Wmi Holdings Corp. v. United States , 891 F.3d 1016 ( 2018 )


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  •   United States Court of Appeals
    for the Federal Circuit
    ______________________
    WMI HOLDINGS CORP., FKA WASHINGTON
    MUTUAL INC., AS SUCCESSOR IN INTEREST TO
    H.F. AHMANSON & CO. AND SUBSIDIARIES,
    FEDERAL DEPOSIT INSURANCE CORPORATION,
    AS RECEIVER FOR WASHINGTON MUTUAL
    BANK, A FEDERAL ASSOCIATION, AS
    SUCCESSOR IN INTEREST TO HOME SAVINGS
    OF AMERICA, SAVINGS OF AMERICA, INC., AS
    SUBSTITUTE AGENT FOR H.F. AHMANSON & CO.
    AND SUBSIDIARIES,
    Plaintiffs-Appellants
    v.
    UNITED STATES,
    Defendant-Appellee
    ______________________
    2017-1944
    ______________________
    Appeal from the United States Court of Federal
    Claims in Nos. 1:08-cv-00211-LKG, 1:08-cv-00321-LKG,
    Judge Lydia Kay Griggsby.
    ______________________
    Decided: June 4, 2018
    ______________________
    ALAN I. HOROWITZ, Miller & Chevalier Chartered,
    Washington, DC, argued all for plaintiffs-appellants.
    2                      WMI HOLDINGS CORP.   v. UNITED STATES
    Plaintiff-appellant WMI Holdings Corp. also represented
    by MARIA O’TOOLE JONES, STEVEN R. DIXON.
    TAMARA L. SHEPARD, DLA Piper US LLP, Boston, MA,
    for plaintiff-appellant Federal Deposit Insurance Corpora-
    tion.
    THOMAS D. JOHNSTON, Shearman & Sterling LLP,
    Washington, DC, for plaintiff-appellant Savings of Ameri-
    ca, Inc. Also represented by RICHARD JOHN GAGNON, JR.
    ANDREW M. WEINER, Tax Division, United States
    Department of Justice, Washington, DC, argued for
    defendant-appellee.   Also represented by DAVID A.
    HUBBERT, BRUCE R. ELLISEN.
    ______________________
    Before PROST, Chief Judge, DYK and O’MALLEY,
    Circuit Judges.
    O’MALLEY, Circuit Judge.
    This appeal involves Appellant WMI Holdings Corp.’s
    (“WMI’s”) claim for a refund of federal taxes paid by its
    predecessor.1 WMI contends it is entitled to more than
    $250 million in refunds attributable to losses and deduc-
    tions that its predecessor should have received for certain
    intangible assets acquired from the federal government in
    the 1980s.
    1   WMI, as successor to H.F. Ahmanson & Co.
    (“Ahmanson”) and its subsidiary, Home Savings of Ameri-
    ca (“Home”), is one of three appellants. The others are the
    Federal Deposit Insurance Corporation, as receiver for
    Home’s successor; and Savings of America, Inc., as substi-
    tute agent for Ahmanson. For simplicity, we refer only to
    WMI unless otherwise specified.
    WMI HOLDINGS CORP.   v. UNITED STATES                    3
    The United States Court of Federal Claims (“Claims
    Court”) dismissed WMI’s refund action, finding that WMI
    failed to establish, to a reasonable degree of certainty, a
    cost basis in each of the assets at issue. See Wash. Mut.,
    Inc. v. United States, 
    130 Fed. Cl. 653
    (2017) (“Claims
    Court Decision”). The court’s finding is not clearly erro-
    neous, and, accordingly, we affirm.
    BACKGROUND
    The parties’ dispute evolved out of transactions origi-
    nating during the savings-and-loan crisis in the late
    1970s and early 1980s. We begin with a description of
    that crisis and the facts leading up to the disputed trans-
    actions.
    I. Savings-and-Loan Crisis
    As their names suggest, savings-and-loan institutions,
    also called “thrifts,” provide two main services. They
    collect customer deposits, which are maintained in inter-
    est-bearing savings accounts, and they originate and
    service mortgage loans funded by those deposits. Histori-
    cally, thrifts were profitable because the interest they
    collected on outstanding loans exceeded the interest they
    paid out to customers.
    That changed, however, in the late 1970s. First, in-
    terest rates rose to unprecedented levels, and thrifts,
    which were locked into long-term, fixed-rate mortgages,
    were unable to compensate for this increase by raising the
    interest rate on their mortgage loans. See United States
    v. Winstar Corp., 
    518 U.S. 839
    , 845 (1996) (describing
    events precipitating the savings-and-loan crisis). To
    maintain their customers, moreover, thrifts were forced to
    raise the interest rates they paid on deposit accounts,
    causing the thrifts to operate at a loss. 
    Id. Second, the
    industry suffered from “disintermediation,” whereby
    customers withdrew their deposits in favor of alternative
    investments paying higher interest rates. This one-two
    4                       WMI HOLDINGS CORP.   v. UNITED STATES
    punch had a devastating effect on the industry, causing
    many thrifts to become insolvent. Between 1981 and
    1983 alone, some 435 thrifts failed. 
    Id. Lacking the
    funds to liquidate the failing thrifts, the
    Federal Savings and Loan Insurance Corporation
    (“FSLIC”), as thrift regulator and insurer of deposits,
    responded to the crisis by encouraging healthy thrifts to
    take over failing ones in what were called “supervisory
    mergers.” 
    Id. at 847.
    These transactions relieved the
    FSLIC of its deposit insurance liability for the insolvent
    thrifts, and, in exchange, provided a package of non-cash
    incentives to acquiring thrifts. Two of those incentives
    are at issue here: “branching” rights and “RAP”—or
    “regulatory accounting purposes”—rights.
