                    121 T.C. No. 8



                UNITED STATES TAX COURT



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



Docket Nos. 3941-99, 15626-99.       Filed September 4, 2003.



     P was chartered by an act of Congress in 1970 and
was originally exempt from Federal income taxation.
Pursuant to the Deficit Reduction Act of 1984 (DEFRA),
Pub. L. 98-369, sec. 177, 98 Stat. 709, P became
subject to Federal income taxation, effective Jan. 1,
1985. For its taxable years 1985 through 1990, P
claims entitlement to amortize intangibles using a fair
market value basis as of Jan. 1, 1985. P’s claim that
it is entitled to use fair market value as its adjusted
basis for amortization is based on the provisions of
DEFRA that specifically apply only to P. R determined
that P’s adjusted basis for amortizing any intangibles
is the regular adjusted cost basis of those assets as
of Jan. 1, 1985.

     Held: Under sec. 167(g), I.R.C., the basis for
amortization of property is the adjusted basis provided
in sec. 1011, I.R.C., for the purpose of determining
gain on the sale or other disposition of property. The
adjusted basis provided in sec. 1011, I.R.C., is
                               - 2 -

     generally based on cost. However, DEFRA sec.
     177(d)(2)(A)(ii) modifies the application of sec. 1011,
     I.R.C., by providing specific rules for determining the
     adjusted basis of property held by P on Jan. 1, 1985.
     Under DEFRA sec. 177(d)(2)(A)(ii), the adjusted basis
     of any asset held by P on Jan. 1, 1985 (with the
     exception of tangible depreciable property) shall, for
     purposes of determining any gain, be equal to the
     higher of the regular adjusted cost basis as provided
     in sec. 1011, I.R.C., or the fair market value of such
     asset as of Jan. 1, 1985. P’s adjusted basis as of
     Jan. 1, 1985, for purposes of amortization, is the
     higher of the regular adjusted cost basis or fair
     market value on Jan. 1, 1985.



     Robert A. Rudnick, Stephen J. Marzen, James F. Warren, and
Neil H. Koslowe, for petitioner.

     Gary D. Kallevang, for respondent.



                              OPINION


     RUWE, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes in docket No. 3941-99 for 1985

and 1986, as follows:

          Year                             Deficiency

          1985                            $36,623,695
          1986                             40,111,127

Petitioner claims overpayments of $9,604,085 for 1985 and

$12,418,469 for 1986.

     Respondent determined deficiencies in petitioner’s Federal

income taxes in docket No. 15626-99 for 1987, 1988, 1989, and

1990, as follows:
                                - 3 -

          Year                            Deficiency

          1987                           $26,200,358
          1988                            13,827,654
          1989                             6,225,404
          1990                            23,466,338

Petitioner claims overpayments of $57,775,538 for 1987,

$28,434,990 for 1988, $32,577,346 for 1989, and $19,504,333 for

1990.

     Petitioner claims entitlement to amortize (all or a portion

of) its asserted tax basis in certain alleged intangibles held on

January 1, 1985.1   Petitioner’s asserted tax basis in each of

these alleged intangibles represents petitioner’s determination

of the respective fair market values of those intangibles as of

January 1, 1985.    Petitioner and respondent filed cross-motions

for partial summary judgment under Rule 1212 regarding the

appropriate basis for amortizing intangible assets that

petitioner claims to have held on January 1, 1985, the date it

first became subject to Federal income taxation.



     1
      Respondent disputes whether the claimed intangibles are
assets that are amortizable for tax purposes. One of the claimed
intangibles involves certain below-market financing which
petitioner claims to have held on Jan. 1, 1985. In their cross-
motions for partial summary judgment, the parties also ask us to
determine whether the claimed intangible for below-market
financing is amortizable. We do not decide that issue in this
Opinion.
     2
      All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for the taxable years in issue.
                               - 4 -

     In this opinion, we decide whether, for purposes of

computing a deduction for amortization, the adjusted basis of any

amortizable intangible assets that petitioner held on January 1,

1985, is the regular adjusted cost basis provided in section 1011

or the higher of the regular adjusted cost basis or fair market

value of such assets on January 1, 1985, as provided in the

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

98 Stat. 709.

                            Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time of filing the

petition, petitioner’s principal office was located in McLean,

Virginia.   At all relevant times, petitioner was a corporation

managed by a board of directors.

     Petitioner was chartered by Congress on July 24, 1970, by

the Emergency Home Financing Act of 1970, Pub. L. 91-351, title

III (Federal Home Loan Mortgage Corporation Act), 84 Stat. 451.

Petitioner was originally exempt from Federal income taxation.

However, Congress repealed petitioner’s Federal income tax

exemption status in DEFRA section 177.   Pursuant to this Act,

petitioner became subject to Federal income taxation, effective

January 1, 1985.
                               - 5 -

     The question we must decide in this opinion involves a

determination of petitioner’s basis for amortizing intangibles

that it allegedly held on January 1, 1985.   Section 167(g), which

forms the basis for amortization deductions, provides that “The

basis on which exhaustion, wear and tear, and obsolescence are to

be allowed in respect of any property shall be the adjusted basis

provided in section 1011 for the purpose of determining the gain

on the sale or other disposition of such property.”   (Emphasis

added.)   Section 1011 generally provides for an adjusted cost

basis for purposes of determining gain or loss (regular adjusted

cost basis).   From the arguments presented by the parties, it

appears that petitioner would have relatively little or no

adjusted basis in its alleged intangibles if the regular adjusted

cost basis provisions of section 1011 applied.

