T.C. Memo. 2003-298
UNITED STATES TAX COURT
FEDERAL HOME LOAN MORTGAGE CORPORATION, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 3941-99, 15626-99. Filed October 27, 2003.
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.
During 1983 and 1984, when it was still exempt from
income tax, P incurred certain costs relating to its
“Freddie Mac” trade name and its trademark “Gnomes”.
In its return for 1985, P filed a statement signifying
its election to amortize its 1983 and 1984 trademark
and trade name expenditures under sec. 177, I.R.C.
Held: Sec. 177(a), I.R.C., provides an election
to amortize trademark and trade name expenditures over
a period of not less than 60 months for expenditures
“paid or incurred during a taxable year beginning after
December 31, 1955”. P’s trademark and trade name
expenditures were not paid or incurred during P’s
taxable years because P was exempt from income tax
during those years. P is not entitled to deductions
under sec. 177, I.R.C.
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Robert A. Rudnick, Stephen J. Marzen, James F. Warren, and
Neil H. Koslowe, for petitioner.
Gary D. Kallevang, for respondent.
MEMORANDUM OPINION
RUWE, Judge: 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.
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Petitioner and respondent filed cross-motions for partial
summary judgment under Rule 1211 on the issue of whether
petitioner’s election under section 177 to amortize certain
trademark and trade name expenditures, which were incurred in
1983 and 1984 when petitioner was tax exempt, was valid where the
election was filed with petitioner’s Federal income tax return
for its first taxable year commencing January 1, 1985.
Background
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,
1
All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for the taxable years in issue.
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petitioner became subject to Federal income taxation, effective
January 1, 1985.
During 1983, petitioner incurred expenses in creating the
trade name “Freddie Mac”. Petitioner claims that these expenses
amount to $33,089.2 In 1984, petitioner launched a campaign to
develop a new advertising concept to project a distinct identity
and increase the market’s awareness of petitioner. Petitioner
settled on “Gnomes”, 11 tiny elfin cartoon characters
representing the legend of the “Gnomes of Zurich”, who were
supposedly shrewd financial experts. Petitioner intended the
Gnomes to help it present the image of financial prowess,
resourcefulness, and ingenuity. Petitioner contends that during
1984, it developed and registered 14 separate “Gnome” trademarks
at a total out-of-pocket cost of $215,349.69.3 Whatever costs
petitioner incurred for trademarks and trade names in 1983 and
1984, it expensed those costs currently on its books in the
respective years 1983 and 1984.
Petitioner claims that under section 177(a), it is entitled
to amortization deductions based on trademark and trade name
expenditures that it incurred in 1983 and 1984 when it was exempt
from income tax. Section 177(a) provides an election to
2
Respondent disputes petitioner’s substantiation of these
expenses.
3
Respondent also disputes petitioner’s substantiation of
this cost.
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amortize, over a period of not less than 60 months, trademark and
trade name expenditures paid or incurred during a taxable year
beginning after December 31, 1955. In order to amortize its
claimed trademark and trade name expenditures, petitioner was
required under section 177(c) and section 1.177-1(c), Income Tax
Regs., to attach a statement, signifying its election to
amortize, to its return for the taxable year in which the
expenses were incurred. Petitioner attached a statement to its
return for the year 1985, which petitioner claims meets the
requirements in the regulations. Petitioner claims that on page
34, statement 17 of its original income tax return for the
taxable year 1985, it elected to defer and amortize its trademark
and trade name expenditures over a period of 60 months, starting
on January 1, 1983, in the case of the “Freddie Mac” item, and on
January 1, 1984, in the case of the “Gnome” items. Petitioner
deducted $49,688 in respect of trademark and trade name
expenditures on its income tax returns for each of the taxable
years 1985 through 1987 and $43,070 in the taxable year 1988.
Discussion
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. FPL Group, Inc. v.
Commissioner, 116 T.C. 73, 74 (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
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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). 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).
Petitioner claims that under section 177(a) it is entitled
to deductions in 1985, 1986, and 1987 for part of the trademark
and trade name expenditures that it incurred during 1983 and 1984
when it was exempt from income tax. Section 177(a)4 in effect
for the taxable years at issue provided:
SEC. 177(a). Election to Amortize.--Any trademark
or trade name expenditure paid or incurred during a
taxable year beginning after December 31, 1955, may, at
the election of the taxpayer (made in accordance with
regulations prescribed by the Secretary), be treated as
a deferred expense. In computing taxable income, all
expenditures paid or incurred during the taxable year
which are so treated shall be allowed as a deduction
ratably over such period of not less than 60 months
(beginning with the first month in such taxable year)
as may be selected by the taxpayer in making such
election. The expenditures so treated are expenditures
properly chargeable to capital account for purposes of
4
Sec. 177(a) was repealed by the Tax Reform Act of 1986,
Pub. L. 99-514, sec. 241(a), 100 Stat. 2181, effective for
expenditures paid or incurred after Dec. 31, 1986.
