                  T.C. Memo. 2006-153



                UNITED STATES TAX COURT



FEDERAL HOME LOAN MORTGAGE CORPORATION, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos. 3941-99, 15626-99.    Filed July 25, 2006.



     At the close of business on Dec. 31, 1984, P had
30 debt instruments outstanding on which it paid
effective contract interest rates that were below
current interest rates that P would have incurred had
it issued comparable debt instruments. P’s right to
use the proceeds of these financing arrangements with
below-market interest rates constitutes an economic
benefit generally referred to as “favorable financing”.
In a prior Opinion, we held that special legislative
provisions entitled P to use the fair market values of
its intangible assets on Jan. 1, 1985, as its bases for
purposes of amortization. Fed. Home Loan Mortgage
Corp. v. Commissioner, 121 T.C. 125 (2003). In another
prior Opinion, we held that the benefit of below-market
financing can, as a matter of law, constitute an
intangible asset which P may amortize if it establishes
a fair market value and a limited useful life. Fed.
Home Loan Mortgage Corp. v. Commissioner, 121 T.C. 254
(2003).
                               - 2 -

           P calculated the fair market value of its
      favorable financing intangible assets to be
      $428,391,551 using the market approach; the market
      approach compared the adjusted issue prices of P’s debt
      instruments to their market prices on Jan. 1, 1985. P
      calculated the limited useful lives of its 30 debt
      instruments to be their average weighted lives. R
      argues that P’s favorable financing had no value and
      was not an asset. R also argues that P did not
      properly adjust for the volatility of the market in
      determining the useful lives.

           Held: P may amortize its favorable financing
      intangible assets because it reasonably estimated the
      fair market value of its favorable financing to be
      $428,391,551 and reasonably estimated the remaining
      limited useful lives.


      Robert A. Rudnick, B. John Williams, Jr., James F. Warren,

Alan J.J. Swirski, and Richard J. Gagnon, Jr., for petitioner.

      Gary D. Kallevang, John A. Guarnieri, Ruth M. Spadaro, and

Charles E. Buxbaum, for respondent.


                             CONTENTS

MEMORANDUM FINDINGS OF FACT AND OPINION . . . . . . . . . . . . 3

FINDINGS OF FACT   . . . . . . . . . . . . . . . . . . . . . . . 5

I.    Favorable Financing Intangible Assets . . . . .    .   .   .   .   . 6
      A.   Ginnie Mae Bonds . . . . . . . . . . . . .    .   .   .   .   . 7
      B.   Notes Issued to Federal Home Loan Banks . .   .   .   .   .   . 7
      C.   Debenture . . . . . . . . . . . . . . . . .   .   .   .   .   . 7
      D.   Note Payable to North Dakota Bank . . . . .   .   .   .   .   . 8
      E.   Capital Debentures . . . . . . . . . . . .    .   .   .   .   . 8
      F.   Zero Coupon Bonds . . . . . . . . . . . . .   .   .   .   .   . 8
      G.   Collateralized Mortgage Obligations (CMOs)    .   .   .   .   . 8
      H.   Guaranteed Mortgage Certificates (GMCs) . .   .   .   .   .    10

II.   Average Weighted Lives of the Debt Instruments . . . . .            15

III. Tax Returns   . . . . . . . . . . . . . . . . . . . . . .            17
                                - 3 -


OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . .       17

I.    The Values of Petitioner’s Favorable Financing
      Intangible Assets . . . . . . . . . . . . . . . . . . . 21
      A.   Petitioner’s Valuation of Its Favorable Financing
           Intangible Assets as of January 1, 1985 . . . . . . 21
      B.   Respondent’s Position That Favorable Financing Has No
           Value . . . . . . . . . . . . . . . . . . . . . . . 27
           1. Expectation of Income . . . . . . . . . . . . . 28
           2. Realization of Value . . . . . . . . . . . . . 30
           3. Contra-Liability Theory . . . . . . . . . . . . 31
                  a. Favorable Financing Is an Asset . . . . . 32
                  b. Favorable Financing Can Be Assigned a
                     Separate Value . . . . . . . . . . . . . 33
                  c. Double Counting the Value . . . . . . . . 35
           4. Petitioner’s Purchase of Its Debt Obligations
               Would Result in Discharge of Indebtedness
               Income . . . . . . . . . . . . . . . . . . . . 37
      C.   Respondent’s Argument That the Value of Petitioner’s
           Favorable Financing Is Limited to the Value of
           Petitioner’s Income Spread . . . . . . . . . . . . 38
      D.   Respondent’s Argument That Taxes Reduce the Value of
           Favorable Financing . . . . . . . . . . . . . . . . 43

II.   Favorable Financing Intangible Assets Have a Reasonably
      Estimable Useful Life As of January 1, 1985 . . . . . .       47

III. Conclusion . . . . . . . . . . . . . . . . . . . . . . .       53

APPENDIX:   Investment Bank Bid Prices . . . . . . . . . . . .      54


              MEMORANDUM FINDINGS OF FACT AND OPINION


      RUWE, Judge:   In docket No. 3941-99, respondent determined

deficiencies in petitioner’s Federal income tax of $36,623,695

for 1985 and $40,111,127 for 1986.      Petitioner claims

overpayments of $9,604,085 for 1985 and $12,418,469 for 1986.

      In docket No. 15626-99, respondent determined deficiencies

in petitioner’s Federal income tax of $26,200,358 for 1987,

$13,827,654 for 1988, $6,225,404 for 1989, and $23,466,338 for
                                - 4 -

1990.    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.

     When petitioner was chartered, it was exempt from Federal,

State, and local taxation, except for real estate tax imposed by

any State or local taxing authority.    Pursuant to the Deficit

Reduction Act of 1984 (DEFRA), Pub. L. 98-369, sec. 177, 98 Stat.

709, petitioner became subject to Federal income tax effective

January 1, 1985.    In a prior opinion, Fed. Home Loan Mortgage

Corp. v. Commissioner, 121 T.C. 129, 147 (2003), we held “that

petitioner’s adjusted basis for purposes of amortizing intangible

assets under section 167(g)[1] is the higher of regular adjusted

cost basis or fair market value as of January 1, 1985.”   (Fn.

ref. omitted.)   In another prior opinion, Fed. Home Loan Mortgage

Corp. v. Commissioner, 121 T.C. 254, 272 (2003), we held that

“The benefit of petitioner’s below-market financing can, as a

matter of law, constitute an intangible asset which could be

amortized if petitioner establishes a fair market value and a

limited useful life as of January 1, 1985.”    The benefit of

below-market financing is generally referred to as “favorable

financing”.    In this opinion, we decide whether petitioner has



     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 5 -

established that its favorable financing intangible assets have

fair market values that may be reasonably estimated and have

ascertainable limited useful lives as of January 1, 1985.2

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulations of facts and the attached exhibits are

incorporated herein by this reference.   At the time the petitions

were filed, petitioner’s principal office was in McLean,

Virginia.

     Congress created petitioner in 1970 to promote access to

mortgage credit throughout the United States by increasing the

liquidity of mortgage investments and improving the distribution

of investment capital for mortgage financing.   Since its

incorporation, petitioner has facilitated investment by the

capital markets in single-family and multifamily residential

mortgages in two ways.   First, petitioner has acquired mortgages

from originators and resold them in securitization transactions,

principally by pooling the mortgages and issuing participation

certificates (PCs).   Second, petitioner bought mortgages from

originators and held them until maturity in its retained mortgage

portfolio, generally financing this activity by issuing various



     2
       This issue is one of several involved in these cases. See
Fed. Home Loan Mortgage Corp. v. Commissioner, 125 T.C. 248
(2005); 121 T.C. 129 (2003); 121 T.C. 254 (2003); 121 T.C. 279
(2003); T.C. Memo. 2003-298.
                               - 6 -

debt instruments.   Petitioner financed approximately 10 percent

of its mortgage purchases through the issuance of long-term

debt.3

I.   Favorable Financing Intangible Assets

     At the close of business on December 31, 1984, petitioner

had outstanding long-term indebtedness on a number of debt

instruments.   The effective contract interest rates4 on some of

these outstanding long-term debt obligations were below the

interest rates that petitioner would have incurred on January 1,

1985, had it issued comparable debt instruments in the market for

the remaining term of the particular debt instrument.

Petitioner’s favorable financing intangible assets consisted of

the benefits it derived from financing arrangements that required

it to pay interest at rates below those prevailing in the

financial markets as of January 1, 1985.

     As of January 1, 1985, petitioner had the following 30

outstanding long-term debt instruments, which had below-market

interest rates and market prices that were lower than the

adjusted issue prices.


     3
       In this context, debt includes collateralized mortgage
obligations (CMOs) and guaranteed mortgage certificates (GMCs).
     4
       The effective contract interest rate is the adjusted
coupon interest rate (or for zero-coupon bonds, the adjusted
effective interest rate). The adjusted coupon interest rate
equals the sum of the coupon rate of interest, the hedging gain
or loss percentage, and any discount from the face value when the
debt obligation was issued.
                                 - 7 -

     A.    Ginnie Mae Bonds

     Ginnie Mae Bonds G-15, G-16, and G-17 were mortgage-backed

bonds, which consisted of promissory notes secured by mortgage

loans owned by petitioner.    The underlying mortgages were held in

trust by petitioner as trustee as security for payment of the

bonds.    These mortgage-backed bonds were guaranteed as to

principal and interest by the Government National Mortgage

Association, a wholly owned corporation within the Department of

Housing and Urban Development.

