Rev. Rul. 54-367

Advice is requested whether a mutual savings bank, which is carrying a large number of mortgages purchased at a discount, may elect to report purchase discounts on interest-bearing installment mortgages on a composite basis by reference to the average period of payments of such mortgages.

Revenue Ruling 216, C.B. 1953-2, 38, holds that mutual savings banks, building and loan associations, and cooperative banks may amortize mortgage premiums and other mortgage acquisition costs on a composite basis.

Reporting mortgage purchase discount on a composite basis seems to involve essentially the same consideration as amortizing mortgage purchase premiums and other mortgage acquisition costs on a composite basis. When each mortgage is treated individually, purchase premiums on installment mortgages are amortized by mutual savings banks in the same manner that discount on installment mortgages is reported, that is, the premium or discount is deducted or taken into income pro rata as payments on principal are received.

Accordingly, it is held that mutual savings banks which are carrying large numbers of interest-bearing installment mortgages purchased at discounts may elect to account for the purchase discounts on a composite basis, provided the method used is regularly employed, the bank's annual discount income is clearly reflected (rather than materially distorted) thereby, and all of its discount income from such mortgage transactions is eventually reported for Federal income tax purposes. Cf. Mount Vernon Trust Co. v. Commissioner , 75 Fed.(2d) 938, Ct. D. 1082, C.B. XV-1, 176 (1936), certiorari denied 296 U.S. 587.

S.M. 3820, C.B. IV-2, 32 (1925), and G.C.M. 14839, C.B. XIV-1, 73 (1935), are modified to the extent that the holdings therein would preclude the use of a composite basis such as considered herein.