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section 1016(a)(1)(relating to adjustments to basis of
property).
Respondent contends that petitioner cannot meet the requirements
of section 177(a) because it was not taxable in 1983 and 1984
when its expenditures were incurred. Neither party cites court
opinions supporting its respective interpretations of section
177, and the issue appears to be one of first impression.
It is a well-settled principle that tax deductions are a
matter of legislative grace, and taxpayers must show that they
come squarely within the terms of the law conferring the benefit
sought. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S.
79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435,
440 (1934); Welch v. Helvering, 290 U.S. 111, 115 (1933); Wilkins
v. Commissioner, 120 T.C. 109, 112 (2003). Further, in
interpreting a statute, as in the instant cases, we start as
always with the language of the statute itself. Consumer Prod.
Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980);
Fed. Home Loan Mortgage Corp. v. Commissioner, 121 T.C. ___, ___
(Sept. 4, 2003). We look to the legislative history primarily to
learn the purpose of the statute and to resolve any ambiguity in
the words contained in the text. Fed. Home Loan Mortgage Corp.
v. Commissioner, supra at ___; Wells Fargo & Co. v. Commissioner,
120 T.C. 69, 89 (2003); Allen v. Commissioner, 118 T.C. 1, 7
(2002). If the language of the statute is plain, clear, and
unambiguous, we generally apply it according to its terms.
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United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241
(1989); Fed. Home Loan Mortgage Corp. v. Commissioner, supra at
___; Burke v. Commissioner, 105 T.C. 41, 59 (1995). If the
statute is ambiguous or silent, we may look to the statute’s
legislative history to determine congressional intent.
Burlington N. R.R. v. Okla. Tax Commn., 481 U.S. 454, 461 (1987);
Fed. Home Loan Mortgage Corp. v. Commissioner, supra at ___;
Ewing v. Commissioner, 118 T.C. 494, 503 (2002).
Section 177 literally requires that the item to be amortized
be an “expenditure paid or incurred during a taxable year”. It
is clear that petitioner was not taxable in 1983 and 1984, when
the expenditures were made, and that those years were not taxable
years with respect to petitioner. Indeed, petitioner’s first
taxable year was 1985.
Section 177(a) and the regulations thereunder provide that
deductions be allowed ratably over a period of not less than 60
months beginning with the first month of the taxable year in
which the expenditure is paid or incurred. Section 1.177-
1(a)(2), Income Tax Regs. provides:
(2) The number of continuous months selected by
the taxpayer may be equal to or greater, but not less,
than 60, but in any event the deduction must begin with
the first month of the taxable year in which the
expenditure is paid or incurred. The number of months
selected by the taxpayer at the time he makes the
election may not be subsequently changed but shall be
adhered to in computing taxable income for the taxable
year for which the election is made and all subsequent
taxable years.
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Petitioner computed its amortization deductions using a 60-
month amortization schedule commencing in 1983 and 1984, the
years in which it incurred the trademark and trade name
expenditures. But, petitioner did not, and could not, claim
deductions for any “amortization” in 1983 and 1984 with respect
to its trademarks and trade name costs because it was tax exempt
during those years. Simply put, petitioner cannot comply with
the literal requirements of section 177(a) and section 1.177-
1(a)(2), Income Tax Regs.
Our reading of section 177(a) and the regulations thereunder
is also supported by the election rules specified in section
177(c). Section 177(c) provides:
SEC. 177(c). Time for and Scope of Election.--The
election provided by subsection (a) shall be made
within the time prescribed by law (including extensions
thereof) for filing the return for the taxable year
during which the expenditure is paid or incurred. The
period selected by the taxpayer under subsection (a)
with respect to the expenditures paid or incurred
during the taxable year which are treated as deferred
expenses shall be adhered to in computing his taxable
income for the taxable year for which the election is
made and all subsequent years.