    Branching rights permitted acquiring thrifts to open
    and operate branches in states other than their home
    states, which, prior to 1981, was generally prohibited. See
    12 C.F.R. § 556.5(a)(3) (1981). This prohibition was
    eliminated for thrifts entering into supervisory mergers
    across state lines. See 
    id. § 556.5(a)(3)(ii)(A)
    (1982). RAP
    rights, by contrast, affected regulatory accounting treat-
    ment for business combinations. At the time, regulations
    mandated, in relevant part, that each thrift maintain a
    minimum capital of at least 3% of its liabilities. See 
    id. § 563.13(a)(2),
    (b)(2) (1983); 
    Winstar, 518 U.S. at 845
    –46.
    This requirement presented an obstacle for healthy thrifts
    seeking to acquire failing ones because, by definition,
    failing thrifts’ liabilities exceeded their assets. Regulators
    eliminated this obstacle by permitting acquiring thrifts to
    use Generally Accepted Accounting Principles (“GAAP”).
    In essence, GAAP allowed acquiring thrifts to treat failing
    thrifts’ excess liabilities as an asset called “supervisory
    goodwill,” which, in turn, could be counted toward the
    acquiring thrifts’ minimum regulatory capital require-
    ment and amortized over a forty-year period (later re-
    WMI HOLDINGS CORP.   v. UNITED STATES                      5
    duced to twenty-five years).2 
    Winstar, 518 U.S. at 850
    –51.
    The RAP rights provided by FSLIC guaranteed such
    treatment, regardless of future regulatory changes.
    The combination of branching and RAP rights induced
    healthy thrifts to enter into supervisory mergers through-
    out the 1980s.
    II. The Transactions at Issue
    One such thrift was Home Savings of America
    (“Home”), a subsidiary of WMI’s predecessor. Originally
    based in Los Angeles, Home grew to become one of the
    largest thrifts in the United States. Home took part in
    two categories of transactions in the 1980s that are rele-
    vant here.
    First, between 1981 and 1985, Home entered into four
    supervisory mergers in six states—Missouri, Florida,
    Texas, Illinois, New York, and Ohio—thereby assuming
    the acquired thrifts’ liabilities in exchange for branching
    and RAP rights. Home would later sell off those branches
    in the 1990s in an effort to focus on its California pres-
    ence.
    Second, in 1988, Home acquired Bowery Savings
    Bank (“Bowery”), a federally chartered mutual savings
    bank headquartered in New York. Prior to the acquisi-
    tion, the Federal Deposit Insurance Corporation (“FDIC”)
    had been providing Bowery with assistance, including a
    RAP right, pursuant to a 1985 government-assisted
    merger. In connection with Home’s 1988 acquisition,
    however, Bowery negotiated a new assistance package,
    which, among other things, replaced the 1985 RAP right
    2   Amortization reflects an intangible asset’s depre-
    ciation over time, and, accordingly, requires a business to
    “‘write down’ the value of the asset each year to reflect its
    waning worth.” 
    Winstar, 518 U.S. at 851
    & n.7.
    6                     WMI HOLDINGS CORP.   v. UNITED STATES
    with a new one. Like the supervisory RAP right, the 1988
    Bowery RAP right allowed Bowery to count the goodwill
    arising out of the acquisition toward regulatory capital.
    Unlike the supervisory RAP right, however, the 1988
    Bowery RAP right established an amortization period of
    twenty years as opposed to forty years. This represented
    an increase from the fourteen-year period established by
    the 1985 Bowery RAP right.
    Home’s branching and RAP rights are considered in-
    tangible assets for tax purposes, and, as such, are gener-
    ally subject to abandonment loss deductions under I.R.C.
    § 165, and amortization deductions under I.R.C. § 167(a),
    respectively.
    III. Procedural History
    Home’s consolidated parent, H.F. Ahmanson & Co.
    (“Ahmanson”), filed income tax returns on behalf of Home,
    claiming deductions based on the transactions described
    above. Those claims spawned the litigation at issue here,
    as well as a related proceeding in the Ninth Circuit.
    A. The Ninth Circuit’s Ruling
    In 2008, WMI—then known as Washington Mutual,
    Inc.—brought suit against the United States in the U.S.
    District Court for the Western District of Washington,
    seeking a refund for tax years 1990, 1992, and 1993 based
    on the amortization of the RAP rights obtained in one of
    the supervisory mergers, as well as the abandonment of
    Home’s Missouri branching rights. To support its claims,
    WMI proffered a valuation report and testimony from its
    expert, Roger Grabowski, who used an income-based
    approach to determine the fair market value of the rights
    at issue. The district court granted judgment in favor of
    the government, rejecting WMI’s refund claims because
    WMI did “not prove[], to a reasonable degree of certainty,
    WMI HOLDINGS CORP.   v. UNITED STATES                    7
    Home’s cost basis in the Branching and RAP rights.”3
    Wash. Mut., Inc. v. United States, 
    996 F. Supp. 2d 1095
    ,
    1097 (W.D. Wash. 2014) (“WaMu I”).
    In an opinion issued several months after the Claims
    Court issued its opinion in this case, the Ninth Circuit
    affirmed. See Wash. Mut., Inc. v. United States, 
    856 F.3d 711
    , 714 (9th Cir. 2017) (“WaMu II”). The court rejected
    WMI’s argument that the district court required an
    unprecedented level of precision and held that the district
    court did not err in determining that the “cumulative
    flaws underlying the Grabowski Model rendered it inca-
    pable of producing a reliable value for the Branching
    Right.” 
    Id. at 722–25.
                 B. The Claims Court’s Decision
    Meanwhile, WMI also filed suit in the Claims Court
    against the United States, seeking a refund of more than
    $250 million for tax years 1991, 1994, 1995, and 1998.
