fair value of all

identifiable assets acquired.” Winstar, 518 U.S. at 848-49. The parties,

therefore, entered the transaction with a pretty clear picture of the cost

incurred by Home Savings by engaging in the mergers. We do not express,

however, any opinion on whether the parties are bound by that estimate.

8

We note here that Washington Mutual argues that the cost to Home

Savings for acquiring the Rights was the excess of the acquired thrifts’ lia-

bilities over their assets. The Rights, however, were part of a complex

consideration package, all of which was acquired by Home Savings in

exchange for its assumption of the thrifts’ liabilities. The issue of how to

allocate that cost among the various components of Home Savings’ con-

sideration package is not before us.

3078 WASHINGTON MUTUAL v. UNITED STATES

II

The United States contends that allowing Home Savings a

cost basis in the Rights is incompatible with the Home

Savings-Southern merger being recognized as a tax-free “G”

reorganization. The United States relies on Washington Mutu-

al’s statement that Home Savings obtained the Rights “outside

the framework of the merger.” The United States reads this

statement as saying that Home Savings acquired some of

Southern’s liabilities “outside the framework of the merger.”

If so, that was in violation of the tax-free “G” reorganization

requirement that “substantially all” of the transferor’s liabili-

ties be acquired by the acquiring institution in the transfer.

See 26 U.S.C. § 368(a)(3)(D)(ii)(II) (Supp. V 1981).

Special rules apply when a corporation acquires assets in a

tax-free reorganization under 26 U.S.C. § 368. The recipient

corporation takes a carryover basis in the assets of the trans-

feror (that is, it assumes the basis the property had in the

hands of the transferor), increased by the amount of gain, if

any, recognized by the transferor in the transfer. 26 U.S.C.

§ 362(a)(2), (b).

[6] A “G” reorganization is a § 368 court-approved trans-

fer by a corporation of all or part of its assets to another cor-

poration in a bankruptcy, receivership, foreclosure, or similar

judicial proceeding, provided generally that the owners of the

transferor corporation receive stock or securities of the trans-

feree corporation pursuant to the plan of reorganization. 26

U.S.C. § 368(a)(1)(G), (3)(A), (3)(B). Under former

§ 368(a)(3)(D)(ii), a transfer of assets by a thrift could qualify

as a “G” reorganization even if its owners did not receive

stock or securities of the transferee corporation, but only if (1)

the thrift transferred substantially all of its assets to the trans-

feree corporation, (2) substantially all of the liabilities of the

transferring thrift immediately before the transfer became lia-

bilities of the transferee corporation as a result of the transfer,

and (3) the Bank Board or FSLIC certified the existence of a

WASHINGTON MUTUAL v. UNITED STATES 3079

ground for appointing a receiver for the transferor thrift speci-

fied in 12 U.S.C. § 1464(d)(6)(A)(i) (insolvency), (ii) (dissi-

pation of assets), or (iii) (unsafe or unsound business

conditions). See 26 U.S.C. § 368(a)(3)(D)(ii) (Supp. V 1981);

12 U.S.C. § 1464(d)(6)(A)(i)-(iii) (1976 & Supp. V 1981).

At issue here is the second requirement, whether substan-

tially all of Southern’s liabilities became liabilities of Home

Savings as a result of the supervisory merger. To argue that

this requirement is not met, the United States seizes on iso-

lated, out-of-context statements made by Washington Mutual

in its effort to explain the complex nature of the transaction

between Home Savings and FSLIC, and to explain why Home

Savings took a cost basis in the Rights. There is no denying

that Washington Mutual struggled to try to explain its cost

basis theory. Washington Mutual, however, has never con-

tended that Home Savings acquired any portion of Southern’s

liabilities outside the merger. Its theory has always been that

Home Savings acquired the Rights outside the merger,

through the Assistance Agreement, in exchange for relieving

FSLIC of its impending insurance liability on account of

Southern’s liabilities to depositors.

[7] Furthermore, as we have explained, the Home Savings-

Southern merger and the assistance agreement between Home

Savings and FSLIC are integral parts of one, all-

encompassing transaction wherein Home Savings acquired

Southern’s excess liability in exchange for a complex consid-

eration package that included structuring the merger as a tax-

free “G” reorganization. For this purpose, the Home Savings-

Southern merger agreement explicitly provided that

all assets and property of every kind and character,

real, personal and mixed, tangible and intangible,

choses in action, rights and credits then owned by

[Southern], or which would inure to it, shall immedi-

ately . . . be vested in and become the property of the

[Home Savings] . . . . All rights, duties and obliga-

3080 WASHINGTON MUTUAL v. UNITED STATES

tions of [Southern] shall remain unimpaired, and

[Home Savings] shall, on the Effective Date, suc-

ceed to all of such rights and assume all of such

duties and obligations.

[8] Home Savings acquired “substantially all” of South-

ern’s liabilities in one transfer and met all other requirements

of 26 U.S.C. § 368(a)(3)(D)(ii) (Supp. V 1981). Recognizing

that Home Savings had a cost basis in the branching rights

and the RAP rights is not incompatible with the Home

Savings-Southern merger being recognized as a tax-free “G”

reorganization.