     B.    Notes Issued to Federal Home Loan Banks

     Notes F-8, F-12, F-15, F-18, F-11, and F-13 were promissory

notes payable to Federal Home Loan Banks (FHLB).     These notes

were passthroughs of the FHLBs’ own obligations.     Under the

Federal Home Loan Mortgage Corporation Act, Pub. L. 91-351, sec.

303(a), 84 Stat. 452 (1970), petitioner was deemed to be a member

of each FHLB and was entitled to borrow from those institutions

subject to certain security requirements.

     C.    Debenture

     Debenture D-2 was issued under section 306(a) of the Federal

Home Loan Mortgage Corporation Act.      This debenture was an

unsecured general obligation of petitioner.
                               - 8 -

     D.   Note Payable to North Dakota Bank

     The note bearing code ND was a fixed-rate loan that

petitioner issued in a private transaction to the Bank of North

Dakota.

     E.   Capital Debentures

     CD-1, CD-2, and CD-3 were capital debentures.   These capital

debentures were subordinated and junior in right of payment to

all obligations and liabilities of petitioner.

     F.   Zero Coupon Bonds

     Petitioner issued zero coupon bonds Z-2 and Z-3, which were

subordinated capital debentures junior in right of payment to all

senior obligations of petitioner.   Zero coupon bonds have no

stated interest rate but are issued at a substantial discount to

face value.   At maturity, the holder is entitled to receive the

face of amount of the bond.

     G.   Collateralized Mortgage Obligations (CMOs)

     CMO A-2, CMO A-3, and CMO C-4 were debt instruments secured

by mortgages which were outstanding on December 31, 1984.   These

CMOs were subject to put and call options; the call dates, put

dates, and final maturity dates were as follows:
                                 - 9 -

      Debt              Call             Put           Final
   Instrument           Date1            Date2     Maturity Date

    CMO A-2              N/A               N/A       12/15/95
    CMO A-3            6/15/03           6/15/08      6/15/13
    CMO C-4            1/31/04           1/31/04      1/31/09
     1
       The call date is the earliest date on which petitioner, if
it so chose, could repay the debt in full.
     2
      The put date is the earliest date on which the holder had
the right to require petitioner to pay any remaining unpaid
principal balance plus accrued interest.

     Each series of CMOs was collateralized by pools of mortgages

owned by petitioner and held by it as trustee.5    Petitioner made

principal payments to holders in the greater amount of (1) the

minimum scheduled payments, or (2) monthly and other payments of

principal petitioner received on the mortgages serving as

collateral.     Petitioner structured the CMOs to permit holders of

certain classes to receive payment in full before other classes.

     The terms of each CMO required petitioner to apply all

payments of principal and interest on the subject mortgages into

a sinking fund for the benefit of the holders.     Petitioner was

required to make payments to the sinking fund semiannually.     The

balance of the sinking fund was then used to make semiannual

principal payments on the senior class of bonds until they were

fully retired.    Thereafter, additional amounts of principal were

paid semiannually to the holders of the class of bonds next in


     5
       The mortgages used as collateral for the outstanding CMOs
as of Jan. 1, 1985, were entirely first lien, conventional
residential mortgages having fixed rates of interest.
                             - 10 -

seniority until those bonds were fully paid, and then on the same

basis to holders of the most junior classes.   The holders

received semiannual interest payments at the stated rate.6    The

holders of CMOs received payments of principal at a rate at least

corresponding to the schedule of minimum payments set forth in

the offering circular or prospectus.   The holders received

payments at a faster rate if the principal amount of the

mortgages that served as collateral paid down faster than implied

by the schedule of minimum payments.   Petitioner never had to

satisfy any minimum sinking fund obligation (i.e., cover a

deficit between funds received from mortgages and minimum

payments of principal to CMO holders).

     H.   Guaranteed Mortgage Certificates (GMCs)

     GMC A 1975, GMC B 1975, GMC A 1976, GMC B 1976, GMC A 1977,

GMC B 1977, GMC C 1977, GMC A 1978, GMC B 1978, GMC C 1978, GMC A

1979, GMC B 1979, and GMC C 1979 were certificates guaranteed by

petitioner and denominated as representing an interest in a pool

of single-family mortgages held by petitioner as trustee.7


     6
       In some cases, interest on the most junior class of bonds
was not paid currently but accrued until the senior classes had
been paid in full.
     7
       Respondent issued to petitioner Priv. Ltr. Rul.
7607233060D (July 23, 1976), which states, in pertinent part:

     Although the issuance of [Guaranteed Mortgage]
     Certificates takes the form of a transfer to the
     Certificate holders by * * * [petitioner] of undivided
                                                    (continued...)
                              - 11 -

     The terms of each GMC series obligated petitioner to pay

interest at a rate stated on the face of its prospectus and to

repay the face amount of the certificate to the holder.

Principal payments were made annually.   GMC holders received

principal repayments in amounts equal to the greater of (1)

minimum scheduled payments, or (2) monthly and other payments of

principal petitioner received on the mortgages serving as

collateral.   Petitioner was unconditionally required to make

annual principal payments to the GMC holders in an amount at

least equal to the minimum levels specified, regardless of the

amounts of principal received from the underlying mortgages.    If

mortgages that served as collateral paid down the principal

amount faster than implied by the schedules of minimum payments,

GMC holders received payments of principal at a faster rate than

required by the schedule of minimum payments.   GMCs holders had

the option to require petitioner to purchase their certificates


     7
      (...continued)
     interests in the Mortgages, the terms of the
     Certificates are such that for Federal income tax
     purposes * * * [petitioner] will not be selling
     undivided interests in the Mortgages but will be
     issuing debt obligations for which the Mortgages held
     by the Trustee are security. * * *

On May 13, 1983, respondent revoked this private letter ruling
and related rulings. See Priv. Ltr. Rul. 8337016 (May 23, 1983).
Respondent does not presently regard GMCs as debt for tax
purposes; however, under the provisions of sec. 7805(b),
respondent has permitted petitioner to treat its GMCs issued
before May 23, 1983, including all of the GMCs at issue in this
case, as debt for tax purposes.
                             - 12 -

at the then-unpaid principal balance plus accrued interest at a

future date specified by the prospectus.

     With respect to the 13 GMCs in issue, the put dates and the

final maturity dates were as follows:

            Debt                Put                 Final
         Instrument            Date             Maturity Date
         GMC A 1975           3/15/90              3/15/05
         GMC B 1975           9/15/90              9/15/05
         GMC A 1976           3/15/91              3/15/06
         GMC B 1976           3/15/96              9/15/06
         GMC A 1977           3/15/97              3/15/07
         GMC B 1977           3/15/02              3/15/07
         GMC C 1977           9/15/02              9/15/07
         GMC A 1978           3/15/03              3/15/08
         GMC B 1978           9/15/03              9/15/08
         GMC C 1978           9/15/03              9/15/08
         GMC A 1979           3/15/04              3/15/09
         GMC B 1979           3/15/04              3/15/09
         GMC C 1979           9/15/04              3/15/09

     With the possible exception of GMC B 1975, petitioner made

minimum payments pursuant to the schedule for all GMCs on all

payment dates after March 1980 through September 1993.8   For GMC




     8
       Petitioner made minimum payments pursuant to the
respective schedule on GMC A 1978, GMC B 1978, GMC C 1978, GMC A
1979, GMC B 1979, and GMC C 1979 on all payment dates from the
inception of the GMC through March 1980.
                              - 13 -

B 1975, petitioner made minimum payments on all payment dates

after December 31, 1984.

     Petitioner initially funded the acquisition of the mortgages

held as collateral for each of the CMOs and GMCs at issue by

means other than the issuance of those particular CMOs and GMCs.

When issuing its GMCs, petitioner disclosed that the proceeds

would provide funds for petitioner to engage in additional

activities consistent with its statutory purposes, including the

purchase of additional mortgages and interests in mortgages and

that some portion of the proceeds could be used to repay part of

petitioner’s borrowings.   When issuing its CMOs, petitioner

disclosed that the proceeds would be used to provide funds for

the corporation to finance its purchase of the mortgages securing

the CMOs.

     With respect to the CMOs and GMCs, petitioner received

monthly payments of interest and principal on the mortgages that

served as collateral.   Petitioner made semiannual or annual

payments of principal and interest to the CMO and GMC holders.

Petitioner paid interest through the date of payment to the

holders on the outstanding principal balance of the CMOs or GMCs,

notwithstanding any receipt of principal amounts on the mortgages

serving as collateral since the previous date of payment.

     Petitioner received spread and float income with respect to

the CMOs and GMCs.   Spread income is the amount by which the
                                           - 14 -

effective interest income rate on the mortgages serving as

collateral exceeds the interest payments to the holders of the

CMOs and GMCs.       The float income is the interest on the monthly

principal and interest payments that could be earned between

receipt of the payments by petitioner and remittance to the CMO

and GMC holders.

