Fed. Home Loan Mortg. Corp. v. Comm'r of Internal Revenue, s. 3941–99
| Decision Date | 29 September 2003 |
| Docket Number | Nos. 3941–99,15626–99.,s. 3941–99 |
| Citation | 121 T.C. No. 13,121 T.C. 254 |
| Parties | FEDERAL HOME LOAN MORTGAGE CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Federal Home Loan Mortgage Corporation (FHLMC) petitioned for redetermination of deficiencies arising from its amortization of below-market loans. On cross-motions for partial summary judgment, the Tax Court, Ruwe, J., held that benefit attributable to taxpayer's below-market financing constituted an amortizable intangible asset, if taxpayer established fair market value and limited useful life.
Taxpayer's motion granted.
See also, 2003 WL 22053841. Robert A. Rudnick, Stephen J. Marzen, James F. Warren, and Neil H. Koslowe, for petitioner.
Gary D. Kallevang, for respondent.
P was originally exempt from Federal income taxation. However, on Jan. 1, 1985, P became subject to taxation under the Deficit Reduction Act of 1984 (DEFRA), Pub.L. 98–369, sec. 177, 98 Stat. 709. P had entered into certain financing arrangements before Jan. 1, 1985, the proceeds of which were used in P's mortgage business. As of Jan. 1, 1985, the contract rates of interest on these financing arrangements were less than the market rates of interest as of that date, because of an increase in interest rates since the date on which P entered into the respective arrangements. P claims that the economic benefit of the below-market financing as of Jan. 1, 1985, is an intangible asset subject to amortization. P claimed amortization deductions on the basis of the fair market value of that alleged intangible asset as of Jan. 1, 1985, pursuant to the special basis provisions that are applicable to P under DEFRA sec. 177(d)(2)(A)(ii). The issue presented by the parties' cross-motions for partial summary judgment is whether, as a matter of law, the benefit of below-market borrowing costs from P's financing arrangements on Jan. 1, 1985, can be an intangible asset that could be amortized for tax purposes.
Held: The benefit attributable to P's below-market financing as of Jan. 1, 1985, can, as a matter of law, constitute an intangible asset which could be amortized if P establishes a fair market value and a limited useful life.
Respondent determined deficiencies in petitioner's Federal income taxes in docket No. 3941–99 for 1985 and 1986, as follows:
+-----------------+
¦Year¦Deficiency ¦
+----+------------¦
¦ ¦ ¦
+----+------------¦
¦1985¦$36,623,695 ¦
+----+------------¦
¦1986¦40,111,127 ¦
+-----------------+
Petitioner claims overpayments of $9,604,085 for 1985 and $12,418,469 for 1986.
Respondent determined deficiencies in petitioner's Federal income taxes in docket No. 15626–99 for 1987, 1988, 1989, and 1990, as follows:
+-----------------+
¦Year¦Deficiency ¦
+----+------------¦
¦ ¦ ¦
+----+------------¦
¦1987¦$26,200,358 ¦
+----+------------¦
¦1988¦13,827,654 ¦
+----+------------¦
¦1989¦6,225,404 ¦
+----+------------¦
¦1990¦23,466,338 ¦
+-----------------+
Petitioner claims overpayments of $57,775,538 for 1987, $28,434,990 for 1988, $32,577,346 for 1989, and $19,504,333 for 1990.
Petitioner and respondent filed cross-motions for partial summary judgment under Rule 121 1 on the question of whether petitioner is entitled to amortize the economic benefit of certain debt obligations which had below-market interest rates on January 1, 1985, the date petitioner became subject to Federal income taxation. Petitioner claims entitlement to amortize its favorable financing using a fair market value basis as of that date. Petitioner determined the fair market value of the claimed favorable financing to total $456,021,853 on January 1, 1985, and claims the following amortization deductions for taxable years 1985 through 1990:
+-----------------------------------+
¦Taxable Year¦Amortization Deduction¦
+------------+----------------------¦
¦ ¦ ¦
+------------+----------------------¦
¦1985 ¦$50,219,116 ¦
+------------+----------------------¦
¦1986 ¦48,702,457 ¦
+------------+----------------------¦
¦1987 ¦47,017,000 ¦
+------------+----------------------¦
¦1988 ¦45,835,556 ¦
+------------+----------------------¦
¦1989 ¦40,680,420 ¦
+------------+----------------------¦
¦1990 ¦38,028,084 ¦
+-----------------------------------+
In this Opinion, we decide whether the benefit of petitioner's favorable financing can, as a matter of law, constitute an intangible asset for tax purposes.
