Freddie Mac 2009 Annual Report Download - page 286

unused tax credits of $594 million that will carryforward into future years because we anticipate being in a taxable loss
position for 2009.
As of December 31, 2009, a full valuation allowance was established against the LIHTC and AMT tax credits based on
our 2009 deferred tax asset valuation allowance assessment.
Unrecognized Tax Benefits
Table 15.4 — Unrecognized Tax Benefits
2009 2008 2007
(in millions)
Balance at January 1 ..................................................................... $636 $637 $677
Changes based on tax positions in prior years . . .................................................. 4 (74) —
Changes to tax positions that only affect timing . .................................................. 165 73 (40)
Balance at December 31 . . . ............................................................... $805 $636 $637
At December 31, 2009, we had total unrecognized tax benefits, exclusive of interest, of $805 million. Included in the
$805 million are $6 million of unrecognized tax benefits that, if recognized, would favorably affect our effective tax rate.
The unrecognized tax benefits on tax positions prior to 2009 changed by $4 million due to a settlement with the IRS. The
settlement had an unfavorable impact on our effective tax rate. The remaining $799 million of unrecognized tax benefits at
December 31, 2009 related to tax positions for which ultimate deductibility is highly certain, but for which there is
uncertainty as to the timing of such deductibility.
We continue to recognize interest and penalties, if any, in income tax expense. Total accrued interest receivable
remained unchanged at $245 million at December 31, 2009 compared to December 31, 2008. Amounts included in total
accrued interest relate to: (a) unrecognized tax benefits; (b) pending claims with the IRS for open tax years; (c) the tax
benefit related to the settlement; and (d) the impact of payments made to the IRS in prior years in anticipation of potential
tax deficiencies. Of the $245 million of accrued interest receivable as of December 31, 2009, approximately $233 million of
accrued interest payable is allocable to unrecognized tax benefits. We recognized approximately $— million of interest
income or expense in 2009, $160 million of interest income in 2008 and $18 million of interest expense in 2007. We have
accrued no amounts for penalties during 2009, 2008 or 2007.
The period for assessment under the statute of limitations for federal income tax purposes is open on corporate income
tax returns filed for years 1985 to 2008. Tax years 1985 to 1997 are before the U.S. Tax Court. In June 2008, we reached
agreement with the IRS on a settlement regarding the tax treatment of the customer relationship intangible asset recognized
upon our transition from non-taxable to taxable status in 1985. As a result of this agreement, we re-measured the tax benefit
from this uncertain tax position and recognized $171 million of tax benefit and interest income in the second quarter of
2008. This settlement, which was approved by the Joint Committee on Taxation of Congress, resolves the last matter to be
decided by the U.S. Tax Court in the current litigation. Those matters not resolved by settlement agreement in the case,
including the favorable financing intangible asset decided favorably by the Court in 2006, are subject to appeal.
The IRS has completed its examinations of years 1998 to 2005 and is currently examining years 2006 and 2007. The
principal matter in controversy as the result of the 1998 to 2005 examinations involves questions of timing and potential
penalties regarding our tax accounting method for certain hedging transactions. It is reasonably possible that the hedge
accounting method issue will be resolved within the next 12 months. Management believes adequate reserves have been
provided for settlement on reasonable terms. Changes could occur in the gross balance of unrecognized tax benefits within
the next 12 months that could have a material impact on income tax expense or benefit in the period the issue is resolved.
However, we have no information that would enable us to estimate such impact at this time.
Effect of Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction for certain non-performance-based
compensation payments made to certain executive officers of publicly held corporations. Because our common stock
previously was not required to be registered under the Exchange Act, we were not a publicly-held corporation under
Section 162(m) and applicable Treasury regulations. The Housing and Economic Recovery Act of 2008 specifically
eliminated the Exchange Act registration exemption for our equity securities. Accordingly, our stock is required to be
registered under the Exchange Act, and we are therefore subject to Section 162(m). The impact has not been material.
Tax Status of REITs
On September 19, 2008, FHFA, as Conservator, advised us of FHFA’s determination that no further common or
preferred stock dividends should be paid by our REIT subsidiaries. FHFA specifically directed us, as the controlling
stockholder of both REIT subsidiaries and the boards of directors of both companies, not to declare or pay any dividends on
the preferred stock of the REITs until FHFA directs otherwise. However, at our request and with Treasury’s consent, FHFA
directed us and the boards of directors of our REIT subsidiaries during fourth quarter 2009 to (i) declare and pay a preferred
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