Federal Home Mortgage Corp. v. Commissioner

The Federal Home Mortgage Corporation (the corporation) (plaintiff) purchased residential mortgages. The corporation offered a prior-approval program, through which it would buy prior-approval mortgage contracts from originators. The corporation charged a fee to offer to purchase a prior-approval mortgage contract. The originators then had 60 days to accept the purchase contract (the 60-day period). If the originator accepted the purchase contract, it was charged a 2 percent commitment fee. If the originator delivered the mortgage to the corporation, 1.5 percent of the commitment fee would be refunded to the originator. The remaining 0.5 percent portion of the commitment fee was nonrefundable. Between 1985 and 1991, the corporation treated the 0.5 percent commitment fee as an option premium for tax purposes. If the originator delivered the mortgage to the corporation, the corporation would deduct the 0.5 percent commitment fee from the cost of the mortgage. If the originator did not deliver the mortgage to the corporation, the corporation would recognize the fee as taxable income for the year in which the 60-day period ended. The Commissioner of Internal Revenue (the Commissioner) (defendant) determined a deficiency against the corporation related to the 0.5 percent commitment fees. The Commissioner argued that the fees were not option premiums, as their full amount was determinable upon receipt and the corporation had a fixed right to receive them. The Commissioner argued that the corporation was required to recognize all the fees as income in the year they were received. The corporation petitioned the United States Tax Court for a redetermination.