Freddie Mac 2004 Annual Report Download - page 77

Other expenses in 2002 included special charitable contributions of $225 million representing cash
contributions to the Freddie Mac Foundation and corporate giving programs announced in the fourth quarter
of 2002. The contribution to the Freddie Mac Foundation is expected to provide operating funds for the
Foundation for six to eight years from the date of the contribution. Other charitable contributions of
approximately $6 million, $6 million, and $35 million for 2004, 2003, and 2002, respectively, are included
within Other administrative expenses.
In 2002, Other expenses includes a $52 million loss recognized in the fourth quarter of 2002 related to the
disposition of certain technology-related assets.
Income Tax Expense
Income tax expense includes (a) deferred tax expense, which represents the net change in the deferred tax
asset or liability balance during the year plus any change in a valuation allowance, and (b) current tax
expense, which represents the amount of tax currently payable to, or receivable from, a tax authority plus
amounts accrued for expected tax deÑciencies (including both tax and interest). Income tax expense excludes
the tax eÅects related to adjustments recorded to AOCI.
Income tax expense was ($790) million, ($2,202) million and ($4,713) million in 2004, 2003 and 2002,
respectively. The eÅective tax rates for 2004, 2003 and 2002 were 21 percent, 31 percent and 32 percent,
respectively. The decrease in the eÅective tax rate over the past three years, particularly in 2004, is primarily
due to the decline in pre-tax income in relation to year-over-year increases in tax credits related to our
investments in housing tax credit partnerships and interest earned on tax-exempt securities. In addition, our
eÅective tax rate for 2004 beneÑted from a $110 million reduction to our tax reserves as a result of our
reaching a closing agreement with the Internal Revenue Service, or IRS, relating to the tax treatment of
dividends paid on step-down preferred stock issued by our two REIT subsidiaries. For more information
regarding this tax reserve adjustment, see ""SUBSEQUENT ACCOUNTING REVISIONS.'' These eÅects
were partially oÅset by a non-tax deductible ($125) million OFHEO civil money penalty and a ($75) million
loss contingency reserve related to legal proceedings arising from the restatement, that were recorded in the
second quarter of 2003. Our eÅective tax rate for 2002 beneÑted from a reduction to our tax reserve related to
favorable U.S. Tax Court rulings.
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