Section 1.177-1(c), Income Tax Regs., which interprets section
177(c), provides:
(c) Time and manner of making election. (1) A
taxpayer who elects to defer and amortize any trademark
or trade name expenditure paid or incurred during a
taxable year beginning after December 31, 1955, shall,
within the time prescribed by law (including extensions
thereof) for filing his income tax return for that
year, attach to his income tax return a statement
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signifying his election under section 177 and setting
forth the following:
(i) Name and address of the taxpayer, and the
taxable year involved;
(ii) An identification of the character and
amount of each expenditure to which the election
applies and the number of continuous months (not
less than 60) during which the expenditures are to
be ratably deducted; and
(iii) A declaration by the taxpayer that he
will make an accounting segregation on his books
and records of the trademark and trade name
expenditures for which the election has been made,
sufficient to permit an identification of the
character and amount of each such expenditure and
the amortization period selected for each
expenditure.
(2) The provisions of subparagraph (1) of this
paragraph shall apply to income tax returns and
statements required to be filed after May 4, 1960.
Elections properly made in accordance with the
provisions of Treasury Decision 6209, approved October
26, 1956 (21 F. R. 8319, C. B. 1956-2, 1370), continue
in effect.
The fact that petitioner’s election must be made in the tax
return for the taxable year in which the expenditures were
incurred supports our conclusion that section 177(a) applies only
to expenditures made during a taxable year.
Petitioner argues that its election was timely since it had
no prescribed due date for any income tax returns for 1983 and
1984, and its first opportunity to file an election under section
177(a) occurred in 1985 when petitioner first became subject to
Federal income tax. If timeliness of the election were the only
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issue we might agree.5 But the issue here is whether petitioner
meets the substantive requirements of section 177(a).
Petitioner argues that the language in section 177(a),
referring to a taxable year, must be read in its full context.
Petitioner points to the following language in section 177(a):
“Any trademark or trade name expenditure paid or incurred during
a taxable year beginning after December 31, 1955”. (Emphasis
added.) Petitioner argues that this language merely establishes
the effective date of section 177. See Act of June 29, 1956, ch.
464, sec. 4, 70 Stat. 406. We disagree. While the above quoted
language certainly specifies that section 177 applies only to
expenditures made after December 31, 1955, it also specifies that
qualifying expenditures be paid or incurred during a “taxable
year” after that date. We cannot simply read this requirement
out of the statute. Petitioner cites no authority for doing so,
and there is nothing in the legislative history indicating that
Congress intended such a limited application.
5
See Dougherty v. Commissioner, 60 T.C. 917 (1973) (election
held effective where filed in response to the Commissioner’s
indication of intention to include additional amount in the
taxpayer’s return years after time prescribed in regulations for
making the election); see also Roy H. Park Broad. v.
Commissioner, 78 T.C. 1093 (1982) (election filed in amended
returns more than 4 years after filing of original return allowed
where taxpayer was unable to secure required certification at
time original return filed); Bayley v. Commissioner, 35 T.C. 288
(1960) (election to compute gain on installment basis which was
made in amended petition to this Court held effective where
taxpayer treated gain in original return as deferred under sec.
1034).
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Indeed, the legislative history of section 177 indicates
that Congress was trying to help smaller companies qualify for a
tax deduction, for what would otherwise be nondeductible
expenditures, because larger companies were already deducting
these expenditures in the form of salaries paid to their
employees who performed work regarding trademarks and trade
names.6 Congress believed that this disparity in tax treatment
resulted in a “hardship” on small companies that were not able to
deduct these expenses in computing their taxable income. The
references in section 177 to expenditures “paid or incurred
during a taxable year” are consistent with Congress’s objective
to establish parity between the way large and small companies
compute their taxable income. Nothing in the statute or
6
The legislative history provides:
Under present law, expenditures paid or incurred
by smaller companies in connection with trademarks and
trade names, such as legal fees, are not deductible but
must be capitalized. Moreover, such expenditures
ordinarily are not amortizable over any period of time
since the useful life of most trademarks and trade
names is indefinite and not ascertainable. However,
certain larger corporations are in a position to hire
their own legal staffs to handle such matters. Because
of difficulties of identification, these large
corporations deduct, in some instances, compensation
paid to their legal staffs for performing the same
functions. Smaller companies, however, cannot afford
to maintain their own legal staffs but must acquire
outside counsel to perform their legal work. By this
amendment your committee intends to eliminate an
existing hardship in the case of small companies. [S.
Rept. 1941, 84th Cong., 2d Sess. (1956), 1956-2 C.B.
1227, 1232.]
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legislative history indicates that Congress wanted to extend this
type of deduction to expenditures that were incurred during a
year when the taxpayer was already exempt from income tax.
We hold that petitioner is not entitled to the claimed
amortization deductions under section 177(a).
An appropriate order
will be issued.