Freddie Mac 2010 Annual Report Download - page 244

sale securities until any temporary unrealized losses are recovered. Our view of our ability to realize the net deferred tax
asset may change in future periods, particularly if the mortgage and housing markets continue to decline.
In 2009, we generated a net operating loss that we carried back to offset our 2007 income tax liability, resulting in an
AMT liability for 2007 after the carryback claim was applied. In 2010, we are estimating a net operating loss that we
anticipate carrying back to partially offset our 2008 regular and AMT liability. AMT credits generated from the 2007 and
2008 AMT liability totaling $36 million will not expire. As a result of the carryback claim to offset our 2007 income tax
liability, approximately $533 million of our LIHTC generated in 2007 were limited. Additionally, we have unused tax credits
of $603 million, $602 million, and $585 million from 2008, 2009, and 2010, respectively, that will be carried forward into
future years because we were in an AMT position. These LIHTC totaling $2.3 billion that are available for use in the future
will begin to expire in 2027.
As of December 31, 2010, we have a net operating loss carryforward of $34.7 billion that will expire in 2030.
Unrecognized Tax Benefits
Table 14.4 — Unrecognized Tax Benefits
2010 2009 2008
(in millions)
Balance at January 1 . . . . . . . ............................................................. $ 805 $636 $637
Changes based on tax positions in prior years . . ................................................. 372 (34) (29)
Changes based on tax positions in current years. ................................................. 48 203 102
Decreases in unrecognized tax benefits due to settlements with taxing authorities ........................... (5) — (74)
Balance at December 31 . . . . ............................................................. $1,220 $805 $636
At December 31, 2010, we had total unrecognized tax benefits, exclusive of interest, of $1.2 billion. This amount relates
to tax positions for which ultimate deductibility is highly certain, but for which there is uncertainty as to the timing of such
deductibility. If favorably resolved, $1.2 billion of unrecognized tax benefits would have a positive impact on the effective
tax rate due to the reversal of the valuation allowance established against deferred tax assets created by the uncertain tax
positions. This favorable impact would be offset by a $332 million tax expense related to the establishment of a valuation
allowance against credits and net operating losses that have been carried forward. A valuation allowance has not currently
been recorded against this amount because a portion of the unrecognized tax benefits was used as a source of taxable income
in our realization assessment of our net deferred tax assets.
We continue to recognize interest and penalties, if any, in income tax expense. Total accrued interest receivable was
approximately $245 million at December 31, 2010, unchanged from December 31, 2009. 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 for tax years 1985 to 1997; 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, 2010 and 2009,
approximately $248 million and $233 million of accrued interest payable, respectively, is allocable to unrecognized tax
benefits. We recognized $0 million, $0 million, and $160 million of interest income (expense) in 2010, 2009, and 2008,
respectively. We have accrued no amounts for penalties during 2010, 2009 or 2008.
The period for assessment under the statute of limitations for federal income tax purposes is open on corporate income
tax returns filed for tax years 1998 to 2009. Tax years 1985 to 1997 were 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 for these tax years. Those matters not resolved by settlement agreement in the
case, including the favorable financing intangible asset decided favorably by the Court in 2006, are no longer subject to
appeal. Therefore, the tax years 1985 through 1997 are now effectively settled.
The IRS completed its examinations of tax years 1998 to 2007. We received Statutory Notices from the IRS assessing
$3.0 billion of additional income taxes and penalties for the 1998 to 2005 tax years. We filed a petition with the U.S. Tax
Court in October 2010 in response to the Statutory Notices. The principal matter of controversy involves questions of timing
and potential penalties regarding our tax accounting method for certain hedging transactions. The IRS responded to our
petition with the U.S. Tax Court in December 2010. We continue to seek resolution of the controversy by settlement. It is
reasonably possible that the hedge accounting method issue will be resolved within the next 12 months. We believe adequate
reserves have been provided for settlement on reasonable terms. However, 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 in the period
the issue is resolved if the outcome reached is not in our favor and the assessment is in excess of the amount currently
reserved. We have no information that would enable us to estimate such impact at this time.
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