        The debt instruments in issue had issue dates, maturity

dates, outstanding principal on December 31, 1984, effective

contract rates, and market prices per $100 on January 1, 1985, as

follows:

                                         Principal       Effective
   Debt                    Maturity     Outstanding      Contract    Market Price Per
Instrument   Issue Date      Date      On 12/31/1984     Interest         $100 on
                                                           Rate1         1/1/19852


 G-15        11/19/1970   11/27/1995    $70,000,000       8.681         87.335069

 G-16          8/2/1971    8/26/1996        82,500,000    7.813         81.835069

 G-17         5/25/1972    5/26/1997    150,000,000       7.250         70.381944

 F-12         2/25/1977    2/25/1985    200,000,000       7.407         99.906250

 F-15         2/27/1978    5/28/1985    200,000,000       8.158         99.890625

 F-8         ll/25/1976   11/25/1985       40,000,000     8.442         99.187500

 F-18         5/25/1979    2/25/1986    200,000,000       9.581         99.937500

 F-11        10/25/1973   11/26/1993    400,000,000       7.412         77.000000

 F-13         2/25/1977    2/25/1997    300,000,000       7.910         75.687500

 D-2          3/30/1983    3/30/1990    300,000,000      10.937         98.062500

 ND            7/1/1975    11/1/1986        11,363,000    7.750         95.968750

 CMO-A2       6/15/1983   12/15/1995    350,000,000      11.162         97.664063

 CMO-A3       6/15/1983    6/15/2013    435,000,000      11.803         96.390625

 CMO-C4       1/31/1984    1/31/2009        85,052,100   12.403         94.890625
                                       3
 Z-2         11/29/1984   11/29/2019       212,584,000   10.252          2.703125

                                        4
 Z-3         11/30/1984   11/30/1994        79,678,000   11.820         31.458333
                                            - 15 -

 CD-1           12/26/1978   12/27/1988     150,000,000    9.412       94.671875

 GMC A-75        2/25/1975      3/15/2005    98,100,000    8.200       92.437500

 GMC B-75        2/25/1975      9/15/2005    63,400,000    8.750       93.125000

 GMC A-76        2/25/1976      3/15/2006    70,600,000    8.550       92.593750

 GMC B-76        8/25/1976      9/15/2006    75,600,000    8.375       88.000000

 GMC A-77        1/25/1977      3/15/2007    77,600,000    8.050       88.937500

 GMC B-77        5/25/1977      3/15/2007    94,000,000    8.125       85.875000

 GMC C-77       11/25/1977      9/15/2007   108,200,000    8.200       83.468750

 GMC A-78         6/1/1978      3/15/2008   186,000,000    8.850       86.250000

 GMC B-78         9/1/1978      9/15/2008    98,800,000    9.000       87.218000

 GMC C-78        12/4/1978      9/15/2008    98,800,000    9.400       89.656250

 GMC A-79         2/1/1979      3/15/2009   114,000,000    9.875       92.125000

 GMC B-79         6/4/1979      3/15/2009   114,000,000   10.250       93.875000

 GMC C-79         8/2/1979      9/15/2009   114,000,000   10.000       91.937500

        1
            See supra note 4.
       2
         The market prices per $100 on Jan. 1, 1985, are based upon petitioner’s
calculations. Respondent’s calculations of the market price per $100 on Jan. 1,
1985, are slightly different. Respondent agrees that this difference is not
significant.
       3
         This figure represents the outstanding principal on Dec. 31, 1984. Because
Z-2 did not pay interest periodically, the principal amount at maturity will equal
$7 billion.
       4
         This figure represents the outstanding principal on Dec. 31, 1984. Because
Z-3 did not pay interest periodically, the principal amount at maturity will equal
$250 million.

II.     Average Weighted Lives of the Debt Instruments

        The average weighted life represents the time it takes for

the average dollar of principal borrowed to be repaid to the

lender.        When principal repayment can vary, or when there is a

chance an option will be exercised to retire the security early,

the average weighted life is calculated using certain assumptions

regarding principal payment rate and exercise timing.                  The

expected remaining average weighted life of each debt instrument
                               - 16 -

as of January 1, 1985, depends on:      (1) The remaining term to

maturity; (2) whether the debt was subject to any call or put

options; and (3) whether any principal repayments would be made

pursuant to either a mandatory schedule or terms that provided

for repayment of principal on the debt based on the rate of

principal repayments received on the mortgages serving as

collateral.    On January 1, 1985, the average weighted lives of

petitioner’s 30 debt instruments in issue were as follows:

              Debt                       Average weighted life

       G-15                               5 years,      5   months
       G-16                               6 years,      8   months
       G-17                              12 years,      5   months
       F-8                                             11   months
       F-11                               8 years,     11   months
       F-12                                             2   months
       F-13                              12 years,      2   months
       F-15                                             5   months
       F-18                               1    year,    2   months
       D-2                                5   years,    3   months
       Z-2                               34   years,   11   months
       Z-3                                9   years,   11   months
       ND                                 1    year,    8   months
       CD-1                               4   years,    0   months
       GMC A 1975                         3   years,    4   months
       GMC B 1975                         3   years,    9   months
       GMC A 1976                         3   years,   10   months
       GMC B 1976                         5   years,    6   months
       GMC A 1977                         4   years,    9   months
       GMC B 1977                         6   years,    3   months
       GMC C 1977                         8   years,    2   months
       GMC A 1978                         8   years,    5   months
       GMC B 1978                         7   years,    4   months
       GMC C 1978                         7   years,    4   months
       GMC A 1979                         6   years,   10   months
       GMC B 1979                         6   years,   10   months
       GMC C 1979                         7   years,    4   months
       CMO A-2                            5   years,   11   months
       CMO A-3                           17   years,    7   months
       CMO C-4                           14   years,    6   months
                              - 17 -

III. Tax Returns

     Petitioner claimed a tax basis for its favorable financing

equal to its claimed fair market value at close of business on

December 31, 1984.   On its 1985 Federal income tax return,

petitioner claimed that as of December 31, 1984, its favorable

financing intangible assets had an aggregate amortizable value of

$456,021,853.9   Petitioner now claims that its favorable

financing intangible assets had an aggregate amortizable value of

$428,391,551 on January 1, 1985.10

                              OPINION

     As part of the legislation that subjected petitioner to

Federal income taxation, Congress enacted a dual-basis rule for



     9
       On its original Federal income tax returns for the years
at issue, petitioner reported the aggregate adjusted bases of its
favorable financing intangible assets as follows:

                                   Aggregate adjusted
                                   basis of favorable
          Year                 financing intangible assets

          1985                          $456,021,853
          1986                           391,552,352
          1987                           337,931,651
          1988                           283,234,501
          1989                           237,398,945
          1990                           196,718,525

Petitioner adjusted the bases of the favorable financing
intangible assets for tax benefits received and the lost bases on
retirements.
     10
       Petitioner reduced the value of its favorable financing
intangible assets using the valuation performed by Dr. Stephen M.
Schaefer.
                               - 18 -

petitioner.   DEFRA sec. 177(d)(2), 98 Stat. 711.   Specifically,

DEFRA section 177(d)(2)(A) 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.

The “special basis rules [were] designed to ensure that, to the

extent possible, pre-1985 appreciation or decline in the value of

* * * [petitioner’s] assets will not be taken into account for

tax purposes.”   H. Conf. Rept. 98-861, at 1038 (1984), 1984-3

C.B. (Vol. 2) 1, 292.

     Section 167(a) allows taxpayers to depreciate property used

in a trade or business, or held for the production of income, for

exhaustion, wear and tear, and obsolescence.   Section 167(g)

provides that “The basis on which exhaustion, wear and tear, and

obsolescence are to be allowed in respect to 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.”    The depreciation of intangible assets is specifically
                             - 19 -

addressed in section 1.167(a)-3, Income Tax Regs., which

provides:

           If an intangible asset is known from experience or
     other factors to be of use in the business or in the
     production of income for only a limited period, the
     length of which can be estimated with reasonable
     accuracy, such an intangible asset may be the subject
     of a depreciation allowance. * * * An intangible
     asset, the useful life of which is not limited, is not
     subject to the allowance for depreciation. No
     allowance will be permitted merely because, in the
     unsupported opinion of the taxpayer, the intangible
     asset has a limited useful life. No deduction for
     depreciation is allowable with respect to good will.
     * * *

     Petitioner’s favorable financing intangible assets arise

from debt obligations in existence on January 1, 1985, that

required petitioner to pay interest to the holders at rates

below-market rates on that date.   In Fed. Home Loan Mortgage

Corp. v. Commissioner, 121 T.C. at 147, we held that

“petitioner’s adjusted basis for purposes of amortizing

intangible assets under section 167(g) is the higher of regular

adjusted cost basis or fair market value as of January 1, 1985.”

In Fed. Home Loan Mortgage Corp. v. Commissioner, 121 T.C. at

272, we held that “The right to use the proceeds of financing

arrangements with below-market interest rates constitutes an

economic benefit” and that “The benefit of petitioner’s below-

market financing can, as a matter of law, constitute an

intangible asset which can be amortized if petitioner establishes

a fair market value and a limited useful life as of January 1,
                              - 20 -

1985.”   In this opinion, we decide the fair market values and

useful lives of petitioner’s favorable financing assets.

     Both parties rely heavily on expert opinions and testimony

to support their respective positions concerning the values and

useful lives of the favorable financing intangible assets.    “[W]e

* * * consider expert opinion testimony to the extent that it

assists us in resolving the issues presented”.    IT&S of Iowa,

Inc. v. Commissioner, 97 T.C. 496, 508 (1991).   We may exercise

our broad discretion to accept or reject an expert’s opinion in

its entirety.   Neonatology Associates, P.A. v. Commissioner, 115

T.C. 43, 86 (2000), affd. 299 F.3d 221 (3d Cir. 2002).