III

The district court also held that FSLIC and Home engaged

in one transaction wherein Home Savings agreed to acquire

the three failing thrifts and to assume their duties and obliga-

tions in exchange for “the package of regulatory ‘carrots’ con-

tained in the Assistance Agreement.” Nonetheless, the district

court held that Home Savings did not take a basis in the

Rights because it did not bargain for it and “[a]s a matter of

general contract interpretation, it makes more sense to con-

clude that whatever tax benefits were conferred came with the

part of the aid package specifically concerning taxation: the

‘G’ reorganization.”

The United States wisely does not make this argument on

appeal. First, what Home Savings bargained for was not that

it would not have to pay taxes on the merger, but that the

merger would be structured to qualify as a tax-free “G” reor-

ganization. The tax-free treatment resulted not from that

structure, but by operation of the Internal Revenue Code.

Similarly, the tax treatment of the Rights depends not on the

agreement of the parties on the issue, but on the provisions of

the Internal Revenue Code, as applied to the parties’ transac-

tion.

WASHINGTON MUTUAL v. UNITED STATES 3081

[9] Second, that Home Savings and FSLIC bargained for

structuring the merger as a tax-free “G” reorganization, but

did not also bargain for the tax treatment of the Rights, does

not mean we cannot recognize Home Savings’ cost basis in

the Rights. Because the tax consequences of a transaction

flow by operation of the tax law, the parties’ failure to antici-

pate and negotiate all tax consequences of their transaction

cannot be interpreted as limiting the transaction’s tax conse-

quences to only those expressly anticipated and bargained

over by the parties. That one party to this litigation was a gov-

ernmental entity is no reason to depart from this basic princi-

ple.

IV

“[W]here a transaction has economic substance and is eco-

nomically realistic, it should be recognized for tax purposes,

and the fact that a transaction is so arranged that the tax con-

sequences are highly favorable to one of the parties affords

the Commissioner no license to recast it into one of less

advantage.” Lewis & Taylor, Inc. v. Comm’r, 447 F.2d 1074,

1077 (9th Cir. 1971). Here, Home Savings agreed to acquire

Security, Hamiltonian, and Southern, whose liabilities far

exceeded their assets, in exchange for a complex consider-

ation package including, among other items, cash, indemni-

ties, the branching and the RAP rights, and the structuring of

the merger as a tax-free “G” reorganization. To this transac-

tion, we apply basic tax principles regarding basis. This leads

us to hold that Home Savings had a cost basis in the Rights

equal to some part of the acquired thrifts’ excess of liabilities

over the value of their assets.9

9

Because Washington Mutual prevails on the cost-basis theory, we need

not address its alternative theory, that it should be recognized a fair market

value basis because the Rights were “assistance” provided by FSLIC to

facilitate a supervisory merger, and therefore should receive the favorable

tax treatment afforded by 26 U.S.C. § 597 (Supp. V 1981).

3082 WASHINGTON MUTUAL v. UNITED STATES

[10] The district court’s judgment and grant of the United

States’ motion for partial summary judgment is REVERSED.

The case is REMANDED to the district court with instruc-

tions to grant Washington Mutual’s motion for partial sum-

mary judgment. It shall proceed to determine the cost basis

and conduct further proceedings in accordance to this opinion.

REVERSED and REMANDED.

FERNANDEZ, Circuit Judge, concurring:

I am not satisfied that Washington Mutual, Inc. (“WaMu”)

can establish a cost basis in the rights that the government

gave Home Savings of America (“Home Savings”) when

Home Savings took over other savings and loan institutions

pursuant to a tax-free “G” reorganization.1 However, I concur

in the result on a different ground — those rights have a fair

market value basis.2

WaMu, successor in interest to Home Savings, brought this

action to recover income taxes that Home Savings allegedly

overpaid to the United States. The district court granted sum-

mary judgment to the government, and this appeal followed.

WaMu asserts that the regulatory accounting privileges

(“RAP”) and the branching rights (hereafter collectively “the

Rights”) received from the Federal Savings and Loan Insur-

ance Corporation (“FSLIC”) as part of an Assistance Agree-

ment between FSLIC and Home Savings have a fair market

value basis.3 WaMu appears to be correct; surely they had

great value, which is why the transaction went forward. How-

1

26 U.S.C. § 368(a)(1)(G).

2

I therefore see no need to wrestle with the question of cost basis at this

time.

3

See 26 U.S.C. § 61(a)(1); 26 C.F.R. § 1.61-2(d)(1).

WASHINGTON MUTUAL v. UNITED STATES 3083

ever, the government asserts three reasons that WaMu is in

error. I reject those reasons.

First, the government says, the Rights were not received

from FSLIC at all, but were received from the Federal Home

Loan Bank Board (“the Board”). I disagree. No doubt the

Rights did flow from actions of the Board, but, then, FSLIC

is just an arm of the Board and is operated by the Board. See

United States v. Winstar Corp., 518 U.S. 839, 890, 116 S. Ct.

2432, 2462, 135 L. Ed. 2d 964 (1996); see also 12 U.S.C.

