Federal Home Loan Mortgage Corporation - Page 1

                                   125 T.C. No. 12                                    

                               UNITED STATES TAX COURT                                

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

               Docket Nos. 3941-99, 15626-99.    Filed November 21, 2005.             

                    P received commitment fees for entering into prior                
               approval purchase contracts with mortgage originators.                 
               The contracts obligated P to purchase mortgages from                   
               originators during a specified period of time pursuant                 
               to a pricing formula but did not require the                           
               originators to sell mortgages to P.  The commitment                    
               fees equaled 2.0 percent of the principal amount of the                
               mortgages.  The commitment fees consisted of a 0.5-                    
               percent nonrefundable portion and a 1.5-percent                        
               refundable portion.  In the taxable years 1985 through                 
               1990, P treated the 0.5-percent nonrefundable portion                  
               of the commitment fees as premiums received for writing                
               put options.  As a result, when an originator sold a                   
               mortgage to P, P treated the 0.5-percent portion of the                
               fee as a reduction of its purchase price and reported                  
               this amount as income over the estimated life of the                   
               mortgage.  If an originator failed to sell the mortgage                
               to P, P reported the 0.5 percent of the fee in the year                

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