121 T.C. No. 15
UNITED STATES TAX COURT
FEDERAL HOME LOAN MORTGAGE CORPORATION, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 3941-99, 15626-99. Filed October 30, 2003.
P was originally exempt from Federal income
taxation. However, on Jan. 1, 1985, P became subject
to taxation under the Deficit Reduction Act of 1984
(DEFRA), Pub. L. 98-369, sec. 177, 98 Stat. 709. P
adopted the accrual method of accounting for its first
taxable year commencing Jan. 1, 1985. Before that
date, P acquired certain mortgages that were in
default. Interest accrued on each of those mortgages
from the date of acquisition up to Jan. 1, 1985. At
various points after Jan. 1, 1985, P foreclosed the
mortgages on the underlying real estate. In computing
its gain or loss from the foreclosures, P increased its
regular adjusted cost basis in the mortgages for unpaid
interest that had accrued before Jan. 1, 1985. R
argues that P is not entitled to increase its regular
adjusted cost basis on account of interest which
accrued before Jan. 1, 1985.
Held: Sec. 166(a), I.R.C., provides a deduction
for bad debts. Sec. 1.166-6(a)(2), Income Tax Regs.,
provides: “Accrued interest may be included as part of
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