Alternatively, we may selectively rely on those portions of an

expert’s opinion that we find most helpful to our decision.       IT&S

of Iowa, Inc. v. Commissioner, supra at 508; Parker v.

Commissioner, 86 T.C. 547, 561 (1986).   “[A]n objective reason

for * * * [rejecting an expert’s testimony] is that another

expert’s opinion is more persuasive.”    Parker v. Commissioner,

supra at 562.   “We are not bound * * * by the opinion of any

expert witness where such opinion is contrary to our judgment.”

IT&S of Iowa, Inc. v. Commissioner, supra at 508.
                                - 21 -

I.   The Values of Petitioner’s Favorable Financing
     Intangible Assets

     A.      Petitioner’s Valuation of Its Favorable Financing
             Intangible Assets as of January 1, 1985

     The fair market value of property is a question of fact.

Bank One Corp. v. Commissioner, 120 T.C. 174, 306 (2003); Estate

of Jung v. Commissioner, 101 T.C. 412, 423-424 (1993); Estate of

Newhouse v. Commissioner, 94 T.C. 193, 217 (1990).     Fair market

value is defined as “‘the price at which the property would

change hands between a willing buyer and willing seller, neither

being under any compulsion to buy or sell and both having

reasonable knowledge of the relevant facts.’”     United States v.

Cartwright, 411 U.S. 546, 551 (1973) (quoting section 20.2031-

1(b), Estate Tax Regs.); Bank One Corp. v. Commissioner, supra at

209; Estate of Newhouse v. Commissioner, supra at 217; see also

sec. 20.2031-1(b), Estate Tax Regs.; sec. 25.2512-1, Gift Tax

Regs.     This is an objective standard that uses a hypothetical

willing buyer and seller.     Estate of Kahn v. Commissioner, 125

T.C. 227, 231 (2005).     This Court considers all relevant evidence

in the record when deciding the value of property.     Bank One

Corp. v. Commissioner, supra at 306; Estate of Jung v.

Commissioner, supra at 431-432.     As valuation is not an exact

science, the taxpayer is not required to establish the precise

value of the asset.     See Estate of Jung v. Commissioner, supra at

423-424; Snyder v. Commissioner, 93 T.C. 529, 545 (1989).
                              - 22 -

Furthermore, “A taxpayer is not required to use the most

theoretically correct method * * * to establish the amount of

depreciation to which he is entitled; rather, his method must be

reasonable.”   IT&S of Iowa, Inc. v. Commissioner, supra at 522

(citing Citizens & S. Corp. & Subs. v. Commissioner, 91 T.C. 463,

514 (1988), affd. without published opinion 900 F.2d 266 (11th

Cir. 1990)).

     Petitioner argues that the benefit of below-market interest

should be measured by the present values of the difference

between the contract interest rates on its debt instruments and

market interest rates over the terms of the loans.    Petitioner

calculated that the January 1, 1985, fair market value of each

favorable financing intangible asset was as follows:

               Debt                    Fair Market Value

           G-15                          $8,865,451
           G-16                          14,986,068
           G-17                          44,427,083
           F-8                              325,000
           F-11                          92,000,000
           F-12                             187,500
           F-13                          72,937,500
           F-15                             218,750
           F-18                             125,000
           D-2                            5,812,500
           Z-2                           24,389,887
           Z-3                            1,448,674
           ND                               458,071
           CD-1                           7,992,188
           GMC A   1975                   7,418,813
           GMC B   1975                   4,358,750
           GMC A   1976                   5,228,813
           GMC B   1976                   8,342,336
           GMC A   1977                   8,146,021
           GMC B   1977                  12,825,330
                               - 23 -

             GMC C 1977                   17,407,946
             GMC A 1978                   24,814,023
             GMC B 1978                   12,413,781
             GMC C 1978                    9,776,662
             GMC A 1979                    8,521,734
             GMC B 1979                    6,626,888
             GMC C 1979                    8,946,893
             CMO A-2                       6,254,753
             CMO A-3                      12,511,453
             CMO C-4                         623,683
               Total                     428,391,551

     Petitioner relies on the expert opinion and testimony of Dr.

Stephen M. Schaefer to determine the value of its favorable

financing.    Professor Schaefer received his doctor of philosophy

at the University of London, Faculty of Economics.     He currently

serves as a professor of finance at London Business School and

has been a visiting professor at seven universities around the

world.   Professor Schaefer has also served on the editorial

boards of numerous publications, published two books, and

published over 30 articles and notes relating to finance and

economics.

     Professor Schaefer explained that the benefit of favorable

financing is based on the difference between the interest

payments on an existing debt obligation and the interest payments

made at the prevailing market rate.     The value of the favorable

financing benefit equals the present value of this difference.

When debt obligations are exchanged in a free market, the price

paid for the debt instruments equals the fair market value of the

future cashflows.    The market price reflects uncertainties; for
                               - 24 -

example, when a bond is prepayable, the market price incorporates

the likelihood that the bond will be prepaid.   A comparison of

the adjusted issue prices of petitioner’s debt instruments and

the market prices indicates that petitioner’s instruments were

traded at a discount as of January 1, 1985.   The difference

between the adjusted issue price and the market price is the

market discount.   The discount reflects the present value

difference between petitioner’s contractual interest rate for

each debt instrument and the market rate for comparable debt on

January 1, 1985.   From petitioner’s perspective, the amount of

the discount is the present value of the additional interest cost

that the debtor would have to incur to borrow the amount of the

existing debt at market rates.

     Professor Schaefer calculated the fair market value of the

favorable financing inherent in each of the 30 debt instruments

as of January 1, 1985, as the difference between the adjusted

issue price per $100 of principal and the January 1, 1985, market

price per $100 of principal, multiplied by the unpaid principal

balance divided by $100.11   Professor Schaefer’s report provided

the January 1, 1985, market price, adjusted issue price, and

unpaid principal balance for the 30 debt instruments as follows:




     11
       FMV = (adjusted issue price per $100 - market price per
$100) x (unpaid principal balance / $100).
                            - 25 -

   Debt        Adjusted       Jan. 1, 1985         Unpaid
instrument   issue price1     market price2   principal balance
G-15          100.0000          87.335069        70,000,000
G-16          100.0000          81.835069        82,500,000
G-17          100.0000          70.381944       150,000,000
F-8           100.0000          99.187500        40,000,000
F-11          100.0000          77.000000       400,000,000
F-12          100.0000          99.906250       200,000,000
F-13          100.0000          75.687500       300,000,000
F-15          100.0000          99.890625       200,000,000
F-18          100.0000          99.937500       200,000,000
D-2           100.0000          98.062500       300,000,000
Z-2             3.0516           2.703125     7,000,000,000
Z-3            32.0378          31.458333       250,000,000
ND            100.0000          95.968750        11,363,000
CD-1          100.0000          94.671875       150,000,000
GMC A 1975    100.0000          92.437500        98,100,000
GMC B 1975    100.0000          93.125000        63,400,000
GMC A 1976    100.0000          92.593750        70,600,000
GMC B 1976     99.0348          88.000000        75,600,000
GMC A 1977     99.4349          88.937500        77,600,000
GMC B 1977     99.5190          85.875000        94,000,000
GMC C 1977     99.5574          83.468750       108,200,000
GMC A 1978     99.5909          86.250000       186,000,000
GMC B 1978     99.7826          87.218000        98,800,000
GMC C 1978     99.5517          89.656250        98,800,000
GMC A 1979     99.6002          92.125000       114,000,000
GMC B 1979     99.6881          93.875000       114,000,000
GMC C 1979     99.7857          91.937500       114,000,000
                               - 26 -

  CMO A-2            99.4511       97.664063        350,000,000
  CMO A-3            99.2668       96.390625        435,000,000
  CMO C-4            95.6239       94.890625         85,052,100
     1
       The adjusted issue price is the unpaid principal balance
minus the fraction of any unamortized original issue discount
remaining as of the valuation date. For a debt instrument issued
at a price that equaled its face value and for which there had
been no redemption before Dec. 31, 1984, the adjusted issue price
equals the initial face amount. The adjusted issue price listed
above is the adjusted issue price per $100 of unpaid principal
balance.
     2
       The Jan. 1, 1985, market price equals the middle price--
this is the average of the bid and asked prices. With the
exception of G-15 and G-16, Professor Schaefer used the average
of the bid prices obtained by Arthur Andersen and petitioner from
the Salomon Brothers, First Boston, Merrill Lynch, and Shearson
Lehman investment banks as the bid price. See appendix. The bid
prices for G-15 and G-16 equaled the average of the available
prices.

     We find that petitioner’s method of valuing its favorable

financing intangible assets provides a reasonable estimate of

fair market value.   The Supreme Court in Dickman v. Commissioner,

465 U.S. 330, 337-338 (1984), indicated that the value of the

right to use borrowed money is readily measurable by reference to

current interest rates.   See also Rev. Proc. 85-46, sec. 3.01,

1985-2 C.B. 507 (stating that the value of a gift below-market

loan is “the difference between the rate at which the money is

loaned and the prevailing market rate.”).      Similarly, we believe

that the favorable financing aspect of petitioner’s debt

instruments may be valued by comparing petitioner’s effective

contract interest rates to the prevailing market rates for those
                              - 27 -

instruments as of January 1, 1985.     The market price of each of

petitioner’s existing debt instruments provides an accurate

indication of the price at which investors would exchange the

debt instruments.   That price reflects the relationship between

the contract rate of interest on the debt and the market rate of

interest as of January 1, 1985.   The market approach used by

petitioner captures the values of the debt instruments using the

prices at which willing buyers and sellers actually exchanged

these instruments as of the valuation date.    We find that the sum

of the market discounts for petitioner’s debt instruments

provides a reasonable estimate of the present value of the

interest costs petitioner saved by paying below-market interest

rates on its outstanding debt instruments on January 1, 1985.

