                  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.
                                  - 2 -

     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.
                               - 3 -

     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.
                               - 4 -

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.
                               - 5 -

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
                               - 6 -

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.
                               - 7 -

     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.
                              - 8 -

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.
                               - 9 -

     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
                              - 10 -

     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
                              - 11 -

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).
                                - 12 -

     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.]
                             - 13 -

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.
