Freddie Mac 2005 Annual Report Download - page 151

Table 14.3 reconciles the statutory federal tax rate to the eÅective tax rate for 2005, 2004 and 2003.
Table 14.3 Ì Reconciliation of Statutory to EÅective Tax Rate
Year Ended December 31,
2005 2004 2003
Statutory corporate rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.0% 35.0% 35.0%
Tax-exempt interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8.7) (4.7) (2.1)
Tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14.3) (7.3) (3.0)
Provision related to tax contingencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.9 (2.0) 0.4
Penalties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.1 Ì 1.0
OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.4 0.2 0.1
EÅective rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.4% 21.2% 31.4%
Impact of tax issues. The IRS has a policy to examine the income tax returns of large corporate taxpayers, including
us, generally every year. We believe that an adequate provision has been made for contingencies related to all income taxes
and related interest and potential penalties in accordance with SFAS 5. However, the ultimate outcome of these tax
contingencies could result in a tax beneÑt or tax provision that could be material to our quarterly or annual results of
operations. We do not believe that liabilities arising from these matters, if any, will have a material adverse eÅect on our
consolidated Ñnancial condition.
Tax Years 1985 through 1990. We are currently in litigation in the U.S. Tax Court, or Court, to contest income tax
deÑciencies asserted by the IRS for years 1985 through 1990. The principal matters in controversy in the case involve
questions of tax law as applied to our transition from non-taxable to taxable status in 1985 and primarily involve the
amortization of certain intangible assets, the two most signiÑcant of which are:
‚Favorable Financing. A number of Ñnancing arrangements where the contract rates of interest were less than
the market rates of interest as of January 1, 1985 due to an increase in interest rates since the date on which we
had entered into the respective arrangements; and
‚Customer Relationships. Our business relationships with a substantial number of mortgage originating
institutions that sold mortgages to us on a regular basis.
Tax Court Rulings. On September 4, 2003 and September 29, 2003, the Court decided favorably for us on two
preliminary motions involving questions of law in the case. On September 4, the Court ruled favorably for us on the question
whether our intangibles are amortizable using, as the adjusted basis, the higher of (a) the regular adjusted cost basis or
(b) the fair market value on January 1, 1985. On September 29, the Court ruled favorably for us on the question whether, as
a matter of law, ""favorable Ñnancing'' (as deÑned above) was amortizable for tax purposes. As part of this case, we claimed,
and the court agreed, that the economic beneÑt of this below-market Ñnancing as of January 1, 1985 is an intangible asset
subject to amortization. In October 2003, the Court ruled unfavorably on two other less signiÑcant issues in the case. In
November 2005, the Court ruled favorably on another less signiÑcant issue in the case.
While signiÑcant, the Court's rulings do not dispose of all of the matters in controversy in the case, which, upon Ñnal
resolution by the Court of all such matters, are subject to appeal by the parties. In addition, we still had to demonstrate that
the intangible assets in question have an ascertainable value and have a limited useful life, the duration of which can be
ascertained with reasonable accuracy. A trial on the value and useful life of Favorable Financing was completed in early June
2005. We are awaiting the Court's decision.
In view of the favorable rulings in September 2003 described above, we recorded in 2002 a reduction in our tax reserves
in the amount of $155 million. If the IRS were to appeal the Court decisions and an adverse ruling resulted, we may
reconsider our reserves related to this matter.
If our tax position on the customer relationship amortization issue described above is upheld through the legal process,
we will be able to recognize tax beneÑts not previously recorded that could be material in the quarter during which they are
recognized. However, we are unable to provide assurances that any such tax beneÑts will be realized.
Tax Years 1991 through 1993. The IRS examination of our federal income tax returns for the years 1991 through
1993 has been completed. In 2002, we Ñled a petition in the Court to contest the deÑciencies asserted by the IRS in a
Statutory Notice of deÑciency. The principal matters in controversy in this case are the same questions at issue in the 1985
through 1990 case as applied to years 1991 to 1993, plus an additional question of tax law regarding the timing of taxation of
our Management and guarantee income.
Tax Years 1994 through 1997. In 2002, the IRS completed its examination of our federal income tax returns for the
years 1994 through 1997. In October 2005 we Ñled a Petition in the Court to contest tax deÑciencies asserted by the IRS for
these years. The principal matter in controversy, other than the same questions at issue in the 1985 through 1993 cases
described above, involves the character of losses on dispositions of mortgage-related securities.
135 Freddie Mac