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time of filing the petition, petitioner's principal office was located in McLean, Virginia. At all relevant times, petitioner was a corporation managed by a board of directors.
Petitioner was chartered by Congress on July 24, 1970, by the Emergency Home Financing Act of 1970, Pub.L. 91–351, title III (Federal Home Loan Mortgage Corporation Act), 84 Stat. 451. Petitioner was originally exempt from Federal income taxation. However, Congress repealed petitioner's Federal income tax exemption status in the Deficit Reduction Act of 1984 (DEFRA), Pub.L. 98–369, sec. 177, 98 Stat. 709. Pursuant to this Act, petitioner became subject to Federal income taxation, effective January 1, 1985.
Petitioner was established to purchase residential mortgages and to develop and maintain a secondary market in conventional mortgages .2 Since the time of its incorporation, petitioner has facilitated investment by the capital markets in single-family and multi-family residential mortgages. In the course of its business, petitioner acquires mortgages from originators. Petitioner either resells the acquired mortgages in securitization transactions, principally by pooling the mortgages and issuing participation certificates (PCs),3 or it holds them to maturity in its retained mortgage portfolio, generally financing this activity by the issuance of various debt instruments. Petitioner is a profit-making business whose net income (for book purposes) was approximately $208 million in 1985. In 1984, petitioner acquired 550,000 mortgage loans, sold $20.5 billion in mortgage-related securities, and posted corporate earnings of $267.4 million.
Petitioner claims that it held a certain intangible asset, which it identifies as “favorable financing”, on January 1, 1985. The “favorable financing” consisted of a number of financing arrangements, the interest rates payable on which were below those currently prevailing in the financial markets on January 1, 1985, because of an increase in interest rates since the date on which petitioner entered into the respective arrangements. Those financing arrangements consisted essentially of issuances of: (1) Notes and bonds payable; (2) subordinated debt (capital debentures and zero coupon bonds); (3) collateralized mortgage obligations (CMOs); and (4) guaranteed mortgage certificates (GMCs). Petitioner claims that the net present value of future cashflows computed at market rates as of January 1, 1985, exceeded the net present value of future cashflows for each respective instrument at its contract rate. It is this difference that petitioner claims as its favorable financing asset as of January 1, 1985. Petitioner has not reported its favorable financing as an asset on its books or on any financial statement. Petitioner did not acquire its favorable financing in any purchase transaction.
Under DEFRA section 177(d)(2)(A)(ii), 98 Stat. 711, Congress provided a specific adjusted basis for determining gain on the sale or other disposition of property held by petitioner on January 1, 1985. DEFRA section 177(d)(2)(A)(ii) provides that the adjusted basis of any asset of petitioner shall “for purposes of determining any gain, be equal to the higher of the adjusted basis of such asset or the fair market value of such asset as of such date.” Section 167(g), which forms the basis for amortization deductions, provides that “The basis on which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 1011, for the purpose of determining the gain on the sale or other disposition of such property”. In a prior Opinion, Fed. Home Loan Mortgage Corp. v. Commissioner, 121 T.C. ––––, (2003), we held that, under section 167(g), petitioner's adjusted basis for purposes of amortizing intangible assets held on January 1, 1985, is determined under the specific adjusted basis rule in DEFRA section 177(d)(2)(A)(ii). Pursuant to DEFRA section 177(d)(2)(A)(ii), petitioner claims entitlement to amortize its favorable financing using a fair market value basis as of January 1, 1985.
Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. FPL Group, Inc. v. Commissioner, 116 T.C. 73, 74, 2001 WL 85184 (2001). Either party may move for summary judgment upon all or any part of the legal issues in controversy. Rule 121(a); FPL Group, Inc. v. Commissioner, supra at 74. A decision will be rendered on a motion for partial summary judgment if the pleadings, answers to interrogatories, depositions, admissions, and other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law. Rule 121(b); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238, 2002 WL 444971 (2002). The moving party has the burden of proving that no genuine issue of material fact exists and that moving party is entitled to judgment as a matter of law. Rauenhorst v. Commissioner, 119 T.C. 157, 162, 2002 WL 31239847 (2002).
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