     B.   Respondent’s Position That Favorable Financing Has No
          Value

     Respondent primarily argues that petitioner failed to show

that the favorable financing intangibles had any value because:

(1) Petitioner did not show it expected to receive a stream of

income from the favorable financing intangible assets; (2)

petitioner did not prove that it could realize the value of the

favorable financing; (3) the favorable financing is a contra-

liability, not an asset; and (4) petitioner could realize the

value of favorable financing only by buying back its debt

instruments in the market, which would be impractical because it

would have to pay tax on the discharge of indebtedness.
                               - 28 -

       The main thrust of respondent’s arguments is that

petitioner’s favorable financing is not an asset.    We addressed

this contention in Fed. Home Loan Mortgage Corp. v. Commissioner,

121 T.C. 254 (2003).    In that Opinion, we concluded:   (1) That

the right to use money at below-market rates is a valuable

economic benefit in terms of the cost savings that can be

achieved in income-producing activities; (2) that favorable

financing is a benefit for which a third party would pay a

premium if the favorable financing were included as part of a

purchase transaction; (3) that petitioner’s favorable financing

arrangements on January 1, 1985, represented something of value;

and (4) that the differential between the market rate of interest

and petitioner’s contract rate of interest serves as a measure of

the economic value of that right on January 1, 1985.       Id. at 260-

261.    Nevertheless, we will briefly discuss respondent’s

arguments that petitioner’s favorable financing had no value.

            1.   Expectation of Income

       Respondent argues that the favorable financing intangible

assets do not have any value because petitioner did not receive

any additional income or earnings from these assets.     Respondent

relies on the expert opinion and testimony of Dr. Scott D.

Hakala.12   Dr. Hakala explained that “Intangible assets are


       12
       Dr. Scott D. Hakala received his doctor of philosophy,
economics at the University of Minnesota. Dr. Hakala is
                                                   (continued...)
                              - 29 -

defined as all elements of a business enterprise that exist in

addition to monetary and tangible assets.    Their existence is

dependent on the presence, or expectation of earnings.” (Fn. ref.

omitted.)

     First, it seems clear that petitioner’s favorable financing

had a positive effect on its net income.    To the extent that

petitioner’s financing costs were lower than they would have been

had petitioner financed its operations with the market rates

prevailing on January 1, 1985, its net income was enhanced.

Second, respondent does not support with legal authority his

contention that the value of the favorable financing intangible

must be based on income.   Indeed, courts have determined the

value of similar intangible assets using cost savings methods.

IT&S of Iowa, Inc. v. Commissioner, 97 T.C. at 514-515; Citizens

& S. Corp. & Subs. v. Commissioner, 91 T.C. at 498.

     We have already held that petitioner’s favorable financing

constituted an economic benefit that can be an amortizable

intangible asset if petitioner establishes a fair market value

and limited useful life as of January 1, 1985.    Fed. Home Loan


     12
      (...continued)
currently a director and principal in CBIZ Valuation Group, LLC.
His expertise includes: Corporate finance, restructuring and
cost of capital; valuation of securities and business interests;
valuation of intangible assets; analysis of publicly traded
securities; economic loss analyses; wage and compensation
determination; transfer pricing; and derivative securities. He
has testified as an expert in over 60 cases in U.S. District
Courts, this Court, and various State courts.
                                - 30 -

Mortgage Corp. v. Commissioner, 121 T.C. at 272.    We also

concluded that the core deposit cases, which use cost savings to

measure value, “support petitioner’s position that favorable

financing is an intangible asset subject to amortization.”     Id.

at 264.   Rather than addressing the valuation issue presently

before the Court, respondent’s argument seems to challenge our

prior holdings.

           2.     Realization of Value

     Respondent argues that the favorable financing intangible

assets do not have a fair market value and that any value is

hypothetical because petitioner could not transfer favorable

financing to a willing buyer.    We might agree that petitioner’s

favorable financing could not be transferred by itself.   However,

we have previously rejected respondent’s argument that favorable

financing could not be valued because it could not be transferred

except as part of a larger acquisition.   Obviously, intangibles

such as core deposits or deposit base13 might have economic


     13
       The term “deposit base” represents the present value of
the future stream of income to be derived from employing the core
deposits of a bank. See Fed. Home Loan Mortgage Corp. v.
Commissioner, 121 T.C. at 262. “Core deposits are a relatively
low-cost source of funds, reasonably stable over time, and
relatively insensitive to interest rate changes.” Citizens & S.
Corp. & Subs. v. Commissioner, 91 T.C. 463, 465 (1988). In First
Chi. Corp. v. Commissioner, T.C. Memo. 1994-300, we defined core
deposits as follows:

          Core deposits can be an essential part of a
     commercial bank when they represent a low cost and
                                                   (continued...)
                                - 31 -

significance only in a larger context, but that does not prevent

giving them a separate value.    See Fed. Home Loan Mortgage Corp.

v. Commissioner, 121 T.C. at 266-267, where we stated:

          We also cannot distinguish the cases involving
     deposit base for the reason that those cases involved
     an acquisition of deposit base in conjunction with a
     larger acquisition of assets of a company. We might
     agree that, as a practical matter, a debtor’s position
     with respect to its favorable financing would not be
     transferred, except as a part of a larger acquisition
     of a company or property. However, this is not, in our
     view, determinative of the question of whether there
     exists an amortizable asset of value. * * *

          3.   Contra-Liability Theory

     Respondent argues that petitioner’s favorable financing is a

contra-liability, not an asset.    Respondent’s expert Dr. Hakala

explained that a contra-liability is a liability on the balance

sheet that is misstated in some economic sense because the

liability is worth less than face value and the liability has

been marked to market.   Dr. Hakala further explained that

transferring the liability to the asset side of the balance sheet



     13
      (...continued)
     stable source of funds. Banks typically invest the
     funds in loans or other income-producing assets, and
     receive fees for services rendered to the depositors.
     The excess of the income generated from the core
     deposits over the associated expenses contributes to
     the profitability of the bank. Core deposits are a
     separate and distinct intangible asset with an inherent
     value because they provide an inexpensive means to
     generate income. Therefore, when one bank considers
     acquiring another bank, core deposits can represent an
     attractive intangible asset and a reason for acquiring
     a bank. [Fn. ref. omitted.]
                              - 32 -

creates an unrealizable asset.   As a result, respondent argues

that the favorable financing intangible assets cannot be valued

separately, without looking at the value of the underlying

mortgages.   According to respondent, petitioner’s valuation

method results in overvaluation, double counting of assets, and

accounting irregularities because petitioner marks its

liabilities to market without making the corresponding downward

adjustment to its assets.

                a.   Favorable Financing Is an Asset

     Respondent’s contra-liability argument revisits the question

of whether favorable financing can be an amortizable asset.    We

have already rejected respondent’s argument that favorable

financing is a liability.   See Fed. Home Loan Mortgage Corp. v.

Commissioner, 121 T.C. at 269, where we stated:

          Respondent argues that petitioner’s favorable
     financing represents a “liability”, not an “asset”.
     Respondent claims that petitioner is “attempting to
     adjust, for tax purposes, the asset side of its balance
     sheet to account for an overstatement in fair market
     value terms of its liabilities.” We cannot agree with
     respondent’s proposed characterization of petitioner’s
     favorable financing as a liability. Indeed, as
     petitioner points out, there is a valuable economic
     benefit associated with the below-market interest rates
     on its financing arrangements as of January 1, 1985.
     It is this economic benefit which petitioner claims as
     an intangible asset and upon which it bases its claimed
     amortization deductions.
                                 - 33 -

                b.      Favorable Financing Can Be Assigned a
                        Separate Value

     As previously indicated, the fact that favorable financing

could not be transferred apart from a transfer of other assets

and liabilities does not prevent assigning it a separate value.

At trial, petitioner’s counsel developed the following

hypothetical situation while examining respondent’s expert, Dr.

Herbert Kaufman:14

          Q:   * * * The houses are both worth $300,000.
     They are identical. They are next door to each other.
     They both have a “for sale” sign in front of them. The
     first house just says, “For sale, House, No Assumable
     Debt.” The second house has “House for Sale Plus 1
     Percent Mortgage Assumable as Part of the Purchase.”

                *    *      *    *    *    *    *

          Q:   Do you believe the second seller is going to
     receive more money at closing than the first seller?

          A:    Assuming that market interest rates are--

          Q:    They’re five.

          A:    Sure.

          Q:    So the second seller would receive more
      money.   Right?

          A:    I would think so.



     14
        Dr. Herbert M. Kaufman received his Ph.D. in economics
from the Pennsylvania State University. He is a professor of
finance at Arizona State University, W.P. Carey School of
Business. Dr. Kaufman’s fields of specialization are:
Investments; financial markets and institutions; monetary
economics; and applied econometrics. He provided a valuation
analysis of petitioner’s asserted favorable financing intangible
assets.
                              - 34 -

          Q:   Why is that?

          A:   Because the assumable mortgage is in place.

          Q:   Does it have value?

