Fed. Home Loan Mortg. Corp. v. Comm'r of Internal Revenue, s. 3941–99
| Decision Date | 30 October 2003 |
| Docket Number | Nos. 3941–99,15626–99.,s. 3941–99 |
| Citation | 121 T.C. No. 15,121 T.C. 279 |
| 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 for six taxable years. On cross-motions for partial summary judgment on issue of inclusion of interest in basis of bad debt accrued when FHLMC was tax exempt, the Tax Court, Ruwe, J., held that FHLMC was not entitled to increase basis in foreclosed loans by interest that had not been subject to tax.
IRS' motion granted.
See also, 2003 WL 22229259, 22429682. 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 adopted the accrual method of accounting for its first taxable year commencing Jan. 1, 1985. Before that date, P acquired certain mortgages that were in default. Interest accrued on each of those mortgages from the date of acquisition up to Jan. 1, 1985. At various points after Jan. 1, 1985, P foreclosed the mortgages on the underlying real estate. In computing its gain or loss from the foreclosures, P increased its regular adjusted cost basis in the mortgages for unpaid interest that had accrued before Jan. 1, 1985. R argues that P is not entitled to increase its regular adjusted cost basis on account of interest which accrued before Jan. 1, 1985.
Held: Sec. 166(a), I.R.C., provides a deduction for bad debts. Sec. 1.166–6(a)(2), Income Tax Regs., provides: “Accrued interest may be included as part of the deduction allowable under this paragraph, but only if it has previously been returned as income.” P's accrued interest, which was accrued when P was tax exempt and not required to file income tax returns, was not “returned as income” within the meaning of sec. 1.166–6(a)(2), Income Tax Regs., and P is not entitled to increase its regular adjusted cost basis for these amounts.
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 issue of whether, for purposes of claiming a bad debt deduction under section 166, petitioner is entitled to increase its regular adjusted cost basis in certain mortgages acquired before January 1, 1985, for unpaid interest which accrued during the period that petitioner was tax exempt.
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. 450. 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 held mortgages in its retained mortgage portfolio or as collateral for issuances of collateralized mortgage obligations (CMOs). In other cases, petitioner, as guarantor of participation certificates (PCs) 2 it issued, would reacquire mortgages placed in a PC pool that became delinquent.3 Petitioner routinely acquired real estate by foreclosure when mortgages that it owned became delinquent. In some cases, mortgages that petitioner held, and had never sold, became delinquent.
In a number of cases, the ownership of mortgages, which were in default, was transferred to petitioner before January 1, 1985. At various points in the taxable years 1985 and 1986, petitioner foreclosed on these mortgages and obtained freehold title to the underlying real estate. Petitioner was required to demonstrate its gain or loss on the foreclosures.
For the taxable years 1985 through 1990, petitioner consistently accrued into income stated interest on all single-family mortgages that it owned, whether or not that interest was received. If such a mortgage was or became delinquent, petitioner nonetheless continued to accrue the interest through the date of foreclosure. Petitioner accrued into income interest from the date of acquisition through the date of foreclosure in respect of all mortgages acquired before January 1, 1985, that were subject to foreclosure after that date.4
As part of the legislation in which petitioner became subject to Federal income taxation, Congress enacted transition rules for determining petitioner's adjusted basis in assets that it held on January 1, 1985. Those rules are contained in DEFRA section 177(d), 98 Stat. 711, which provides:
(2) Adjusted basis of assets.—
(A) In general.—Except as otherwise provided in subparagraph (B), the adjusted basis of any asset of the Federal Home Loan Mortgage Corporation held on January 1, 1985, shall—
(i) for purposes of determining any loss, be equal to the lesser of the adjusted basis of such asset or the fair market value of such asset as of such date, and
(ii) 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.
* * *
(5) Adjusted basis.—For purposes of this subsection, the adjusted basis of any asset shall be determined under part II of subchapter O of the Internal Revenue Code of 1954.
In computing the gain or loss from its foreclosure sales, petitioner determined its adjusted basis pursuant to DEFRA section 177(d)(2) for mortgages acquired before, and held on, January 1, 1985. In determining its adjusted basis under these transition rules, petitioner included in its regular adjusted cost basis the amounts of unpaid interest which it had accrued from the date of acquisition of each mortgage to the date of foreclosure on the underlying real estate. These amounts of accrued interest included certain interest which had accrued before January 1, 1985.
Petitioner used its regular adjusted cost basis in determining the amount of any gain realized, or loss incurred, on the foreclosure of real estate securing mortgages that petitioner owned on January 1, 1985. During the taxable year 1985, petitioner foreclosed on 2,735 mortgages which it had held on January 1, 1985, and petitioner included in its adjusted cost basis $3,050,459 of unpaid interest accrued as of December 31, 1984. During the taxable year 1986, petitioner foreclosed on 747 mortgages held on January 1, 1985, and it included in its adjusted cost basis $675,988 of unpaid interest accrued as of December 31, 1984.
The parties filed cross-motions for partial summary judgment on the question of whether, for purposes of claiming a bad debt deduction under section 166, petitioner is entitled to increase its regular adjusted cost basis in certain mortgages acquired before January 1, 1985, for unpaid interest which accrued before January 1, 1985, when it was tax exempt.
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 the moving party is entitled to judgment as a matter of law. Rauenhorst v. Commissioner, 119 T.C. 157, 162, 2002 WL 31239847 (2002).
Section 166(a) allows a deduction for bad debts.5 The basis for determining the amount of the deduction for any bad debt is the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property. Sec. 166(b).6 Section 1.166–6, Income Tax Regs., provides specific rules for bad debts which are attributable to mortgaged or pledged property. Section 1.166–6, Income Tax Regs., provides:
(a) Deficiency deductible as bad debts—(1) Principal amount. If mortgaged or pledged property is lawfully sold (whether to the creditor or another purchaser) for less than the amount of the debt, and the portion of the indebtedness remaining unsatisfied after the sale is wholly or partially...
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