B&O Tax Ruling for Banks and Financial Institutions

In Cashmere Valley Bank vs State of Washington Department of Revenue on September 25, 2014 the Washington Supreme Court came down with a new ruling on the scope of the exclusion of B&O tax of income from interest earned on mortgages for banks and financial institutions.  The interest earned on the mortgages is not taxed as income if the mortgages are secured by a first mortgages on residential property.  Cashmere Valley Bank received income from investments it held in Real Estate Mortgage Interest Conduits (REMICs) and Collateralized Mortgage Obligations (CMOs).  The bank argues that the income they received from these investments should be excluded from the B&O tax.   The court held that REMICs and CMOs represent a right to income from mortgages, but that owners of these investments do not themselves hold the mortgages and thus are not qualified to exclude their income from these investments from the B&O Tax.  In light of this ruling, banks and financial institutions may want to review and potentially restructure their investment portfolio.

Dianna Caley 
Partner

Wong Fleming | Washington