     As a part of the legislation pursuant to which petitioner

became subject to Federal income taxation, Congress enacted

“special basis rules 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.   The special basis rules, which are contained in

DEFRA section 177(d)(2), 98 Stat. 711, provide a dual-basis rule

for purposes of determining any loss and any gain regarding
                               - 6 -

assets held by petitioner on January 1, 1985.     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.
     [Emphasis added.]

     Petitioner claims that it is entitled to amortize

intangibles that it held on January 1, 1985, using a fair market

value basis under DEFRA section 177(d)(2)(A)(ii).       Petitioner

claims the following fair market values for its alleged

intangibles:

        Intangibles                    Fair Market Value

     Information systems                  $27,214,000
     Favorable leasehold                    9,459,349
     Seller/servicer list                   6,215,000
     Favorable financing                  456,021,853
     Customer relations                   600,000,000

Petitioner claims entitlement to the following amortization

deductions for its 1985-90 taxable years:
                                                 - 7 -
     Claimed
    Intangible            1985         1986           1987           1988         1989          1990

Information systems $5,981,964     $5,981,964     $5,981,952     $5,931,920   $3,336,160           $40
Favorable leaseholds    513,120       513,120        380,625        368,580      368,446       367,164
Seller/servicer list 1,123,572      1,123,572      1,123,572        711,072      711,072       711,072
Favorable financing 50,219,116     48,702,457     47,017,000     45,835,556   40,680,420    38,028,084
Customer relations   60,000,000    60,000,000     60,000,000     60,000,000   60,000,000    60,000,000
                    1
  Total claim        117,837,720   116,321,113    114,503,149   112,847,128   105,096,098   99,106,360

        1
          The parties stipulate this table; the actual total of the claimed amortization deductions
for 1985 is $117,837,772.



                                          Discussion

       Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.                           FPL Group, Inc. v.

Commissioner, 116 T.C. 73, 74 (2001).                           Either party may move for

summary judgment upon all or any part of the legal issues in

controversy.            Rule 121(a); FPL Group, Inc. v. Commissioner, supra

at 74.      A decision will be rendered on a motion for partial

summary judgment if the pleadings, answers to interrogatories,

depositions, admissions, and other acceptable materials, together

with the affidavits, if any, show that there is no genuine issue

as to any material fact and that a decision may be rendered as a

matter of law.           Rule 121(b); Elec. Arts, Inc. v. Commissioner,

118 T.C. 226, 238 (2002).                The moving party has the burden of

proving that no genuine issue of material fact exists and that

party is entitled to judgment as a matter of law.                                Rauenhorst v.

Commissioner, 119 T.C. 157, 162 (2002).

       The parties in the instant cases filed cross-motions for

partial summary judgment on the question of whether petitioner’s

claimed intangibles are amortizable using their fair market value
                                - 8 -

on January 1, 1985, as adjusted basis.    The parties agree that

there are no genuine issues of material fact relating to this

legal question.    Respondent assumes for purposes of this issue

that at least some of petitioner’s claimed intangibles are

amortizable for tax purposes.

Arguments of the Parties

     Petitioner claims that the special basis rules of DEFRA

section 177(d)(2) provide the adjusted basis for purposes of

amortizing any intangibles that it held as of January 1, 1985.

Petitioner contends that this result is required by the

interaction of section 167(g) and DEFRA section 177(d)(2)(A).

Thus, petitioner claims that it is entitled to amortize its

alleged intangibles at their fair market value.

     Respondent argues that DEFRA section 177(d)(2) does not

provide rules for determining the adjusted basis for amortization

of petitioner’s intangibles but, instead, provides special basis

rules solely for purposes of determining gain and loss from the

sale or other disposition of property that petitioner held on

January 1, 1985.    He argues that petitioner’s adjusted basis for

purposes of amortizing any intangibles that it might have held on

that date is determined under the regular adjusted cost basis

rules of the Code without reference to the special basis rules of

DEFRA section 177(d)(2).    Respondent contends that petitioner

would have relatively little or no adjusted cost basis.
                                - 9 -

Analysis

     In interpreting a statute, we start as always with the

language of the statute itself.    Consumer Prod. Safety Commn. v.

GTE Sylvania, Inc., 447 U.S. 102, 108 (1980).    We look to the

legislative history primarily to learn the purpose of the statute

and to resolve any ambiguity in the words contained in the text.

Wells Fargo & Co. v. Commissioner, 120 T.C. 69, 89 (2003); Allen

v. Commissioner, 118 T.C. 1, 7 (2002).    If the language of the

statute is plain, clear, and unambiguous, we generally apply it

according to its terms.    United States v. Ron Pair Enters., Inc.,

489 U.S. 235, 241 (1989); Burke v. Commissioner, 105 T.C. 41, 59

(1995).    If the statute is ambiguous or silent, we may look to

the statute’s legislative history to determine congressional

intent.    Burlington N. R.R. v. Okla. Tax Commn., 481 U.S. 454,

461 (1987); Ewing v. Commissioner, 118 T.C. 494, 503 (2002).