    WMI claimed it was entitled to a refund based on the
    amortization of the RAP rights obtained in the superviso-
    ry mergers and the Bowery acquisition, as well as the
    abandonment of Home’s Florida, Illinois, New York, and
    Ohio branching rights.
    WMI offered a valuation report from Grabowski that
    was nearly identical to the report he presented in the
    Washington case.4 And, like the Washington district
    3    “[T]he term ‘basis’ refers to a taxpayer’s capital
    stake in property and is used to determine the gain or loss
    on the sale or exchange of property and the amount of
    depreciation allowances.” In re Lilly, 
    76 F.3d 568
    , 572
    (4th Cir. 1996) (internal quotation marks omitted). The
    basis of an asset is typically its cost, also known as its
    “cost basis.” I.R.C. § 1012(a).
    4   WMI asserts that Grabowski’s analysis in this
    case differs from that presented in the Washington case.
    8                      WMI HOLDINGS CORP.   v. UNITED STATES
    court, the Claims Court rejected Home’s tax refund
    claims, finding that WMI had failed to prove Home’s cost
    basis in each of the branching rights, RAP rights, and
    Bowery government assistance rights. Claims Court
    
    Decision, 130 Fed. Cl. at 688
    –704.
    WMI timely appealed the Claims Court’s ruling to
    this court.   We have jurisdiction under 28 U.S.C.
    § 1295(a)(3).
    DISCUSSION
    There is no dispute that Home has some cost basis in
    its RAP and branching rights collectively, and that WMI
    is entitled to a tax refund if it can allocate the cost basis
    to each of those rights individually. There is also no
    dispute that WMI bears the burden of proving it is enti-
    tled to a refund. Before addressing whether WMI satis-
    fied that burden, we first address WMI’s contention that
    the Claims Court applied an incorrect legal framework.
    That issue is a legal one that we review de novo. See Kan.
    Gas & Elec. Co. v. United States, 
    685 F.3d 1361
    , 1366
    (Fed. Cir. 2012); Okerlund v. United States, 
    365 F.3d 1044
    , 1049 (Fed. Cir. 2004).
    I. Legal Framework
    It is well established that, “[i]n a tax refund case, the
    ruling of the Commissioner of Internal Revenue is pre-
    sumed correct.” Bubble Room, Inc. v. United States, 
    159 F.3d 553
    , 561 (Fed. Cir. 1998). To rebut that presumption
    See Reply 11. When pressed at oral argument before this
    court, however, WMI was unable to identify any differ-
    ences, and conceded that “the general approach was
    similar.” See Oral Arg. at 14:47–15:10, WMI Holdings
    Corp.      v.   United     States     (No. 2017-1944),
    http://oralarguments.cafc.uscourts.gov/
    default.aspx?fl=2017-1944.mp3.
    WMI HOLDINGS CORP.   v. UNITED STATES                    9
    of correctness, “[i]t is not enough” for a taxpayer “to
    demonstrate that the assessment of the tax for which
    refund is sought was erroneous in some respects.” United
    States v. Janis, 
    428 U.S. 433
    , 440 (1976). Instead, the
    taxpayer must also prove the amount of the refund due.
    Id.; Bubble 
    Room, 159 F.3d at 561
    (“To rebut this pre-
    sumption of correctness, the taxpayer must come forward
    with enough evidence to support a finding contrary to the
    Commissioner’s determination. In addition, the taxpayer
    has the burden of establishing entitlement to the specific
    refund amount claimed.” (citation omitted)).
    Thus, “if insufficient evidence is adduced upon which
    to determine the amount of the refund due, the Commis-
    sioner’s determination of the amount of tax liability is
    regarded as correct.” WaMu 
    II, 856 F.3d at 721
    (internal
    quotation marks omitted); see Charron v. United States,
    
    200 F.3d 785
    , 792 (Fed. Cir. 1999) (affirming the trial
    court’s finding that the taxpayers had not substantiated
    their claims regarding the amount of income excluded
    from their taxable income); Danville Plywood Corp. v.
    United States, 
    899 F.2d 3
    , 7–8 (Fed. Cir. 1990) (stating
    that the taxpayer “must come forward with enough evi-
    dence to support a finding contrary to the Commissioner’s
    determination,” and must thereafter “carry the ultimate
    burden of proof”); Better Beverages, Inc. v. United States,
    
    619 F.2d 424
    , 428 n.4 (5th Cir. 1980) (“Where the taxpay-
    er fails to carry this burden to prove a cost basis in the
    item in question, the basis utilized by IRS, which enjoys a
    presumption of correctness, must be accepted even where,
    as here, the IRS has accorded the item a zero basis.”).
    The Claims Court here recognized that Home had
    some cost basis in the branching and RAP rights acquired
    in each of the supervisory mergers. The “central issue”
    was whether WMI could establish the portion of each
    merger’s purchase price that should be allocated to each
    constituent right so as to enable the court to determine
    Home’s cost basis therein. See Claims Court Decision, 130
    10                    WMI HOLDINGS CORP.   v. UNITED STATES
    Fed. Cl. at 690. In particular, because WMI paid a lump-
    sum purchase price for the rights in each transaction, it
    was required to allocate “the purchase price among the
    assets according to each asset’s relative fair market value
    at the time of the acquisition.” WaMu 
    II, 996 F. Supp. 2d at 1104
    ; see Bixby v. Comm’r, 
    58 T.C. 757
    , 785 (1972)
    (“[W]hen a taxpayer buys a mixed group of assets for a
    lump sum, the purchase price will be allocated among the
    assets in accordance with the relative value that each
    item bears to the total value of the group of assets pur-
    chased.”).