          A:   The assumable mortgage?

          Q:   Yes.

          A:   Yeah. The value of the assumable mortgage
     with regard to the house, which is the asset,--

               *      *   *   *      *   *   *

          A:   --has value.

Further, Dr. Kaufman was asked and answered as follows:

          Q:   * * * Back to my other hypothetical about
     the two homes next door to each other, let’s assume you
     can’t decide which house to buy, the $300,000 one with
     no assumable mortgage or the $300,000 house with the 1
     percent mortgage. Market rates are five.

               *      *   *   *      *   *   *

          Q:   Do you think it’s possible to calculate how
     much more you would pay for that house with the
     assumable 1 percent mortgage? Is that possible to do?

          A:   I think it’s probably possible.

          Q:   But a buyer certainly would have the tools to
     determine how much more to pay for the below-market
     financing. Is that right?

          A:   Not for the below-market financing; for the
     house with the below-market.

               *      *   *   *      *   *   *

          A:    Again, you keep wanting to separate. I can’t
     separate that because you’re not going to buy a
     liability.

          Q:   Let’s say the buyer hired an appraisal
     company and had in the buyer’s hand an appraisal saying
                                - 35 -

     the house is worth $300,000. Right? How would the
     buyer decide how much more to pay for the house with
     the 1 percent mortgage? It would determine the value
     of the below-market mortgage and add that to the price.
     Isn’t that fair?

          A:      That’s true, yeah.
     Like the purchaser and seller of the houses in the

hypothetical situation, we think that petitioner can ascertain

the value of the favorable financing.    As we have mentioned,

financial markets determined the current price of petitioner’s

debt obligations on the valuation date; a comparison of the

contract price and the prevailing market price provides a

reasonable measure of the value of the favorable financing

associated with the debt instrument.     Therefore, we disagree with

respondent that a separate value cannot be assigned to

petitioner’s favorable financing.

                  c.   Double Counting the Value

     Respondent also argues that petitioner’s method of valuing

its favorable financing overvalues and double counts petitioner’s

assets because petitioner’s “real assets”--the mortgages--have

lost value when compared to prevailing market rates.

     We think that respondent’s concerns of double counting are

misguided.     When petitioner was chartered, it was exempt from

Federal, State, and local taxation, except for real estate tax

imposed by any State or local taxing authority.     Congress enacted

special legislation that subjected petitioner to Federal income
                               - 36 -

taxation.    In that special legislation, Congress created a dual-

basis rule for petitioner’s assets “to ensure that, to the extent

possible, pre-1985 appreciation or decline in value of * * *

[petitioner’s] assets will not be taken into account for tax

purposes.”   H. Conf. Rept. 98-861, supra at 1038, 1984-3 C.B.

(Vol. 2) at 292.    Just as this legislation applies to

petitioner’s favorable financing intangible assets, DEFRA section

177(d)(2) governs the adjusted bases of petitioner’s so-called

real assets.    For the purposes of determining a loss, DEFRA

section 177(d)(2)(A) provides that “the adjusted basis of any

asset of * * * [petitioner] held on January 1, 1985, * * * be

equal to the lesser of the adjusted basis of such asset or the

fair market value of such asset” as of January 1, 1985.    Congress

created the special dual-basis rule specifically for petitioner

when it became a taxable entity to ensure that pre-1985

appreciation or decline in value would not be taken into account

for tax purposes.    H. Conf. Rept. 98-861, supra at 1038, 1984-3

C.B. (Vol. 2) at 292.    The adjusted basis rules of DEFRA section

177(d)(2)(A), which requires petitioner to calculate a loss using

an adjusted basis equal to the lesser of fair market value or

adjusted basis, address the kind of double counting that appears

to concern respondent.
                                 - 37 -

          4.    Petitioner’s Purchase of Its Debt Obligations
                Would Result in Discharge of Indebtedness Income

     Respondent appears to argue that the only way petitioner

could realize the value of favorable financing would be to buy

back its debt instruments at their discounted market prices.

Respondent claims that this is impractical because petitioner

would incur tax on the resulting discharge of indebtedness

income.

     When a taxpayer repays a debt at a discount, the taxpayer

normally realizes income from the discharge of indebtedness.      See

sec. 61(a)(12); United States v. Kirby Lumber Co., 284 U.S. 1, 3

(1931).   Section 1.61-12(a), Income Tax Regs., provides that “The

discharge of indebtedness, in whole or in part, may result in the

realization of income.   * * *    A taxpayer may realize income by

the payment or purchase of his obligations at less than their

face value.”   When a taxpayer receives borrowed funds, those

funds are excluded from income because the taxpayer has an

obligation to repay the funds.     United States v. Centennial Sav.

Bank FSB, 499 U.S. 573, 582 (1991).       The rationale for including

discharge of indebtedness in a taxpayer’s income is that the

taxpayer “realizes an accession to income due to the freeing of

assets previously offset by the liability.”       Jelle v.

Commissioner, 116 T.C. 63, 67 (2001) (citing United States v.

Kirby Lumber Co., supra at 3).
                               - 38 -

     If petitioner entered the market and purchased its debt

obligations for less than the amount that it had borrowed,

petitioner would normally realize income equal to the difference

between the amount it borrowed and the amount it paid to purchase

its debt instruments.   We think that respondent’s argument that

petitioner could have received discharge of indebtedness income

by repurchasing its debt at a discount supports our conclusion

that petitioner’s favorable financing had value.

     C.   Respondent’s Argument That the Value of Petitioner’s
          Favorable Financing Is Limited to the Value of
          Petitioner’s Income Spread

     Assuming, without conceding, that favorable financing is a

valuable asset, respondent argues that the price an acquirer

would pay to purchase petitioner’s rights and obligations with

respect to its CMOs or GMCs would not exceed the present value of

petitioner’s spread income associated with those instruments.    As

of January 1, 1985, respondent asserts that the present value of

the spread related to petitioner’s GMCs and CMOs equaled

approximately $11.4 million and $7.2 million, respectively.

     Dr. Hakala concluded that favorable financing is not an

intangible asset; however, Dr. Hakala found that petitioner’s

income spread has value because its assets and liabilities are

closely matched.15   According to Dr. Hakala, when previously



     15
       Dr. Hakala indicates that the CMOs and GMCs are exactly
matched.
                              - 39 -

issued debt is matched to income-earning assets, the issued debt

does not have any intangible value by itself.   In his report, Dr.

Hakala explained that “what is of value to a potential buyer is

the potential income stream between mortgages and obligations to

holders of the securities.”

     To determine the value of the income spread from the GMCs,

Dr. Hakala used the net management and guarantee income16

petitioner reported for the 6 months that ended June 30, 1985,

and compared that to the average principal balance outstanding

over that same 6-month period.   He concluded that the management

and guarantee income totaled $3.5 million.   Dr. Hakala assumed

general and administrative costs of 9 basis points annually and

reduced the total value to incorporate the effect of taxes; these

adjustments reduced the net management and guarantee income to

$1.6 million.   “Taking into account the actual runoff of each GMC

and discounting to present value the future net spread income at

the weighted average cost of capital results in a value of

approximately $11.4 million for the spread associated with all of

the GMCs.”   Dr. Hakala used the same analysis to find that the

present value of the CMOs’ future net spread income at the

weighted average cost of capital equaled $7.2 million.


     16
       Management and guarantee income is the excess
income/expense during a month from each GMC trust, including the
excess of the effective interest income on mortgages backing the
GMCs over the amount payable to GMC investors and short-term
investments.
                                - 40 -

     We disagree with respondent that the value of petitioner’s

favorable financing intangible assets is limited to the value of

the income spread.   Dr. Hakala’s income spread analysis is

premised on his conclusion that favorable financing cannot be an

intangible asset.    However, in Fed. Home Loan Mortgage Corp. v.

Commissioner, 121 T.C. at 272, we held that favorable financing

was an economic benefit and that “the benefit of * * * below-

market financing can, as a matter of law, constitute an

intangible asset”.

     Professor Schaefer explained that the income spread is a

measure of petitioner’s equity value, and that equity is

different from the value of petitioner’s assets, including the

favorable financing intangible assets.    Equity is generally

described as the excess of the value of assets (tangible and

intangible) over liabilities.    The value of petitioner’s

favorable financing assets is the present value of the cost

savings between the effective contract interest rate on

petitioner’s debt obligations and the prevailing market interest

rates on equivalent debt obligations at the valuation date.     To

illustrate the differences between the value of an intangible

asset and equity value, Professor Schaefer gave the following

examples:

     To illustrate this further, suppose a company has a
     long lease on office space at $5 per square foot when
     the market price for similar space is, say, $70. It is
     clear that this lease is valuable to the company; if it
                             - 41 -

     did not own the lease at $5 per square foot it would
     have to rent more expensive space and, as a result,
     both the earnings and the value of the company would be
     lower. Of course the price an acquirer would pay is
     the value of the earnings stream from the whole
     company, i.e., its revenues less its total costs,
     including the costs of space. However, it is clear
     that paying $5 rather than $70 per square foot for
     space increases the earnings of the company and
     therefore has value to an acquirer.