     DEFRA section 177(d)(2)(A) does not specifically state that

the adjusted basis for purposes of determining gain provided

therein is also to be used for purposes of amortizing

petitioner’s intangibles held on January 1, 1985.    The

legislative history likewise does not contain a specific

expression of congressional intent with respect to the

amortization of intangibles.    The conference report states

simply:

          The Senate amendment includes special basis rules
     designed to ensure that, to the extent possible, pre-
                              - 10 -

     1985 appreciation or decline in the value of Freddie
     Mac assets will not be taken into account for tax
     purposes. Under these rules, for purposes of
     determining gain, the basis of any asset held on
     January 1, 1985, is to be the higher of (1) the regular
     adjusted basis of the asset in the hands of Freddie
     Mac, or (2) the fair market value of the asset on
     January 1, 1985. For purposes of determining loss, the
     basis of any asset held on January 1, 1985, is to be
     the lower of these two figures. Where the amount
     realized on the disposition of an asset is greater than
     the lower of these figures, but less than the higher
     figure, no gain or loss is to be recognized by Freddie
     Mac on the disposition. [H. Conf. Rept. 98-861, supra
     at 1038, 1984-3 C.B. (Vol. 2) at 292.]

     DEFRA section 177(d)(2) provides a specific adjusted basis

for purposes of determining any gain on the sale or other

disposition of petitioner’s property:   DEFRA section

177(d)(2)(A)(ii) provides that the adjusted basis of any asset

held by petitioner on January 1, 1985, shall, for purposes of

determining any gain, be equal to the higher of the regular

adjusted cost basis of such asset or the fair market value of

such asset as of such date.   The Code has historically used the

adjusted basis for determining gain as the reference point for

determining the basis for the depreciation or amortization of

property.   Indeed, section 167(g)3 specifies that the basis for

determining gain is the basis to be used for depreciation or

amortization.4


     3
      Sec. 167(g) currently appears in the Code as sec. 167(c).
     4
      Sec. 167(g) provides rules relating to the basis for the
depreciation of tangible property and the amortization of
                                                   (continued...)
                              - 11 -

     Section 167(g) provides that “The basis on which exhaustion,

wear and tear, and obsolescence are to be allowed in respect of

any property shall be the adjusted basis provided in section 1011

for the purpose of determining the gain on the sale or other

disposition of such property.”   See also sec. 1.167(g)-1, Income

Tax Regs.   Section 167(g) refers specifically to the adjusted

basis for determining gain provided in section 1011.   Section

1011(a) provides:

          SEC. 1011(a). General Rule.--The adjusted basis
     for determining the gain or loss from the sale or other
     disposition of property, whenever acquired, shall be
     the basis (determined under section 1012 or other
     applicable sections of this subchapter and subchapters
     C (relating to corporate distributions and
     adjustments), K (relating to partners and
     partnerships), and P (relating to capital gains and
     losses)), adjusted as provided in section 1016.

As a general matter, section 1011 requires the use of the cost

basis determined under section 1012,5 adjusted as provided in




     4
      (...continued)
intangible property.   See secs. 1.167(a)-3, 1.167(g)-1, Income
Tax Regs.
     5
      Sec. 1012 provides:

     SEC. 1012.   BASIS OF PROPERTY--COST.

          The basis of property shall be the cost of such
     property, except as otherwise provided in this
     subchapter and subchapters C (relating to corporate
     distributions and adjustments), K (relating to partners
     and partnerships), and P (relating to capital gains and
     losses). * * *
                                - 12 -

section 10166 (i.e., the regular adjusted cost basis), for

purposes of determining gain or loss.    Section 1011 does not

specify any alternative basis rules besides those contained in

other sections of subchapters C, K, O, and P of the Code, which

are not applicable to the instant cases.

     DEFRA section 177(d)(2), which has not been codified, is not

specifically referenced in section 1011.    Nevertheless, DEFRA

section 177(d)(2)(A) specifically provides the rules for

determining adjusted basis in property held on January 1, 1985,

when determining petitioner’s gain on the sale or other

disposition of such property.    Thus, as to petitioner, the

specific basis rules contained in DEFRA section 177(d)(2)(A)

replace the regular adjusted cost basis rules contained in

sections 1011 through 1023 of the Code.    Since section 167(g)

requires that the adjusted basis for determining gain be used as

the adjusted basis for amortizing intangibles, it is logical to

conclude that petitioner must use the specific adjusted basis

determined under DEFRA section 177(d)(2)(A)(ii) to amortize any

intangibles it might have held on January 1, 1985.




     6
      Sec. 1016 provides adjustments to basis; e.g., for
expenditures, receipts, losses, or other items, properly
chargeable to capital account and for exhaustion, wear and tear,
obsolescence, amortization, and depletion to the extent of the
amount allowed (but not less than the amount allowable) as
deductions in computing taxable income. Sec. 1016(a)(1) and (2).
                              - 13 -

     Respondent argues that section 167(g) refers to section 1011

and that section 1011 does not refer to the specific adjusted

basis rule of DEFRA section 177(d)(2)(A)(ii).   However, we point

out that DEFRA section 177(d)(2)(A)(ii) is a special transition

rule, which is applicable only to property held by petitioner as

of January 1, 1985, and which replaces section 1011 for purposes

of determining gain.   Under these circumstances, we are not

inclined to read too much into the absence of a specific

reference to DEFRA section 177(d)(2)(A)(ii) in section 1011 or in

the enumerated subchapters cited in section 1011.   Further, the

regulation interpreting section 1011(a) provides:

     The adjusted basis for determining the gain or loss
     from the sale or other disposition of property is the
     cost or other basis prescribed in section 1012 or other
     applicable provisions of subtitle A of the Code,
     adjusted to the extent provided in sections 1016, 1017,
     and 1018 or as otherwise specifically provided for
     under applicable provisions of internal revenue laws.
     [Sec. 1.1011-1, Income Tax Regs.; emphasis added.]