    To meet this burden, WMI was not, of course, required
    to allocate the purchase prices with absolute precision.
    See Miami Valley Broad. Corp. v. United States, 204 Ct.
    Cl. 582, 601 (1974) (“Mathematical precision is impossi-
    ble, and the broadest kind of estimates must be made.”).
    But, as the Claims Court noted, WMI was required to
    establish the values of the rights to a “reasonable degree
    of certainty.” Claims Court 
    Decision, 130 Fed. Cl. at 687
    (quoting WaMu 
    I, 996 F. Supp. 2d at 1102
    ). Ultimately,
    the court determined that WMI failed to meet that bur-
    den, finding that it did not put forward “sufficient evi-
    dence for the Court to make a ‘reasonable and rational
    approximation’ of the value of those assets.” 
    Id. at 690.
    The court’s statements are consistent with the legal
    principles articulated above and demonstrate that the
    court applied the correct legal framework.
    WMI argues that, if the court disagreed with WMI’s
    valuation, it should have made its best guess as to what
    the correct cost basis should be. We disagree. While we
    recognize the difficulty a taxpayer faces when trying to
    allocate cost basis in connection with these types of dec-
    ades-old transactions, a trial court is not required to
    undertake an independent analysis when, as here, the
    taxpayer’s own evidence is insufficient to allow the court
    to do so. See Trigon Ins. Co. v. United States, 234 F.
    Supp. 2d 581, 591 (E.D. Va. 2002) (“The sophisticated
    WMI HOLDINGS CORP.   v. UNITED STATES                       11
    valuation techniques here can only be employed reliably
    by an expert in the field. That exercise is beyond the
    reach, and outside the province, of a district judge.”). A
    contrary rule effectively would shift the burden of proof
    from the taxpayer to the court. While it is true that a
    court “has discretion in choosing a method of evaluation
    and some leeway in determining the amount of fair mar-
    ket value,” it “has no discretion to make a finding of the
    value of an asset where there is no evidence to support it.”
    Krapf v. United States, 
    977 F.2d 1454
    , 1463 (Fed. Cir.
    1992); see 
    Trigon, 234 F. Supp. 2d at 587
    (rejecting the
    argument that “the taxpayer need not prove that its
    proffered valuation is correct, but only that the correct
    refund amount is something higher than that advocated
    by the United States”). Thus, “[i]f the court is not satis-
    fied that [a] taxpayer has properly allocated a value to an
    identified severable intangible asset, it is not a fortiori the
    duty of the court to determine that value[.]” Kraft, Inc. v.
    United States, 
    30 Fed. Cl. 739
    , 765 (1994).5
    Relying on Capital Blue Cross v. Commissioner, 
    431 F.3d 117
    (3d Cir. 2005), WMI nevertheless contends that,
    notwithstanding minor flaws in the taxpayer’s proffered
    valuation, the court “must do its best to calculate a rea-
    sonable and correct basis.” Appellants Br. 25 (quoting
    Capital 
    Blue, 431 F.3d at 120
    ). In that case, the Third
    Circuit reversed the Tax Court’s zero cost basis determi-
    nation in hundreds of insurance contracts, despite “sever-
    al flaws” in the taxpayer’s valuation of those contracts.
    Capital 
    Blue, 431 F.3d at 119
    –20. But Capital Blue does
    not stand for the broad proposition that a court must
    undertake its own analysis or that a zero cost basis de-
    termination can never be appropriate. In fact, the Third
    5    The court may make such a determination, but
    only “if the value can be determined from a review of the
    record in its entirety.” 
    Kraft, 30 Fed. Cl. at 765
    .
    12                      WMI HOLDINGS CORP.   v. UNITED STATES
    Circuit remanded for the Tax Court to determine “wheth-
    er the Commissioner is correct about [certain additional]
    flaws in Capital’s data and methodology” that the Com-
    missioner identified on appeal, and “the extent to which
    those flaws invalidate [the expert’s] ultimate valuation.”
    
    Id. at 140.
        Instead, Capital Blue stands for the more limited
    proposition that it is unreasonable to reject a taxpayer’s
    valuation simply because the government identified
    “minor flaws” in the valuation. 
    Id. at 130
    (“[I]t will not, in
    our view, be reasonable for a court to reject the taxpayer’s
    valuation out of hand simply because the Commissioner
    has identified minor flaws in the valuation.”). As de-
    scribed below, the flaws that the Claims Court identified
    here are major and systemic, which distinguishes this
    case from Capital Blue. Finally, the Third Circuit noted
    in Capital Blue that the taxpayer bears a “heavy burden”
    to prove that its intangible assets may be valued sepa-
    rately and with “reasonable precision,” and this burden
    “will often prove too great to bear.” 
    Id. at 129–30
    (inter-
    nal quotation marks omitted). Thus, notwithstanding its
    holding, the Capital Blue court applied a standard similar
    to the standard that WMI argues the Claims Court incor-
    rectly applied here.
    WMI also relies on Cohan v. Commissioner, 
    39 F.2d 540
    (2d Cir. 1930), for the proposition that a court should
    “make as close an approximation as it can.” Appellants
    Br. 47 (citing 
    Cohan, 39 F.2d at 543
    –44). In that case, the
    Second Circuit reversed the Tax Court’s predecessor’s
    disallowance of deductions for business entertainment
    expenses on the basis that the taxpayer failed to keep
    adequate business records. 
    Cohan, 39 F.2d at 543
    –44.
    We have noted, however, that the Cohan rule does not
    apply where a taxpayer fails to provide evidence that
    would permit an informed estimate of the amount of
    deduction in the first place. See, e.g., 
    Charron, 200 F.3d at 794
    (stating that Cohan “does not require the conclu-
    WMI HOLDINGS CORP.   v. UNITED STATES                    13
    sion” that “vague and unpersuasive” testimony is “suffi-
    cient to establish . . . entitlement to . . . claimed deduc-
    tions”).
