The U.S. Supreme Court case Cottage Savings Association v. Commissioner of Internal Revenue in 1990 revolved around the issue of tax deductions for losses incurred from the sale and exchange of mortgage participation certificates by a savings and loan association, Cottage Savings Association. The court ruled in favor of Cottage Savings, stating that it could claim a deduction for its loss under section 1001(a) of the Internal Revenue Code because there was a "material difference" between what it gave up and what it received in return during these transactions. This decision clarified how to determine whether an exchange has occurred for purposes of recognizing losses under federal income tax law: if two properties are materially different – meaning their respective possessors enjoy legal entitlements that are different in kind or extent – then an exchange has taken place.

In the dissenting opinion for Cottage Savings Association v. Commissioner of Internal Revenue, Justice Thurgood Marshall argued that the majority's interpretation of "realization" in Section 1001(a) was too broad and inconsistent with previous court rulings. He contended that a mere change in legal form does not constitute realization unless it results in an alteration to the taxpayer's economic position or rights. In this case, he believed there was no such alteration as both before and after the exchange, Cottage Savings held essentially identical mortgage participation interests secured by homes located within similar geographical areas. Therefore, according to him, these exchanges should not be considered realizations under Section 1001(a). Furthermore, he expressed concern about potential tax avoidance schemes if taxpayers could claim losses based on minor changes in property forms without any significant economic consequences.