     The parties advance differing interpretations of the

“internal revenue laws” language in section 1.1011-1, Income Tax

Regs.   Petitioner argues that this language should be read to

incorporate any internal revenue law which specifically provides

the adjusted basis for determining gain or loss from the sale or

other disposition of property.   Respondent contends that “It is

apparent” from the text of section 1011 “that alternatives to the

cost basis of § 1012 are confined to ‘this subchapter’

(subchapter O) or elsewhere in the Code, namely, subchapters C, K
                                - 14 -

and P.”   He argues that section 1011 does not refer to an

adjusted basis specified in other “internal revenue laws”, and

the language in section 1.1011-1, Income Tax Regs., “does not

provide for alternatives to § 1012 itself; it provides for some

mechanism of basis adjustments as an alternative to §§ 1016, 1017

and 1018.”7

     We read section 1.1011-1, Income Tax Regs., to incorporate

rules for determining adjusted basis in property which are

“specifically provided for under applicable provisions of

internal revenue laws.”   We do not read the regulation to mean

that the section and subchapters enumerated in section 1011 are

the exclusive means of determining adjusted basis in property.8

This interpretation is more consistent with the application of



     7
      Respondent also argues:

          Even if Treas. Reg. § 1.1011-1 can be read, as
     petitioner apparently wants to read it, so as to permit
     some other “internal revenue act” to supplant the cost
     basis of § 1012 (or the others permitted by § 1011),
     such alternative “internal revenue act” would then be
     outside of § 1011. * * *

We do not construe respondent’s argument to suggest that sec.
1.1011-1, Income Tax Regs., may be an invalid interpretation of
sec. 1011.
     8
      We point out that the Deficit Reduction Act of 1984
(DEFRA), Pub. L. 98-369, sec. 177(d)(2), 98 Stat. 711, was
enacted after sec. 1011 was added to the Code and amended in the
Tax Reform Act of 1969, Pub. L. 91-172, sec. 201(f), 83 Stat.
564. Sec. 1.1011-1, Income Tax Regs., was promulgated on Nov. 6,
1957, and has not been changed. DEFRA sec. 177(d)(2) has not
been codified.
                               - 15 -

the regular adjusted basis rules and any special adjusted basis

rules, including DEFRA section 177(d)(2).

     Even if the “internal revenue laws” language in the

regulation refers only to adjustments to initial cost or other

basis, we fail to see how this forecloses any reference to DEFRA

section 177(d)(2).    In our view, DEFRA section 177(d)(2) is in

effect an adjustment to cost basis.9    Section 1.1011-1, Income

Tax Regs., reflects such an interpretation.    A reasonable

interpretation of adjusted basis under section 1011 incorporates

any internal revenue laws which provide for a specific adjusted

basis for purposes of determining gain or loss.    DEFRA section

177(d)(2)(A) is an internal revenue law, which specifically

provides the adjusted basis for purposes of determining any gain

from the sale or other disposition of property held by petitioner

on January 1, 1985.    Section 167(g) requires the use of this

adjusted basis for purposes of amortizing petitioner’s alleged

intangibles.

     It also appears that Congress contemplated this result under

section 167(g) when it provided an exception in DEFRA section 177



     9
      Respondent claims that “The plain language of the dual
basis rule provides for no such alternatives to § 1016, 1017 or
1018 for the purpose of making basis adjustments. Thus, nothing
in * * * [DEFRA] § 177(d) triggers the ‘as otherwise specifically
provided’ clause of the regulation for any purpose.” However,
DEFRA sec. 177(d)(2) refers to an “adjusted basis” and not an
unadjusted basis. An adjusted basis presupposes that the
appropriate adjustments have either been made or incorporated.
                             - 16 -

for purposes of determining petitioner’s adjusted basis in

tangible depreciable property.   That exception is contained in

DEFRA section 177(d)(2)(B) and provides:

          (B) Special Rule for Tangible Depreciable
     Property.--In the case of any tangible property which--

          (i) is of a character subject to the allowance for
     depreciation provided by section 167 of the Internal
     Revenue Code of 1954, and

          (ii) is held by the Federal Home Loan Mortgage
     Corporation on January 1, 1985,

     the adjusted basis of such property shall be equal to
     the lesser of the basis of such property or the fair
     market value of such property as of such date.

