Rev. Rul. 72-523

Advice has been requested whether, under the circumstances described below, the taxpayer may inventory mortgage loans which it originates.

The taxpayer, a mortgage corporation with an established place of business, uses an accrual method of accounting and is engaged in the business of originating loans for the purpose of satisfying the continuous demands of its customers. It holds the mortgage loans for profitable sale to customers in the ordinary course of its trade or business, sells them to institutional investors, and generally services the mortgages that it sells. The taxpayer derives substantial profits from the sale of the mortgages that it originates. The mortgages are securities within the meaning of section 1236(c) of the Internal Revenue Code of 1954 and, for both financial reporting and Federal income tax purposes, the taxpayer has consistently priced its inventory of mortgage loans on the basis of cost or market, whichever is lower.

Section 1.471-5 of the Income Tax Regulations, in effect, states that a dealer in securities may, for Federal income tax purposes, inventory securities held for resale. Section 1.471-5 of the regulations provides, in part, as follows:

* * * For the purposes of this section, a dealer in securities is a merchant of securities, * * * regularly engaged in the purchase of securities and their resale to customers, that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. * * *

The description of a dealer in securities as one who as a merchant buys securities and sells them, does not preclude the taxpayer from being a dealer in securities with respect to mortgages that it acquires from the original obligors as well as those that it acquires from the mortgagees or their assignees.

Accordingly, based upon the facts in the instant case, the taxpayer qualifies as a dealer in securities and may, for Federal income tax purposes, inventory the mortgages held for sale in the ordinary course of its trade or business.

A taxpayer engaged in the trade or business of holding mortgage loans for sale to customers in the ordinary course of its trade or business and which desires to change its method of valuing its inventory of mortgages must obtain the prior approval of the Commissioner in accordance with the provisions of section 446 of the Code and section 1.446-1(e) of the regulations, including the application of Revenue Procedure 70-27, C.B. 1970-2, 509.

Revenue Ruling 65-95, C.B. 1965-1, 208, is modified to the extent it holds that a dealer in securities may not under section 1.471-5 of the regulations inventory mortgage loans that it originates.