334 P.3d 1100
Wash.2014Background
- Cashmere Valley Bank claimed a B&O tax deduction under RCW 82.04.4292 for interest earned on REMIC/CMO investments.
- The deduction requires five elements, including that the investment be 'primarily secured by first mortgages or trust deeds on nontransient residential property.'
- REMICs/CMOs structure payments via tranches; cash flows come from mortgage pools but investors do not hold direct mortgage collateral.
- DOR audited 2004–2007 tax years; Cashmere paid the assessment and sought a refund under RCW 82.32.180.
- Lower courts held REMICs are not 'primarily secured' by mortgages or deeds of trust; Cashmere challenged the ruling seeking the deduction.
- The court reaffirmed that the plain meaning of 'primarily secured' requires direct or recourse-backed security in real property.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does RCW 82.04.4292 apply to REMIC investments? | Cashmere: REMICs produce interest income that should be deductible under the statute. | DOR: REMICs are not investments primarily secured by first mortgages or deeds of trust; deduction not available. | No; REMIC investments are not primarily secured. |
| Are REMICs 'primarily secured by' first mortgages or deeds of trust? | Cashmere: underlying mortgage payments trace to securitized cash flows; trust structure may suffice. | DOR: no direct security interest or recourse to underlying mortgages; securitization does not provide primacy of mortgage security. | No; they lack direct encumbrance or recourse to underlying collateral. |
| Should the court follow HomeStreet's five-element framework to determine eligibility? | Cashmere argues HomeStreet supports deduction in part due to tracing to homeowner interest payments. | DOR and Court: HomeStreet is distinguishable; REMICs do not meet the 'primarily secured' element. | HomeStreet framework applied; REMICs fail the 'primarily secured' element. |
Key Cases Cited
- HomeStreet, Inc. v. Dep’t of Revenue, 166 Wn.2d 444 (2009) (five-element test for RCW 82.04.4292 deduction; plain-language interpretation)
- Wash. Imaging Servs., LLC v. Dep’t of Revenue, 171 Wn.2d 548 (2011) (burden on taxpayer to prove deduction qualifications; de novo review)
- American Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398 (2010) (business-to-business contract interpretation; deference to agency expertise)