Freddie Mac 2006 Annual Report Download - page 151

Table 14.3 reconciles the statutory federal tax rate to the eÅective tax rate.
Table 14.3 Ì Reconciliation of Statutory to EÅective Tax Rate
Year Ended December 31,
2006 2005 2004
Statutory corporate rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.0% 35.0% 35.0%
Tax-exempt interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12.2) (8.7) (4.7)
Tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (21.9) (14.3) (7.3)
Provision related to tax contingencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6.4) 1.9 (2.0)
Penalties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 0.1 Ì
OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.4 0.4 0.2
EÅective rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5.1)% 14.4% 21.2%
Our negative eÅective tax rate in 2006 and the decrease in our eÅective tax rate over the past three years is primarily
due to the decline in pre-tax income, the year-over-year increases in tax credits related to our investments in low-income
housing tax credit partnerships and interest earned on tax-exempt housing-related securities. In 2006, our negative eÅective
tax rate also reÖects reductions in our tax reserves as discussed below.
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, making a provision for such
contingencies requires signiÑcant judgment. The ultimate outcome of these tax contingencies is subject to uncertainties,
diÇcult to predict and 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 1997. We are in litigation in the U.S. Tax Court, or Court, to contest income tax deÑciencies
asserted by the IRS for years 1985 through 1997. 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 two
types of intangible assets:
‚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.
In July 2006, the Court ruled favorably for Freddie Mac on the questions of value and useful life of Favorable
Financing. In response to this decision, we recorded a $108 million reduction in our tax contingency reserves as of Ñrst
quarter 2006. The Court's rulings to date in the case are subject to appeal by the parties upon Ñnal resolution by the Court. If
the IRS were to appeal the July 2006 or any prior Court decisions and any adverse rulings resulted, we may reconsider our
reserves.
We are in discussions with the IRS regarding settlement of the Customer Relationships controversy. The favorable
resolution of this controversy would represent a gain contingency which we have not recorded.
In November 2006, Freddie Mac entered into a settlement with the IRS that included resolution of several other
controversies in the case, including a controversy regarding the timing for recognition of certain Management and guarantee
fees. In view of the settlement, we recorded a $50 million reduction in our tax contingency reserves as of Ñrst quarter 2006.
Tax Years 1998 through 2005. 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 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 in accordance with SFAS 5 has been made for contingencies
related to income taxes and related interest as described under ""Impact of tax issues'' above.
The tax years 2003 to 2005 are being examined by the IRS.
NOTE 15: EMPLOYEE BENEFITS
DeÑned BeneÑt Plans
We maintain a tax-qualiÑed, funded 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
139 Freddie Mac