The conference report accompanying this legislation states with

respect to this exception:

          The conference agreement follows the rules of the
     Senate amendment regarding the basis of Freddie Mac
     assets held by the corporation on January 1, 1985.
     However, the conference agreement provides an exception
     to these general rules in the case of tangible
     depreciable property held by Freddie Mac on January 1,
     1985. For such property, the adjusted basis, for
     purposes of both gain or loss, is to be equal to the
     lesser of (1) the regular adjusted basis of the
     property in the hands of Freddie Mac, or (2) the fair
     market value of the property as of January 1, 1985.
     This rule is primarily intended to prevent Freddie Mac
     from claiming deductions based on pre-1985 depreciation
     of tangible property (e.g., buildings or office
     equipment) held by the corporation as of the date of
     taxability. [H. Conf. Rept. 98-861, supra at 1039-
     1040, 1984-3 C.B. (Vol. 2) at 293-294.]

In enacting this exception, Congress contemplated and explicitly

separated tangible depreciable property from other property,

including intangibles, that petitioner held on January 1, 1985.
                               - 17 -

Congress recognized that DEFRA section 177(d)(2)(A)(ii) would

otherwise have provided the adjusted basis for the depreciation

(or amortization) of all property under section 167(g).    Since

the special rule of DEFRA section 177(d)(2)(B) applies only to

tangible depreciable property, it follows that DEFRA section

177(d)(2)(A)(ii) provides the adjusted basis for the amortization

of all assets other than tangible depreciable property.    It also

follows that any amortizable intangibles that petitioner held on

January 1, 1985, are to be amortized using the basis rule

provided in DEFRA section 177(d)(2)(A)(ii).

     Respondent contends that Congress did not provide a special

exception similar to the exception contained in DEFRA section

177(d)(2)(B) for intangibles, because Congress was not aware that

petitioner held any of the alleged intangibles at the time of the

enactment of DEFRA.    He points out that, since its inception,

petitioner has been required by statute to provide its financial

statements to Congress, and petitioner has not reported any of

the alleged intangibles as assets on its books or on any

financial statement.    He speculates that while Congress would

have been aware of petitioner’s tangible depreciable properties

from a review of the financial statements, and this might explain

why Congress explicitly provided basis rules for depreciation of

those properties in DEFRA section 177(d)(2)(B), Congress would

not have been aware of any intangibles since none were apparently
                               - 18 -

listed on the financial statements.     We do not know whether

Congress reviewed, or relied upon, petitioner’s financial

statements in devising the special basis rules under DEFRA

section 177(d)(2), or whether Congress was aware or not aware of

petitioner’s claimed intangibles.    We do know that for purposes

of determining adjusted basis, Congress separated tangible

depreciable property from other property that petitioner held on

January 1, 1985.   We cannot assume that Congress inadvertently

failed to include a special exception for intangibles simply

because no intangibles appeared as assets on petitioner’s

financial statements.    That being said, we are left with a

special exception to DEFRA section 177(d)(2)(A), which refers

only to tangible depreciable property and which by implication

indicates that the adjusted basis of intangible property is

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

     Respondent argues that we should not infer “an amortization

scheme for petitioner’s intangibles” on the basis of

congressional silence.    However, given the statutory framework

for determining adjusted basis, the interplay of DEFRA section

177(d)(2)(A) and section 1011 of the Code, and the reference in

section 167(g) to the basis for determining gain as the basis to

be used for amortization, we cannot agree that we are inferring

petitioner’s basis for amortization by reason of congressional

silence.
                              - 19 -

     Respondent argues that petitioner’s interpretation of DEFRA

section 177(d)(2) is inconsistent with fundamental tenets of

depreciation in that:   (1) Petitioner is claiming amortization

using a fair market value basis as of the date it became taxable;

and (2) permitting petitioner to amortize its intangibles using a

fair market value basis allows petitioner to receive a “double

recovery” of costs that it expensed on its books before becoming

a taxable entity.   But, Congress’s selection of the special basis

rule contained in DEFRA section 177(d)(2)(A)(ii) is not the first

time that Congress selected a higher of fair market value or

regular adjusted cost basis for determining adjusted basis.

Petitioner’s situation is analogous to the determination of the

adjusted basis of property held at the time of the enactment of

the Federal income tax on March 1, 1913.   The basis rules which

finally developed for property held on, and acquired before, that

date are contained in section 1053,10 which provides:

     SEC. 1053.   PROPERTY ACQUIRED BEFORE MARCH 1, 1913.

          In the case of property acquired before March 1,
     1913, if the basis otherwise determined under this


     10
      The rule now contained in sec. 1053 has undergone a number
of changes since the original enactment of the Federal income tax
in 1913. Although taxpayers were originally required to use a
fair market value basis for determining any gain from the sale or
other disposition of property, see Revenue Act of 1916, ch. 463,
sec. 2(c), 39 Stat. 758, Congress eventually settled on a dual-
basis rule for determining gain or loss with the basis for
determining any gain as the higher of the regular adjusted cost
basis or fair market value of the property as of Mar. 1, 1913.
See Revenue Act of 1934, ch. 277, sec. 113(a)(14), 48 Stat. 706.
                             - 20 -

     subtitle, adjusted (for the period before March 1,
     1913) as provided in section 1016, is less than the
     fair market value of the property as of March 1, 1913,
     then the basis for determining gain shall be such fair
     market value. * * *[11]
Since section 167(g)12 requires the same basis used for

