In Cashmere Valley Bank v. WA Dept. of Revenue, No. 8937-5, the Washington Supreme Court interpreted the state tax deduction statute, RCW 82.04.4292 (1980). The statute, prior to being amended in 2012, provided that banks and financial institutions could deduct from their income “amounts derived from interest received on investments or loans primarily secured by first mortgages or trust deeds” or residential properties. The plaintiff bank invested in mortgage-backed securities and collateralized mortgage obligations, and claimed interest earned on these investments as a deduction from its B & O tax. The Supreme Court disallowed the deduction. Although the investments gave the plaintiff the right to receive cash flow generated by the pool of mortgages, the investments were not backed by any encumbrance on the mortgaged properties (not “primarily secured”) in the event of default, the Court reasoned.