§ 1725(a). Indeed, the Board operates through FSLIC. See

Winstar, 518 U.S. at 891, 116 S. Ct. at 2463. So, it is almost

tautological to say that what FSLIC gave originated at the

Board. What is significant, however, is that the Assistance

Agreement was the contract between FSLIC and Home Sav-

ings and that agreement incorporates the Board resolutions

that ultimately conferred the Rights upon Home Savings. It

cannot be doubted that the Rights were received from FSLIC

as part of the compensation to Home Savings when it, at the

urging of FSLIC, merged with a number of insolvent savings

and loan institutions.

Second, the government argues that the Rights were not

given to Home Savings under the provisions of 12 U.S.C.

§ 1729(f). Again, I must disagree. If the Rights were not con-

veyed pursuant to that provision, it is difficult to see how they

were conveyed at all because that is the provision that grants

FSLIC the authority to enter into agreements and issue bene-

fits to an insured institution, like Home Savings, for the pur-

pose of facilitating a transaction of this type. It is already

established beyond peradventure that § 1725(f) provided

FSLIC’s authority to grant the RAP rights to Home Savings.

See Winstar, 518 U.S. at 890, 116 S. Ct. at 2462. Assuming

that the branching rights could be granted at all, and the gov-

ernment agrees that they could be, I see no principled basis

for declaring that, unlike the RAP rights, they did not flow

through FSLIC to Home Savings via the Assistance Agree-

ment.

3084 WASHINGTON MUTUAL v. UNITED STATES

Third, the government argues that even if the above is true,

Home Savings was not entitled to the beneficial treatment

granted by 26 U.S.C. § 597 (1981),4 a provision enacted for

the very purpose of facilitating the kind of transaction that

occurred here. At first blush, it is difficult to see why it was

not. Well, says the government, § 597 only applies to “money

or other property” and the Rights are neither. Why not?

Because, says the government, the section is entitled “FSLIC

financial assistance” and the Rights cannot be financial.

Again, it is difficult to see why that would be so. In the first

place, although titles might be helpful sometimes, they are not

necessarily a good guide. In fact, in a tax case, we held that

“the title of a statute cannot limit the plain meaning of its

text.” Nordby Supply Co. v. United States, 572 F.2d 1377,

1378 (9th Cir. 1978); see also 26 U.S.C. § 7806(b). Secondly,

the word “financial” does not exclude the concept of property,

and the words of the section itself demonstrate that. Finally,

there can be no doubt that the parties knew that the Rights

would aid Home Savings financially. Those rights were the

property that made the deal viable. It seems peculiar to say

that they are not the “property” referred to in § 597 because

that property can only be money or things like money. Can it

4

The section read as follows:

§ 597. FSLIC financial assistance.

(a) Exclusion from gross income.

Gross income of a domestic building and loan association does

not include any amount of money or other property received from

the Federal Savings and Loan Insurance Corporation pursuant to

section 406(f) of the National Housing Act (12 U.S.C. sec.

1725(f)) regardless of whether any note or other instrument is

issued in exchange therefor.

(b) No reduction in basis of assets.

No reduction in the basis of assets of a domestic building and

loan association shall be made on account of money or other

property received under the circumstances referred to in subsec-

tion (a).

WASHINGTON MUTUAL v. UNITED STATES 3085

be thought that Congress did not understand the broad mean-

ing of the word “property” in general? I think not.

Moreover, says the government, the legislative history5

refers to “payments” and that can only mean money. Again,

I fail to see why one cannot pay over consideration or pay

debts with property, and people often do. Moreover, the fact

that § 597 refers to an “amount” does not change the analysis.

Clearly, the whole of the phrase is “amount of money or other

property.” In the first place, the word “amount” could be

taken as modifying the word money only, in which case the

word “property” would stand alone. In the second place, there

is nothing peculiar about speaking of an amount of property,

if “amount” modifies that word also. For example, in 26

U.S.C. § 301(c) a stockholder, who receives a distribution

from a corporation, is taxed on the amount of the distribution.

And for that purpose, the word “amount” means “amount of

money received,”6 plus “the fair market value of the other

property received.”7 Finally, the net effect of the govern-

ment’s position would be to essentially read the word “prop-

erty” out of § 597. I see no basis for that reading.

In short, on its face § 597 appears to provide that when

Home Savings received the Rights, those constituted property

with a significant value and Home Savings was entitled to

have that property treated for tax purposes under those provi-

sions. Nothing the government has argued changes that. Thus,

WaMu has a fair market value basis in the Rights.

Home Savings greatly benefitted the government at a time

of great need. When Home Savings agreed to engage in the

mergers in question, it was given the Rights as part of the

inducement to do so. The Rights were no mere lagniappe;

5

See H.R. Conf. Rep. No. 97-215, at 284 (1981), reprinted in 1981-2

C.B. 481, 526.

6

26 U.S.C. § 301(b)(1)(A).

7

Id. at (b)(1)(B)(i).

3086 WASHINGTON MUTUAL v. UNITED STATES

they had substantial value. Whether one accepts the analysis

of the majority or mine, the result is that Home Savings did

have a basis in them.

Thus I concur in the result.