determining gain to be used as the basis for amortization, it

follows that the amortization of an intangible asset held on

March 1, 1913, will be based on the fair market value of the

asset as of that date if that value is higher than the adjusted



     11
      The regulations indicate that sec. 1053 and related Code
sections provide a dual-basis rule similar to DEFRA sec.
177(d)(2) with respect to property held as of Mar. 1, 1913. The
basis for determining gain is the cost or other basis, adjusted
as provided in sec. 1016 and other applicable provisions of ch. 1
of the Code, or its fair market value as of Mar. 1, 1913,
whichever is greater. Sec. 1.1053-1(a), Income Tax Regs. The
basis for determining loss is the basis determined in accordance
with pt. II (sec. 1011 and following), subch. O, ch. 1 of the
Code, or other applicable provisions of ch. 1 of the Code,
without reference to the fair market value as of Mar. 1, 1913.
Sec. 1.1053-1(b), Income Tax Regs.
     12
      Sec. 167(g) followed a similar historical path as sec.
1053 in its inclusion in the Code. The rules stated in sec.
167(g) were enacted as sec. 114(a) of the Revenue Act of 1934,
ch. 277, 48 Stat. 710. As its basis for including those rules,
Congress stated that “Since in some cases the basis for
determining gain differs from the basis for determining loss, it
is necessary to specify definitely which of these bases is to be
used for depreciation * * * purposes.” H. Rept. 704, 73d Cong.,
2d Sess., at 29 (1934), 1939-1 C.B. (Part 2) 554, 575; S. Rept.
558, 73d Cong., 2d Sess., at 36 (1934), 1939-1 C.B. (Part 2) 586,
613. It is clear that Congress, in enacting this rule, made a
conscious choice that in the circumstance of a dual-basis rule,
the basis for depreciation (or amortization) is the basis used
for determining gain on the sale or other disposition of
property. It is clear that Congress envisioned the type of
situation, such as sec. 1053 and DEFRA sec. 177(d)(2), wherein
specific legislation provides different bases for purposes of
determining gain or loss.
                              - 21 -

cost basis in the intangible asset.    See sec. 1.1053-1(a), Income

Tax Regs.

     We fail to see why these same principles are not analogous

to petitioner’s situation.   Congress provided a special adjusted

basis for purposes of determining any gain on petitioner’s

property held as of January 1, 1985.   Certainly, Congress was

aware of the rules that developed from the enactment of the

Federal income tax on March 1, 1913, recognized the potential of

a similar application with respect to tangible depreciable

property, and provided a special exception for such property but

did not provide a special exception for intangible property.

This contradicts respondent’s suggestion that Congress could not

have intended the use of a fair market value basis with respect

to petitioner’s alleged intangibles.

     Respondent suggests that petitioner’s situation is more

analogous to provisions that pertain to the adjusted basis of

assets belonging to previously exempt organizations.   Respondent

points to the repeals of tax exemption for the Blue Cross and

Blue Shield organizations in the Tax Reform Act of 1986, Pub. L.

99-514, sec. 1012(b), 100 Stat. 2391, and for the Teachers

Insurance Annuity Association and College Retirement Equities

Fund in the Taxpayer Relief Act of 1997, Pub. L. 105-34, sec.

1042, 111 Stat. 939.   Unlike DEFRA section 177(d)(2), both of

those enactments provided a fair market value basis for purposes
                               - 22 -

of determining both gain and loss.      Also, unlike our situation,

Congress expressed its intent in the conference reports

accompanying those enactments that the fair market value basis

was not to be used for purposes of determining depreciation or

for other purposes.   See H. Conf. Rept. 99-841 (Vol. II), at II-

349 to II-350 (1986), 1986-3 C.B. (Vol. 4) 1, 349-350; H. Conf.

Rept. 105-220, at 566-567 (1997), 1997-4 C.B. (Vol. 2) 1457,

2036-2037.   We cannot discern what considerations went into

enacting different basis rules in these enactments or the

statements in the conference reports.     However, those rules are

confined to the particular taxable entities involved.

     Respondent also argues that Congress did not intend to

provide a basis for the amortization of petitioner’s intangible

assets different from the regular adjusted cost basis determined

under sections 1011, 1012, and 1016, because Congress explicitly

reaffirmed the application of the regular adjusted basis rules in

DEFRA section 177(d)(5).    DEFRA section 177(d)(5) provides:    “For

purposes of this subsection, the adjusted basis of any asset

shall be determined under part II of subchapter O of the Internal

Revenue Code of 1954.”    Accepting respondent’s position with

respect to DEFRA section 177(d)(5) would seemingly nullify the

specific adjusted basis rules provided in DEFRA section

177(d)(2)(A) and (B).    We do not read this provision as

respondent does.   Instead, as we explain in greater detail below,
                                 - 23 -

we read DEFRA section 177(d)(5) to provide the rules for purposes

of determining petitioner’s regular adjusted cost basis in its

assets as of January 1, 1985.     This regular adjusted cost basis

is then used in various parts of DEFRA section 177(d)(2) as a

comparison to the fair market value of petitioner’s assets for

purposes of determining which of these two amounts should be used

as petitioner’s adjusted basis.

     Section 1016(a)(3) generally deals with amortization

sustained in periods where a taxpayer was not subject to tax.