    The Ninth Circuit has cautioned, moreover, that lib-
    eral application of the Cohan rule “would be in essence to
    condone the use of that doctrine as a substitute for burden
    of proof.” Coloman v. Comm’r, 
    540 F.2d 427
    , 431–32 (9th
    Cir. 1976); see 
    Trigon, 234 F. Supp. 2d at 591
    (refusing to
    apply Cohan to complex valuation cases where “the basic
    evidentiary predicate for valuation has been found want-
    ing in so many ways” because, “to do so would offend
    fundamental precepts respecting the nature and im-
    portance of the burden of proof”). We agree with the
    Ninth Circuit that, on these facts, “such a proposition
    would essentially do away with the taxpayer’s burden”
    altogether. WaMu 
    II, 856 F.3d at 727
    .
    Finally, WMI’s reliance on Meredith Broadcasting Co.
    v. United States, 
    186 Ct. Cl. 1
    (1968), is similarly mis-
    placed. There, the Court of Claims found that the value of
    various television network affiliation contracts “was
    created largely by plaintiff’s vendor having combined
    them in one ownership, and would all alike have been
    destroyed by being severed.” 
    Id. at 24.
    Because of the
    unique nature of the contracts, the court determined that
    “an accurate allocation of value among the several classes
    of intangibles is impossible,” and that the court must
    therefore “make the broadest kind of estimate.” 
    Id. Here, however,
    there is no allegation that the rights at issue
    cannot be severed and valued independently. Indeed,
    while the Claims Court did not reach the issue, the par-
    ties agree that a tax deduction for the branching rights
    required, as a prerequisite, that those rights had been
    abandoned. The RAP rights have no such prerequisite.
    Thus, unlike the rights in Meredith Broadcasting, the
    rights here are clearly severable, even if calculating the
    impact of that severance is difficult.
    14                     WMI HOLDINGS CORP.   v. UNITED STATES
    We therefore conclude that the Claims Court did not
    apply an incorrect legal framework. Notably, our conclu-
    sion is consistent with that reached by the Ninth Circuit
    on virtually identical facts. See WaMu 
    II, 856 F.3d at 725
    –27.
    We next address whether the flaws in Grabowski’s
    valuation were so deficient as to justify a zero cost basis
    determination for the supervisory mergers and Bowery
    acquisition.
    II. Supervisory Mergers
    As described above, the Claims Court found that WMI
    failed to meet its burden of establishing a cost basis in
    each of the RAP and branching rights that Home acquired
    in the supervisory mergers. We review the trial court’s
    factual findings, including its determination of the assets’
    fair market values, for clear error. See Ark. Game & Fish
    Comm’n v. United States, 
    736 F.3d 1364
    , 1379–80 (Fed.
    Cir. 2013); Kan. Gas & 
    Elec., 685 F.3d at 1366
    ; 
    Okerlund, 365 F.3d at 1049
    .
    A. RAP Rights
    The Claims Court found that it could not assess the
    value of Home’s RAP rights because WMI had mischarac-
    terized the nature of those rights. Claims Court 
    Decision, 130 Fed. Cl. at 691
    –95. As explained below, the court’s
    findings are not clearly erroneous.
    Grabowski valued each RAP right as “a contract[ual]
    right conveyed to Home by FSLIC” that “allowed Home to
    treat the goodwill recorded in the transaction as an asset
    (on a diminishing basis over 40 years) for purposes of
    meeting regulatory capital requirements.” J.A. 7148.
    Specifically, he estimated the cost associated with raising
    and maintaining replacement capital to maintain the
    hypothetical willing buyer’s pre-merger capital level. In
    other words, Grabowski assumed that Home needed the
    approval of government regulators to treat the goodwill
    WMI HOLDINGS CORP.   v. UNITED STATES                    15
    created by these transactions as an asset subject to amor-
    tization over a period of up to forty years. This assump-
    tion, however, is flawed.
    The Claims Court noted that it “is without dispute
    that the accounting regulations in place at the time of
    the” supervisory mergers “required that Home use the
    purchase method of accounting,” which provided for the
    treatment of goodwill as an asset. Claims Court 
    Decision, 130 Fed. Cl. at 692
    . The court pointed out, for example,
    that the Federal Home Loan Bank Board’s September
    1981 Memorandum R-31b mandated that acquiring
    thrifts account for the goodwill created by the merger in
    accordance with GAAP, which, in turn, required thrifts to
    use the purchase method of accounting to account for
    supervisory mergers. 
    Id. That method
    allowed compa-
    nies to treat goodwill as an asset, and to amortize that
    goodwill over a period of up to forty years.
    Thus, as the Claims Court properly found, the RAP
    rights Home acquired as part of the supervisory mergers
    were in the nature of “a guarantee”—i.e., “the right to
    continue to amortize the goodwill created by these mer-
    gers over a period of forty years if the regulations govern-
    ing the amortization period for goodwill changed in the
    future.” 
    Id. at 692–93.
    Grabowski’s valuation of the
    rights as creating a contractual approval to treat goodwill
    as an asset was therefore predicated on an incorrect
    interpretation of the nature of those rights, and caused
    Grabowski to overvalue them.
    WMI objects to the Claims Court’s interpretation of
    Memorandum R-31b as having given Home the right to
    use the purchase method of accounting and to amortize
    supervisory goodwill. WMI argues that the memorandum
    simply authorized regulators to approve such amortiza-
    tion upon application by an acquiring thrift. To support
    that argument, WMI points to the memorandum’s refer-
    ence to an “application from an association requesting
    16                     WMI HOLDINGS CORP.   v. UNITED STATES
    approval for a business combination to be accounted for
    by the purchase method of accounting.” Appellants Br. 42
    (quoting J.A. 4361). We disagree. The memorandum
    provides that accounting for goodwill in accordance with
    GAAP is acceptable for regulatory purposes. See J.A.