     Similarly, suppose two companies, A and B, have
     identical assets and identical amounts of debt but pay
     different rates of interest on their debt. Company A’s
     liabilities pay the Prevailing Market Interest Rate
     while company B’s liabilities pay a below-market
     interest rate. In this case, company B’s earnings will
     be higher than company A’s and an acquirer would
     clearly pay more for company B than for company A. The
     difference in the earnings of the two companies is the
     difference between interest payments at the Prevailing
     Market Interest Rate (the rate on company A’s
     liabilities) and the lower rate on company B’s
     liabilities. Thus, the difference between the earnings
     of the two companies is equal to company B’s Favourable
     Financing benefits and the higher amount that an
     acquirer would pay for company B over company A is the
     value of company B’s Favourable Financing Assets.

To further rebut respondent’s claim that favorable financing

cannot exceed the value of equity, Professor Schaefer explained:

     This claim is clearly flawed since all that is required
     for the value of the Favourable Financing Assets to
     exceed the value of equity is for the present value of
     the Asset Spread to Market[17] to be negative. * * *

     17
       Professor Schaefer describes Asset Spread to Market as
follows:

     the difference between the rate the firm actually earns
     on its assets and the rate it would earn if it had to
     invest in the market (at the Prevailing Market Interest
     Rate), measures the benefit to the firm of the specific
     assets it holds. I refer to this rate as the Asset
     Spread to Market. If positive, this difference
                                                   (continued...)
                             - 42 -

     the value of Freddie Mac’s equity is always equal to
     the present value of its Asset Spread to Market plus
     the value of its Favourable Financing Assets. Thus, if
     the present value of the Asset Spread to Market is
     negative, the value of the Favourable Financing Assets
     will exceed the value of equity. * * *

In order to illustrate this point, Professor Schaefer used the

following example:

     A more concrete example is provided by the S&L crisis,
     which featured negative Asset Spreads to Market, and
     therefore Favourable Financing Assets with a higher
     value than equity. In the early 1980s, when interest
     rates rose sharply, the condition of many S&Ls
     deteriorated as the value of their fixed-rate mortgage
     assets fell. Suppose that, in September 1981 when
     mortgage rates were above 15%, an S&L held fixed-rate
     mortgages paying a rate of 6% and therefore selling at
     around 40% of their face amount. Suppose further that
     this S&L was fortunate in the sense that it was
     entirely financed with core deposits * * * that paid 2%
     and therefore, despite earning 6% on its assets when
     market rates were 15%, it nonetheless earned a positive
     spread of 4% (equal to the rate on its assets of 6%
     less 2% paid on its liabilities).

     To the extent that the core deposits remain in place,
     this S&L is solvent. However, its positive net worth
     does not come from its assets--these have fallen in
     value by 60%--but from its liabilities. The total
     spread of 4% is made up of a substantial and negative
     Asset Spread to Market of--9% (a 6% asset return less a
     15% market rate) and a large and positive Favourable
     Financing benefit of 13% (the 15% market rate less the
     2% paid on deposits). The value of the Favourable
     Financing Assets for this S&L (the present value of the
     13% spread) would clearly exceed the value of its
     equity (the present value of the 4% spread).



     17
      (...continued)
     represents the “favourableness” of the firm’s assets,
     just as the difference between the market and actual
     financing rates represents the “favourableness” of the
     firm’s liabilities. * * *
                                - 43 -

     We must decide the value of petitioner’s favorable financing

intangible assets.    Because income spread measures equity and not

the value of individual assets, we find that the value of

petitioner’s favorable financing intangible assets is not limited

to the income spread.

     D.   Respondent’s Argument That Taxes Reduce the Value of
          Favorable Financing

     Assuming that petitioner’s favorable financing intangible

assets do have value, respondent argues that petitioner’s

calculations over-valued these assets because its method failed

to incorporate the effect of taxes.      In his rebuttal report, Dr.

Hakala explained that “the reduction in the value of the

liability would be partially offset by a deferred tax liability.”

Dr. Hakala calculated value by reducing the value of the

intangible assets for income taxes and increasing the value by

the tax shield.18    After incorporating the tax effect, Dr. Hakala

prepared a summary analysis of the favorable financing intangible

assets using Professor Schaefer’s market prices as follows:

               Debt                   Corrected Value

               G-15                       $6,977,205
               G-16                       11,448,352
               G-17                       30,735,708
               F-8                           296,491
               F-11                       67,179,640


     18
       The reduction of value for income taxes reflects the
present value of cashflows on an after-tax basis. The tax shield
is the amortized tax benefit associated with creating an
intangible asset.
                             - 44 -

               F-12                       176,830
               F-13                    50,628,337
               F-15                       203,957
               F-18                       112,856
               D-2                      4,594,048
               Z-2                     14,598,063
               Z-3                      1,039,813
               ND                         405,439
               CD-1                     6,538,498
               GMC A 1975               6,194,495
               GMC B 1975               3,592,694
               GMC A 1976               4,299,020
               GMC B 1976               6,551,705
               GMC A 1977               6,524,267
               GMC B 1977               9,891,261
               GMC C 1977              12,890,475
               GMC A 1978              18,287,188
               GMC B 1978               9,347,594
               GMC C 1978               7,361,840
               GMC A 1979               6,486,039
               GMC B 1979               5,043,839
               GMC C 1979               6,737,022
               CMO A-2                  4,862,086
               CMO A-3                  8,187,424
               CMO C-4                    420,731
                  Total               311,612,917

     Petitioner argues that its market-based valuation approach

integrates the effect of taxes into the value of an asset.   In

other words, petitioner argues that the market prices of its debt

instruments already reflect the tax considerations of buyers and

sellers.

     In his rebuttal report, Dr. Hakala quoted the following

excerpt from “Assets Acquired in a Business Combination to be

Used in Research and Development Activities:   A Focus on

Software, Electronic Devices, and Pharmaceutical Industries”

(2001) by the AICPA’s IPR&D Task Force:   “The task force believes

that the valuation of an intangible asset would include (a) the
                                 - 45 -

expected tax payments resulting from the cashflows attributable

to the intangible asset and (b) the tax benefits resulting from

the amortization of that intangible asset for income tax

purposes.”    At trial, Dr. Hakala was asked to read the two

sentences that immediately followed the sentence he quoted in his

rebuttal report:    “‘Including the tax affects [sic] in the

valuation is common in the income and cost approaches.    It is not

typical in the market approach because any tax benefits would

already be factored into the quoted market price through the

negotiation of market participants during the bid and ask

process.’”

     Petitioner’s expert, Mr. Howard A. Scribner,19 testified

that taxes can affect the value of intangible assets but that the

market approach incorporates taxes into the valuation.

Specifically, Mr. Scribner was asked and answered as follows:

          Q:   Are taxes relevant or irrelevant in a market-
     based valuation of an intangible asset?

          A:   A market-based intangible asset reflects the
     interactions of buyers and sellers. All factors,
     including taxes, are reflected in those prices.

     We agree with petitioner that the market approach of valuing

an asset incorporates the effect of taxes.    Respondent’s expert

relied on a source that states that the effect of taxes typically

is not included in the market approach because the quoted market



     19
          See infra pp. 48-49.
                                - 46 -

price already reflects taxes.    Mr. Scribner confirmed that the

market price incorporates the effect of taxes.    We find that

petitioner properly valued its favorable financing intangible

assets using the market-based method and that no further

adjustment is necessary to account for the tax effect.

     We agree that petitioner has proven that its favorable

financing intangible assets have values that were reasonably

estimated.   We hold that the values of petitioner’s favorable

financing intangible assets are as follows:

                Debt                 Fair market value

                G-15                     $8,865,451
                G-16                     14,986,068
                G-17                     44,427,083
                F-8                         325,000
                F-11                     92,000,000
                F-12                        187,500
                F-13                     72,937,500
                F-15                        218,750
                F-18                        125,000
                D-2                       5,812,500
                Z-2                      24,389,887
                Z-3                       1,448,674
                ND                          458,071
                CD-1                      7,992,188
                GMC A 1975                7,418,813
                GMC B 1975                4,358,750
                GMC A 1976                5,228,813
                GMC B 1976                8,342,336
                GMC A 1977                8,146,021
                GMC B 1977               12,825,330
                GMC C 1977               17,407,946
                GMC A 1978               24,814,023
                GMC B 1978               12,413,781
                GMC C 1978                9,776,662
                GMC A 1979                8,521,734
                GMC B 1979                6,626,888
                GMC C 1979                8,946,893
                CMO A-2                   6,254,753
                                - 47 -

                CMO A-3                   12,511,453
                CMO C-4                      623,683
                  Total                  428,391,551

II.   Favorable Financing Intangible Assets Have a Reasonably
      Estimable Useful Life As of January 1, 1985

      To amortize favorable financing, a taxpayer must show that

the intangible assets have limited useful lives, the duration of

which may be ascertained with reasonable accuracy.     Section

1.167(a)-3, Income Tax Regs., provides:

      § 1.167(a)-3.   Intangibles.

           If an intangible asset is known from experience or
      other factors to be of use in the business or in the
      production of income for only a limited period, the
      length of which can be estimated with reasonable
      accuracy, such an intangible asset may be the subject
      of depreciation allowance. Examples are patents and
      copyrights. An intangible asset, the useful life of
      which is not limited is not subject to the allowance
      for depreciation. * * *

      “A taxpayer may establish the useful life of an asset for

depreciation based upon his own experience with similar property,

or, if his own experience is inadequate, based upon the general

experience in the industry.”     Citizens & S. Corp. & Subs. v.