Section 1016(a)(3) provides that proper adjustment in respect of

property shall in all cases be made:

             (3) in respect of any period--

                  (A) before March 1, 1913,

                  (B) since February 28, 1913, during which
             such property was held by a person or an
             organization not subject to income taxation under
             this chapter or prior income tax laws,

                  *    *    *    *    *       *   *

     for exhaustion, wear and tear, obsolescence, amortiza-
     tion, and depletion, to the extent sustained;[13]


     13
          Sec. 1.1016-4, Income Tax Regs., provides:

          (a) Adjustments to basis must be made for
     exhaustion, wear and tear, obsolescence, amortization,
     and depletion to the extent actually sustained in
     respect of:

                  (1) Any period before March 1, 1913,

                  (2) Any period since February 28, 1913,
                                                      (continued...)
                                 - 24 -

Respondent speculates that since section 1016(a)(3) provides a

mechanism to account for amortization that may have occurred when

petitioner was not subject to Federal income taxation, then:

     there would have been no reason for Congress to include
     some specially tailored provision in * * * [DEFRA] §
     177 to account for any depreciation in petitioner’s
     assets that may have occurred before 1985, or after
     1985; unless, of course, Congress chose to deviate from
     the statutory scheme already in place in the Code. * *
     * Congress did not so chose [sic] with respect to
     intangible assets, only tangible assets.

We disagree with respondent’s interpretation of the interplay of

DEFRA section 177(d)(2) and section 1016(a)(3).




     13
          (...continued)
              during which the property was held by a person or
              organization not subject to income taxation under
              chapter 1 of the Code or prior income tax laws,

                  *    *    *    *    *    *    *

          (b) The amount of the adjustments described in
     paragraph (a) of this section actually sustained is
     that amount charged off on the books of the taxpayer
     where such amount is considered by the Commissioner to
     be reasonable. Otherwise the amount actually sustained
     will be the amount that would have been allowable as a
     deduction:

                   (1) During the period described in paragraph
             (a)(1) or (2) of this section, had the taxpayer
             been subject to income tax during those periods,
             * * *

                  *    *    *    *    *    *    *

     In the case of a taxpayer subject to the adjustment
     required by subparagraph (1) or (2) of this paragraph,
     depreciation shall be determined by using the straight
     line method.
                               - 25 -

     For purposes of determining any gain on the sale or other

disposition of property (other than tangible depreciable

property), DEFRA section 177(d)(2)(A)(ii) first requires a

comparison between petitioner’s adjusted cost basis under the

general rules and the fair market value of the property as of

January 1, 1985.   DEFRA section 177(d)(2)(A)(ii) mandates that

for purposes of determining any gain, petitioner’s adjusted basis

is the higher of the two.   In order to make such a comparison,

petitioner’s adjusted cost basis under the regular rules must

first be determined.   It is clear that this adjusted cost basis

is determined under the regular adjusted basis rules of the Code

(i.e., sections 1011-1023), which include section 1016(a)(3).

Indeed, DEFRA section 177(d)(5) provides that “For purposes of

this subsection, the adjusted basis of any asset shall be

determined under part II of subchapter O of the Internal Revenue

Code of 1954.”14   It follows that, for purposes of the DEFRA

section 177(d)(2)(A)(ii) comparison, the regular adjusted cost

basis of any property held by petitioner would include a section

1016(a)(3) adjustment where appropriate to account for pre-1985

amortization sustained in petitioner’s intangibles.   It also

follows that the regular adjusted cost basis rules of the Code

would apply for purposes of amortization allowed (or allowable)


     14
      Part II of subch. O of the Code is entitled “Basis Rules
of General Application” and consists of secs. 1011 through 1024
(renumbered as secs. 1011 through 1023).
                                 - 26 -

for years after 1984.     See sec. 1016(a)(2).   It does not follow

that section 1016(a)(3) requires a pre-1985 adjustment where the

higher fair market value basis is prescribed under DEFRA section

177(d)(2)(A)(ii).15     See sec. 1053 (providing a similar rule for

March 1, 1913 property);16 Even Realty Co. v. Commissioner, 1


     15
      See also Staff of Joint Comm. on Taxation, General
Explanation of the Revenue Provisions of the Deficit Reduction
Act of 1984, at 551 (J. Comm. Print 1984), which states: “For
purposes of determining gain, the basis of any asset held on
January 1, 1985, is to be the higher of (1) the regular adjusted
basis of the asset in the hands of Freddie Mac (as determined
under Code secs. 1011-1023) or (2) the fair market value of the
asset on January 1, 1985.” Of course, the General Explanation is
not prepared by members of Congress, and it is not a part of the
legislative history. See Allen v. Commissioner, 118 T.C. 1, 14-
15 (2002). However, the statements in the General Explanation
are consistent with our reading of DEFRA sec. 177(d) and the
legislative history, and it is therefore entitled to respect.
See Intl. Multifoods Corp. v. Commissioner, 108 T.C. 579, 588
(1997).
     16
          Sec. 1.1053-1(c), Example, Income Tax Regs., provides:

          Example. (i) On March 1, 1908, a taxpayer
     purchased for $100,000, property having a useful life
     of 50 years. Assuming that there were no capital
     improvements to the property, the depreciation
     sustained on the property before March 1, 1913, was
     $10,000 (5 years @ $2,000), so that the original cost
     adjusted, as of March 1, 1913, for depreciation
     sustained prior to that date is $90,000. On that date
     the property had a fair market value of $94,500 with a
     remaining life of 45 years.