    4359 (“Accounting for business combinations involving
    insured institutions should be in accordance with general-
    ly accepted accounting principles (GAAP).”); see also Am.
    Fed. Bank, FSB v. United States, 
    62 Fed. Cl. 185
    , 187
    (2004) (noting that Memorandum R-31b “allowed acquir-
    ing thrifts to apply the purchase method to account for
    mergers, such that any excess amount paid by the ac-
    quiror over the net fair market value of the assets ac-
    quired and liabilities assumed was assigned to ‘goodwill’
    considered as an intangible asset for purposes of regulato-
    ry capital”). The “application” referenced in Memoran-
    dum R-31b, therefore, reflects the fact that all business
    combinations were required to obtain regulatory approval,
    regardless of whether they intended to use the purchase
    method of accounting or a different method. Claims Court
    
    Decision, 130 Fed. Cl. at 693
    n.33. “Application” does not
    refer, as WMI contends, to regulatory approval to use the
    purchase method of accounting.
    In sum, the Claims Court found that Grabowski’s
    misplaced assumptions about the nature of the RAP
    rights undermined WMI’s fair market value determina-
    tions for those rights. Because the court’s findings are not
    clearly erroneous, we affirm the court’s ruling.
    B. Branching Rights
    The Claims Court also found that it could not assess
    the value of Home’s branching rights because Grabowski’s
    valuation was “unreasonable,” “unsupported,” and “unre-
    liable.” 
    Id. at 695–96.
    While perhaps phrased more
    harshly than necessary, the court’s findings are not
    clearly erroneous.
    WMI HOLDINGS CORP.   v. UNITED STATES                    17
    To value the branching rights, Grabowski used an in-
    come-based approach in which he forecast the cash flow
    that a hypothetical willing buyer would have expected to
    generate as a result of having a right to operate in a state
    other than the thrift’s home state. The “main assump-
    tions” he made in his analysis “were the number of new
    branches, the growth of deposits in new and acquired
    branches, and the income the willing buyer would earn on
    new mortgage loans made with those deposits.” J.A.
    7140.
    With respect to the number of new branches,
    Grabowski based his projection in part on Home’s own
    expansion into Northern California. In 1970, Home
    entered Northern California by acquiring four branches in
    the San Francisco area with $36.4 million in deposits, or
    $9.1 million per branch, representing 0.6% of the market.
    Over the next ten years, Home expanded to forty North-
    ern California branches and increased its total inflation-
    adjusted deposits to $760.1 million, or $19 million per
    branch, representing 6.1% of the market. By 1981,
    Home’s California deposits per branch were nearly double
    the average in the state. Grabowski asserted that a
    hypothetical buyer would “expect[] to be able to replicate
    this level of branch network growth in other markets,
    assuming the markets had similar levels of depositor
    concentration (i.e., population density).” J.A. 7139.
    With respect to the growth of deposits, Grabowski es-
    timated that it took Home five years to “ramp up” depos-
    its in Northern California branches, and “considered this
    rate of individual branch ramp up to be representative of
    what any willing buyer would have expected.” J.A. 7140.
    Finally, with respect to loan demand, Grabowski asserted
    that a hypothetical buyer would expect to be able to turn
    all new deposits into new loans because, historically, that
    had been Home’s experience. Grabowski “assumed that a
    willing buyer would have expected the same.” J.A. 7143.
    18                    WMI HOLDINGS CORP.   v. UNITED STATES
    The central problem with this analysis, however, is
    that Grabowski’s assumptions were based on outdated
    market data and were inconsistent with the actual mar-
    ket conditions facing thrifts when the branching and RAP
    rights were actually acquired. The conditions during the
    acquisition period included an unprecedentedly high
    interest rate and pervasive disintermediation. As the
    Claims Court noted, “Grabowski’s assumption that the
    hypothetical willing buyer would achieve significant
    deposit growth in the high interest rate environment of
    the early 1980s is belied by the undisputed evidence
    regarding the dire economic and industry-specific condi-
    tions at the time.” Claims Court 
    Decision, 130 Fed. Cl. at 696
    . Indeed, it was the unusually dire market conditions
    that persisted at the time that prompted the FSLIC to
    offer RAP and branching rights to healthy thrifts as an
    enticement to purchase unhealthy ones.
    As the court also accurately observed, to obtain the
    significant deposit growth projected by Grabowski, “a
    hypothetical willing buyer would need to not only avoid
    the well-documented adverse impact of disintermediation,
    but also to persuade a significant number of the deposi-
    tors who were still willing to deposit their funds into a
    savings and loan institution to deposit these funds in a
    new thrift.” 
    Id. at 697.
    The court found that the evidence
    did not support such assumptions, which the court char-
    acterized as “unreasonable” and “at odds with the eco-
    nomic and industry-specific realities at the time.” 
    Id. at 695–96.
    The court was entitled—and, in fact, required—
    to review the record “with the understanding that the tax
    consequences of any particular transaction must be based
    upon economic realities.” 
    Kraft, 30 Fed. Cl. at 766
    .
    Home’s experience expanding into Northern Califor-
    nia in the 1970s, moreover, is substantially different from
    the inter-state expansion effectuated by its supervisory
    mergers in the 1980s. And, as the Claims Court found,
    WMI “fail[ed] to adequately account for the regulatory
    WMI HOLDINGS CORP.   v. UNITED STATES                  19
    hurdles that a hypothetical willing buyer would have
    encountered in opening de novo branches in projecting
    deposit growth.” Claims Court 
    Decision, 130 Fed. Cl. at 698
    . In particular, the court found it unlikely that a
    hypothetical buyer would be able to open new branches at
    the rate projected by Grabowski given that the timeline
    for regulatory approval of a new branch was typically a
    year or longer. 