Commissioner, 91 T.C. at 500 (citing section 1.167(a)-1(b),

Income Tax Regs.); Banc One Corp. v. Commissioner, 84 T.C. 476,

499 (1985) (citing section 1.167(a)-1(b), Income Tax Regs.),

affd. without published opinion 815 F.2d 75 (6th Cir. 1987).      The

taxpayer is not required to prove the precise useful life for

purposes of depreciation--a “‘reasonable approximation’” of the

useful life is sufficient.     Citizens & S. Corp. & Subs. v.
                              - 48 -

Commissioner, supra at 500; Banc One Corp. v. Commissioner, supra

at 499 (citing Burnet v. Niagara Falls Brewing Co., 282 U.S. 648,

655 (1931), Super Food Servs., Inc. v. United States, 416 F.2d

1236 (7th Cir. 1969), and Spartanburg Terminal Co. v.

Commissioner, 66 T.C. 916 (1976)).     The taxpayer must base the

useful life estimation upon facts that existed at the valuation

date.   Citizens & S. Corp. & Subs. v. Commissioner, supra at 500;

Banc One Corp. v. Commissioner, supra at 499.     Taxpayers may use

evidence of their subsequent experiences to corroborate their

projections.   Citizens & S. Corp. & Subs. v. Commissioner, supra

at 500.

     Petitioner argues that on January 1, 1985, the reasonably

estimated remaining useful lives of the 30 favorable financing

intangible assets equaled the average weighted lives.    Petitioner

relies on the expert opinion and testimony of Mr. Howard A.

Scribner.   Mr. Scribner received a B.S.C. in accounting from

Rider University and an M.B.A. in finance from Rutgers Graduate

School of Management.   He is also a licensed certified public

accountant (C.P.A.) and an accredited business valuation

specialist in the American Society of C.P.A.s.    He is a partner

in the Economic and Valuation Services practice of KPMG LLP.     Mr.

Scribner has more than 20 years of valuation experience involving

intangible assets, debt, common and preferred stock, partnership
                                - 49 -

interests, and stock options of privately and publicly held

companies.

     Mr. Scribner determined that the estimated useful lives of

the favorable financing intangible assets equal the average

weighted lives of the debt obligations that give rise to them.

According to Mr. Scribner, the estimated useful lives of the

favorable financing intangible assets did not change on account

of subsequent unforeseen events because

     the interactions of market participants force the
     incorporation of all known and expected information
     available at that date into the existing prevailing
     market interest rate. Therefore, the market consensus
     establishes the current market interest rate to be the
     best estimate of the prevailing interest rate over the
     life of the investment.

     Mr. Scribner states that the average weighted life

represents the time it takes for the average dollar of principal

borrowed to be repaid to the lender.     The average weighted life

is calculated by:    (1) Multiplying the principal payment by the

number of years or pro rata portion of a year that the principal

amount has been outstanding, (2) adding the results for all

payment periods, and (3) dividing that sum by the total principal

paid.20    For debt obligations that do not repay any principal


     20
          The average weighted life formula is as follows:

                      AWL =   E PMT x n
                                   P
PMT is the principal payment, n is the number of years that the
principal amount has been outstanding, and P is the total
                                                   (continued...)
                                 - 50 -

until maturity, the average weighted life is the time remaining

to maturity.

     The following example illustrates how Mr. Scribner’s

calculated the average weighted life for ND:

                   Years           Principal
   Date        Outstanding (A)    Payment (B)    (A*B)/11,363,0001

 1/1/1985         --                   --                --
11/1/1985       0.8333            $1,407,703            0.10
11/1/1986       1.8333             9,954,795            1.61
  Total average weighted life                           1.71
     1
       This figure is the total principal outstanding on ND as of
Dec. 31, 1984.

Mr. Scribner estimated that ND had an average weighted life of

1.71 years, or 1 year, 9 months.

     When an issuer holds an option to repay debt, Mr. Scribner’s

report explains that the option may affect the average weighted

life because the issuer may elect to redeem the instrument before

maturity.   Petitioner would elect to exercise an option to repay

debt before maturity if it would save interest expense.    For

example, petitioner would exercise the option to redeem the

instrument before maturity when the interest rate of the

instrument exceeded the market rate.

     Similarly, if the holder of a debt has a put option, the

holder will exercise the option when the debt obligation pays

interest at a rate below the market rate of interest because the


     20
      (...continued)
principal paid.
                               - 51 -

holder could reinvest at a higher rate.     Favorable put options

would shorten the estimated remaining useful life of favorable

financing intangible assets.

     Respondent argues that petitioner has not established a

limited useful life for the favorable financing intangible assets

because petitioner’s calculations failed to consider the

volatility of the markets, which may eliminate the benefit of

these assets before the useful lives asserted by petitioner

expire.   Respondent’s theory would seem to produce shorter useful

lives for the favorable financing intangible assets, which would

accelerate petitioner’s depreciation allowance.21    Instead,

petitioner used a more conservative estimate of the useful life

measured by the averaged weighted life.

     We disagree with respondent that petitioner failed to take

market volatility into account when determining the useful lives

of its assets.   Mr. Scribner explained that the market

incorporates all known information and expected information into

establishing the prevailing market rates.    Mr. Scribner concluded

that “the market consensus establishes the current market

interest rate to be the best estimate of the prevailing interest

rate over the life of the investment.”




     21
        Respondent did not offer alternative useful life
calculations for petitioner’s favorable financing intangible
assets.
                             - 52 -

     Because respondent contends that there is no fair market

value to support the existence of the favorable financing

intangibles, respondent offered no view as to their useful lives.

Although Dr. Hakala disagrees that the average weighted lives

equal the remaining useful lives of the assets, Dr. Hakala

substantially agreed with the average weighted life calculations

performed by petitioner’s experts.    We find that petitioner has

proven that its favorable financing intangible assets have

reasonably estimable useful lives equal to the average weighted

lives of the debt obligations from which these assets arose.    We

hold that petitioner’s favorable financing intangible assets had

useful lives as follows:

           Debt                 Average Weighted Life

         G-15                      5 years,      5   months
         G-16                      6 years,      8   months
         G-17                     12 years,      5   months
         F-8                                    11   months
         F-11                        8 years,   11   months
         F-12                                    2   months
         F-13                     12 years,      2   months
         F-15                                    5   months
         F-18                      1    year,    2   months
         D-2                       5   years,    3   months
         Z-2                      34   years,   11   months
         Z-3                       9   years,   11   months
         ND                        1    year,    8   months
         CD-1                      4   years,    0   months
         GMC A    1975             3   years,    4   months
         GMC B    1975             3   years,    9   months
         GMC A    1976             3   years,   10   months
         GMC B    1976             5   years,    6   months
         GMC A    1977             4   years,    9   months
         GMC B    1977             6   years,    3   months
         GMC C    1977             8   years,    2   months
         GMC A    1978             8   years,    5   months
                              - 53 -

         GMC   B 1978              7   years, 4 months
         GMC   C 1978              7   years, 4 months
         GMC   A 1979              6   years, 10 months
         GMC   B 1979              6   years, 10 months
         GMC   C 1979              7   years, 4 months
         CMO   A-2                 5   years, 11 months
         CMO   A-3                17   years, 7 months
         CMO   C-4                14   years, 6 months

III. Conclusion

     Petitioner has proven that the favorable financing

intangible assets have reasonably estimable values and

ascertainable remaining useful lives in accordance with our

findings.   Since other issues in these cases remain unresolved,

our conclusions, as stated herein, will be incorporated in a Rule

155 computation upon resolution of the remaining issues.
                                    - 54 -

                APPENDIX:       Investment Bank Bid Prices

       The following table lists the investment bank bid prices

obtained by petitioner and Arthur Andersen, which were used to

value petitioner’s favorable financing.



                                             Bid Price
     Debt                            Salomon         Merrill   Shearson
  Instrument     First Boston       Brothers          Lynch     Lehman


  G-15                --              --                 --    87.250000
  G-16                --              --                 --    81.750000
  G-17              70.343750         --                 --    70.250000
  F-12              99.875000       99.812500            --      --
  F-15              99.875000       99.812500            --      --
  F-8               99.187500       99.093750            --      --
  F-18              99.906250       99.812500            --      --
  F-11              77.125000       76.625000            --      --
  F-13              75.375000       75.750000            --      --
  D-2               97.750000         --                 --    98.125000
  CMO A-2           97.468750       96.875000      96.625000   97.687500
  CMO A-3           96.406250       95.687500      96.250000   95.218750
  CMO C-4           95.906250       93.343750      95.375000   92.937500
  ND                95.562500         --                 --    95.625000
  CD-1              94.718750         --                 --    94.500000
  Z-2               2.500000          --                 --    2.656250
  Z-3               31.625000       31.000000            --    31.375000
                1
  GMC A 1975     92.062500            --                 --      --
                1
  GMC B 1975     92.750000            --                 --      --
                1
  GMC A 1976     92.218750            --                 --      --
                1
  GMC B 1976     87.625000            --                 --      --
                1
  GMC A 1977     88.562500            --                 --      --
                                 - 55 -

                1
GMC B 1977       85.500000          --             --             --
                1
GMC C 1977       83.093750          --             --             --
                1
GMC A 1978       85.875000          --             --             --
                1
GMC B 1978       86.843000          --             --             --
                1
GMC C 1978       89.281250          --             --             --
                1
GMC A 1979       91.750000          --             --             --
                1
GMC B 1979       93.500000          --             --             --
                1
GMC C 1979       91.562500          --             --             --

  1
      Mean of dealer bid prices obtained from First Boston and Salomon Bros.
