The Federal Home Loan Mortgage Corporation — known as Freddie Mac — was set up by the US government to create a secondary market in residential mortgages. It was originally exempted from US income taxes, but Congress made it subject to such taxes starting in 1985. Freddie Mac was the borrower of billions of dollars under notes, bonds, subordinated debt instruments, collateralized mortgage obligations and guaranteed mortgage certificates on January 1, 1985 when it became subject to taxes. It had to value all of its assets as of that date so that it would be able to calculate gains and losses from any future sales of the assets.

Interest rates had gone up since it borrowed a lot of its debts. Freddie Mac took the position that one of its “assets” was the fact that it had borrowed at what were then below-market rates. It calculated the future savings on interest payments on its debts at $465 million and began amortizing — or deducting — that amount over the remaining life of its outstanding debts. It claimed an amortization deduction in 1985 of $50.2 million.

The IRS objected. The IRS had previously taken the position that a debt cannot be an “asset.” The US Tax Court held for Freddie Mac in late September. The court said, “It is beyond doubt that the right to use money represents a valuable property interest.” The court said it could see no difference between a right to use money at below-market rates and the right to use property under a lease at below-market rents. In either case, any “basis” — or cost allocated to — the property right can be recovered through amortization.

The decision has implications for companies making acquisitions. The IRS is considering whether to appeal.