    Id. The court’s
    findings are not clearly
    erroneous.
    WMI argues that, even if the Claims Court’s objec-
    tions to Grabowski’s assumptions were warranted, the
    court erred by disregarding the valuation in toto. Accord-
    ing to WMI, the court should have modified the inputs to
    Grabowski’s model to account for the perceived flaws in
    his assumptions. To support this argument, WMI points
    to Grabowski’s “sensitivity analyses,” in which he valued
    branching rights under the alternative assumptions that
    deposit growth for the first two years in a new market
    would be 50% less than what he projected, or that only
    half of the deposits would be used to fund loans for the
    first two years while the other half were invested in
    Treasury bills. WMI contends that these sensitivity
    analyses demonstrate the flexibility of Grabowski’s ap-
    proach.    In particular, WMI argues that, because
    Grabowski’s methodology was not flawed, the court should
    have just disregarded his flawed assumptions and inject-
    ed new ones into the methodology. See Oral Arg. at
    12:05–13:35 (“Q. Is it your position that . . . the court
    then has the obligation to readjust the assumptions and
    do the economic valuation? A. Yes, absolutely.”).
    The Claims Court, however, did not find Grabowski’s
    sensitivity analyses helpful, questioning, among other
    things, why Grabowski limited his adjustments to only
    two years, when high interest rates were expected to
    endure much longer. 
    Id. at 697
    & n.37. Grabowski also
    failed to explain why he reduced deposit growth and loan
    demand by 50% rather than by some other percentage.
    20                    WMI HOLDINGS CORP.   v. UNITED STATES
    
    Id. In any
    event, even if these adjustments were intended
    to be merely demonstrative, WMI does not explain which
    adjustments the Claims Court purportedly should have
    made. See WaMu 
    II, 856 F.3d at 727
    (“Appellant’s argu-
    ment that the court was required to sua sponte estimate
    some value for the Rights is foreclosed. On these facts,
    such a proposition would essentially do away with the
    taxpayer’s burden.”).
    Given the lack of guidance as to how the Claims Court
    could have modified Grabowski’s model, the court’s con-
    clusion that it could not have done so, without doing so
    arbitrarily, is not unreasonable. Compare Trigon Ins. Co.
    v. United States, 
    215 F. Supp. 2d 687
    , 738–39 (E.D. Va.
    2002) (finding that “it was of critical, outcome determina-
    tive importance that the inputs used to arrive at the
    valuation were accurate and reliable,” and that the criti-
    cal inputs “simply do not square with the facts of record”
    and therefore cannot be used to derive a more accurate
    valuation), with Deseret Mgmt. Corp. v. United States, 
    112 Fed. Cl. 438
    , 456 (2013) (modifying plaintiff’s expert’s
    discount rate where literature describing the appropriate
    modification was available in the record).
    Finally, WMI argues that it was improper for the
    court to treat Grabowski’s shortcomings with respect to
    the RAP rights as an independent basis for holding that
    WMI had not established any cost basis in the branching
    rights. According to WMI, if the court determined that
    Grabowski allocated too much basis to the RAP rights, the
    court should have found that he allocated too little basis
    to the branching rights. Again, we disagree.
    As an initial matter, the Claims Court did not reject
    WMI’s branching rights claims solely because it had
    already rejected its RAP rights claims. Rather, the court
    noted that, because WMI’s allocation of cost basis to the
    RAP rights was flawed, its allocation to the branching
    rights must also be “call[ed] into doubt.” Claims Court
    WMI HOLDINGS CORP.   v. UNITED STATES                    21
    
    Decision, 130 Fed. Cl. at 695
    . The court then proceeded to
    give reasons why WMI’s cost basis allocation for the
    branching rights was independently flawed. Indeed, the
    court stated that, notwithstanding WMI’s deficient RAP
    right valuation, “the evidence also shows plaintiffs have
    not established Home’s cost basis in the Branching Rights
    because their fair market value determinations for this
    asset do not constitute a ‘reasonable or rational approxi-
    mation’ of the value of these assets.” 
    Id. More importantly,
    WMI’s argument has merit only to
    the extent the branching rights and RAP rights were the
    only assets acquired in the supervisory mergers to which
    the cost basis must be allocated. WMI has not shown this
    to be the case. And, as the government points out, the
    failing thrifts’ traditional goodwill could also absorb some
    of the cost basis, even if such goodwill would have been of
    low value during the savings-and-loan crisis. See Deseret
    
    Mgmt., 112 Fed. Cl. at 450
    –51 (noting that even unprofit-
    able companies possess goodwill).
    Grabowski’s methodology is only as good as his as-
    sumptions, which, as the Claims Court found, were incon-
    sistent with market realities and, at times, unsupported.
    Because the court’s findings are not clearly erroneous, we
    affirm the court’s ruling.6
    III. Bowery Transaction
    Finally, as discussed above, Bowery obtained assis-
    tance from the FDIC in 1988 to replace the assistance it
    6    The government also argued before the Claims
    Court that Home did not, in fact, abandon its branching
    rights, and that WMI therefore could not claim deductions
    for those rights. We need not reach that argument be-
    cause, even assuming that Home abandoned the rights,
    we conclude that WMI failed to establish a cost basis in
    each of those rights.