          (ii) For the purpose of determining gain from the
     sale or other disposition of the property on March 1,
     1954, the basis of the property is the fair market
     value of $94,500 as of March 1, 1913, adjusted for
     depreciation allowed or allowable after February 28,
     1913, computed on $94,500. Thus, the substituted
     basis, $94,500, is reduced by the depreciation
                                                    (continued...)
                                - 27 -

B.T.A. 355 (1925); Atterbury v. Commissioner, 1 B.T.A. 169

(1924).

     Respondent argues that petitioner’s claimed amortization of

its alleged intangibles at their fair market values as of January

1, 1985, is “precisely contrary to the stated intent of the dual

basis rule.   This rule was explicitly intended to avoid taking

pre-1985 appreciation into account for tax purposes; by

amortizing FMVs, petitioner would take such pre-1985 appreciation

into account.”   We disagree.   Taking amortization deductions

using a fair market value basis does not, in our view, thwart the

congressional purpose stated in the legislative history.    Indeed,

as petitioner suggests, recovering pre-1985 appreciation through

amortization assures that pre-1985 appreciation will not be taxed

in much the same way as a recovery of basis does when it is used

as an offset to gain in the sale or other disposition of the

property.17




     16
      (...continued)
     adjustment from March 1, 1913, to February 28, 1954, in
     the aggregate of $86,100 (41 years @ $2,100), leaving
     an adjusted basis for determining gain of $8,400
     ($94,500 less $86,100).
     17
      We recognize that Congress provided a different rule with
respect to tangible depreciable property. Congress did not
express any similar concern with respect to any intangible
property that petitioner might have held on Jan. 1, 1985.
Congress could have provided a similar rule for intangible
property, but did not.
                               - 28 -

     Respondent also focuses on the magnitude of the amortization

deductions that petitioner claims for 1985 through 1990.     Those

deductions range from approximately $99 million in 1990 to $117.8

million in 1985.   Respondent claims that allowing deductions of

this size would be inconsistent with Congress’s repeal of

petitioner’s tax exempt status, since it virtually eliminates

petitioner’s tax liabilities for the years following January 1,

1985.18   Respondent relies upon certain revenue estimates

contained in Staff of Joint Comm. on Taxation, General

Explanation of the Revenue Provisions of the Deficit Reduction

Act of 1984, at 555 (J. Comm. Print 1984), as follows:   “This

provision is estimated to increase fiscal year budget receipts by

$67 million in 1985, $109 million in 1986, $142 million in 1987,

$185 million in 1988, and $240 million in 1989.”   Respondent

speculates that given the size of the amortization deductions,

petitioner’s tax liabilities for 1985-90 would fall substantially

short of the revenue estimates.

     First, we fail to see how the revenue estimates and the

comparative reductions in petitioner’s tax liabilities are

particularly relevant to the question before us, which involves


     18
      Respondent contends that allowing deductions of this size
would have allowed petitioner to maintain its competitive
advantage against its chief competitor, the Federal National
Mortgage Association (Fannie Mae), a consequence which Congress
sought to avoid. See Staff of Joint Comm. on Taxation, General
Explanation of the Revenue Provisions of the Deficit Reduction
Act of 1984, at 550 (J. Comm. Print 1984).
                             - 29 -

the interpretation of a particular statute, as well as its

interplay with the regular adjusted basis rules in the Code.

Second, it would be inappropriate to speculate on the factors

that were considered in making such “estimates”.19   See Fort

Howard Corp. v. Commissioner, 103 T.C. 345, 364 (1994) (revenue

estimates have little relevance in interpreting a statute).

     Respondent also claims that “with respect to the dual basis

rule provided in * * * [DEFRA] § 177(d)(2)(A), it is not possible

to know which basis rule applies until such time that the asset

is disposed of and the sales price is known.”   He contends that

the basis to be used for purposes of determining any gain

“depends entirely on the amount of the sale as well as the fact

of the sale”, since “Until petitioner’s Intangibles are sold or

disposed of, and the sales proceeds are known, it will not be

known whether there will be any ‘gain’ at all for purposes of * *

* [DEFRA] § 177(d)(2)(A)(ii).”

     Petitioner’s basis for amortization is not dependent upon

whether the particular property is sold or disposed of or upon

the amount realized in that transaction.   Indeed, if respondent’s

argument is correct, the same logic would apply in all cases

where Congress has provided a dual-basis rule for determining



     19
      We point out that we have not yet decided, in these
proceedings, the appropriate amount of any deductions to which
petitioner is entitled, and, indeed, whether its alleged
intangibles are subject to amortization for tax purposes.
                                - 30 -

gain or loss.     Section 167(g) requires the basis for depreciation

or amortization be the same basis as the basis for determining

gain.     Since petitioner’s adjusted cost basis and fair market

value in its assets are ascertainable as of January 1, 1985, and

since DEFRA section 177(d)(2)(A)(ii) provides that the adjusted

basis for determining gain is the higher of those two amounts,

petitioner’s adjusted basis for amortization of its intangibles

is determinable as of that date.     Any subsequent sale or

disposition of those intangibles has no bearing on this

comparison.

     We hold 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, 1985.20



                                                An appropriate order

                                           will be issued.




     20
      We express no opinion at this time whether petitioner
actually held the claimed intangible assets on Jan. 1, 1985,
their value on that date, or whether such putative assets are
amortizable.
