Freddie Mac 2005 Annual Report Download - page 152

Tax Treatment of REITs. In February 1997, we formed two REIT subsidiaries that issued a total of $4.0 billion in
step-down preferred stock to investors. Under the IRS regulations in eÅect when the REITs were formed, we believed that
the dividend payments by the REITs to holders of the REITs' step-down preferred stock were fully tax deductible. We
entered into a closing agreement with the IRS that resolved issues related to the tax treatment of dividends paid on the step-
down preferred stock. We and the IRS agreed that we will only be entitled to deductions attributable to the step-down
preferred stock transactions as if we had borrowed directly from the REITs' preferred shareholders. As a result of this
closing agreement, we recorded a reduction in tax reserves of $94 million in 2004. See ""NOTE 18: MINORITY
INTERESTS'' for more information concerning the REITs.
Tax Years 1998 through 2002. This examination cycle includes the years for which we have restated our Ñnancial
statements. The IRS has completed its regular examination of our 1998 through 2002 tax returns, but could raise additional
issues. As a result of the regular examination, the principal matter in controversy, other than the same questions at issue in
the 1985 through 1997 cases described above, involves questions of timing and potential penalties regarding our tax
accounting method for certain hedging transactions. We believe the risk of loss due to the assertion of penalties by the IRS
related to our tax accounting methods is remote. As to the questions of timing, we believe that an adequate provision has
been made for contingencies related to income taxes and related interest.
Tax Treatment of Paired Swap Transactions. In August and September of 2001, we entered into a series of nine sets
of paired swap transactions. We reported and paid tax treating each pair of those swap transactions as a single integrated
transaction for federal income tax purposes. Two additional swaps were executed in November 2001. Although the facts
and circumstances surrounding these swaps were diÅerent from the earlier swaps, we also reported and paid tax treating
these swaps as a single integrated transaction for federal income tax purposes. The IRS examination report did not assert a
tax deÑciency related to any of these paired swap transactions.
NOTE 15: EMPLOYEE BENEFITS
DeÑned BeneÑt Plans
We maintain a tax-qualiÑed deÑned beneÑt pension plan, or Pension Plan, covering substantially all of our employees.
Pension Plan beneÑts are based on an employee's years of service and highest average compensation, up to legal plan limits,
over any consecutive 36 months of employment. Pension Plan assets are held in trust and the investments consist primarily
of funds comprised of listed stocks and corporate bonds. In addition to our Pension Plan, we maintain a nonqualiÑed,
unfunded deÑned beneÑt pension plan for our oÇcers, referred to as our non-qualiÑed pension plan. The related retirement
beneÑts for our nonqualiÑed pension plan are paid from our general assets. These nonqualiÑed and qualiÑed deÑned beneÑt
pension plans are collectively referred to as deÑned beneÑt pension plans.
We maintain a deÑned beneÑt postretirement health care plan, or Retiree Health Plan, that generally provides
postretirement health care beneÑts on a contributory basis to retired employees age 55 or older who rendered at least 10 years
of service (Ñve years of service if retiree is eligible to retire prior to March 1, 2007) and who, upon separation or
termination, immediately elected to commence beneÑts under the Pension Plan in the form of an annuity. Our Retiree
Health Plan is currently unfunded and the beneÑts are paid from our general assets. This plan and our deÑned beneÑt
pension plans are collectively referred to as deÑned beneÑt plans.
For Ñnancial reporting purposes, we use a September 30 valuation measurement date for all of our deÑned beneÑt plans.
We are required to accrue the estimated cost of retiree beneÑts as employees render the services necessary to earn their
pension and postretirement health beneÑts. Our pension and postretirement health care costs related to these deÑned beneÑt
plans for 2005, 2004 and 2003 presented in the following tables were calculated using assumptions as of September 30,
2004, 2003 and 2002, respectively. The funded status of our deÑned beneÑt plans for 2005, 2004 and 2003 presented in the
following tables was calculated using assumptions as of September 30, 2005, 2004 and 2003, respectively.
136 Freddie Mac