    22                    WMI HOLDINGS CORP.   v. UNITED STATES
    had been receiving pursuant to a 1985 merger. WMI
    argues that it should have received amortization deduc-
    tions for the 1985 rights, which did not materially change
    in 1988. The Claims Court disagreed, finding that the
    deductions should be based on the “new” assets that
    Home acquired in the 1988 Bowery acquisition. Claims
    Court 
    Decision, 130 Fed. Cl. at 701
    –02. “We review the
    characterization of transactions for tax purposes de novo,
    based on underlying findings of fact, which we review for
    clear error.” Wells Fargo & Co. v. United States, 
    641 F.3d 1319
    , 1325 (Fed. Cir. 2011).
    We agree with the Claims Court that the 1988 ex-
    change of rights constituted a realization event that
    triggered Home’s tax obligations. Section 1001(a) of the
    Internal Revenue Code provides that “[t]he gain [or loss]
    from the sale or other disposition of property” is the
    difference between “the amount realized” from the dispo-
    sition of the property and its “adjusted basis.” I.R.C.
    § 1001(a). A disposition of property for this purpose
    includes “the exchange of property for other property
    differing materially either in kind or in extent.” Treas.
    Reg. § 1.1001-1(a). In other words, an exchange of proper-
    ty “gives rise to a realization event so long as the ex-
    changed properties are ‘materially different’—that is, so
    long as they embody legally distinct entitlements.” Cot-
    tage Sav. Ass’n v. Comm’r, 
    499 U.S. 554
    , 566 (1991).
    Here, the Claims Court correctly determined that the
    government assistance provided to Bowery in 1988 was
    materially different from that provided in 1985. As the
    court noted, the 1988 assistance, among other things,
    eliminated an income maintenance agreement—which
    was intended to reduce Bowery’s interest rate risk for a
    defined asset base for up to fifteen years—and decreased
    the amount of assets covered by credit protection. Claims
    Court 
    Decision, 130 Fed. Cl. at 670
    , 701. Additionally, the
    1988 assistance eliminated the 1985 RAP right, which
    allowed Bowery to reverse its purchase accounting ad-
    WMI HOLDINGS CORP.   v. UNITED STATES                    23
    justments for the purpose of calculating capital for regula-
    tory purposes. It replaced that right with a new one that
    allowed Bowery to count goodwill arising out of the Bow-
    ery acquisition toward regulatory capital. 
    Id. Finally, the
    1988 right increased the amortization period from four-
    teen years to twenty years. 
    Id. As the
    Claims Court noted, these differences demon-
    strate that the assistance packages “embody legally
    distinct entitlements and that a realization event oc-
    curred when the Bowery entered into the 1988 Bowery
    Assistance Agreement.” 
    Id. at 702
    (quoting Cottage 
    Sav., 499 U.S. at 566
    ). The 1988 RAP right did not merely
    change the mechanics of the 1985 RAP right, as WMI
    contends; it provided a new methodology by which good-
    will is defined. Indeed, as WMI concedes, the two RAP
    rights could lead to different legal consequences based on
    the same facts. See Reply 26–27. These different legal
    consequences imply different legal entitlements. See
    Cottage 
    Sav., 499 U.S. at 566
    (holding that a transaction
    in which a company exchanged its interests in one group
    of residential mortgage loans for another lender’s inter-
    ests in a different group of loans was a realizable transac-
    tion); Phila. Park Amusement Co. v. United States, 130 Ct.
    Cl. 166, 168–70 (1954) (holding that an amendment of a
    taxpayer’s railway franchise to extend the term by ten
    years and transfer away ownership of a bridge constituted
    an exchange for tax purposes). The Claims Court there-
    fore correctly determined that the 1988 exchange gave
    rise to a realization event.
    WMI asserts that, even if, in certain respects, the
    1988 RAP right is different from the 1985 RAP right, the
    exchange nevertheless qualifies as a “like-kind exchange,”
    which would allow Bowery to defer recognition of a gain
    or loss. See Deseret 
    Mgmt., 112 Fed. Cl. at 447
    (“Such an
    exchange allows the exchanger to delay recognizing gain
    on the exchanged property, as the tax basis of that prop-
    erty carries forward to the newly-acquired property.”).
    24                     WMI HOLDINGS CORP.   v. UNITED STATES
    But this, too, is incorrect and was properly rejected by the
    Claims Court.
    Section 1031(a) of the Code operates as an exception
    to § 1001(a), allowing a taxpayer to defer recognition of
    gain or loss from qualifying exchanges of “like kind”
    property. I.R.C. § 1031(a)(1). The phrase “like kind”
    refers “to the nature or character of the property.” Treas.
    Reg. § 1.1031(a)-1(b). The exception applies when “the
    taxpayer’s economic situation after the exchange is fun-
    damentally the same.” VIP’s Indus. Inc. v. Comm’r, 
    105 T.C.M. 1890
    , 
    2013 WL 3184624
    , at *3 (T.C. 2013);
    see Snowa v. Comm’r, 
    123 F.3d 190
    , 193 n.5 (4th Cir.
    1997). That is not the case here. As the Claims Court
    pointed out—and as described above—the nature and
    character of Bowery’s RAP right fundamentally changed
    because, among other things, it allowed Bowery to ac-
    count for the goodwill arising out of Home’s acquisition as
    an asset as opposed to reversing the write-down on Bow-
    ery’s loans. Claims Court 
    Decision, 130 Fed. Cl. at 703
    .
    We agree with the Claims Court that Bowery’s 1988
    receipt of an assistance package was a realization event,
    and we therefore affirm the court’s ruling.
    CONCLUSION
    While we recognize that WMI may have been entitled
    to some deduction, our holding inevitably flows from the
    fact that the burden to value the basis for the assets at
    issue was squarely upon WMI, which failed to satisfy that
    burden. For these reasons, we affirm the Claims Court’s
    dismissal of WMI’s tax refund claims.
    AFFIRMED
    COSTS
    No costs.