Freddie Mac Announces Resolution of REIT Dividend Tax Issue
May 13, 2005
McLean, VA – Freddie Mac (NYSE: FRE) has entered into a Closing Agreement with the Internal Revenue Service (IRS) that resolves issues relating to the tax treatment of dividends paid on step-down preferred stock issued by the company’s two real estate investment trust (REIT) subsidiaries. The IRS refers to these issuances as “fast-pay” preferred stock transactions.
In February 1997, Freddie Mac formed two REIT subsidiaries that issued a total of $4 billion in step-down preferred stock to investors. Under the IRS regulations in effect when the REITs were formed, the company believed that the dividend payments by the REITs to holders of the REITs’ step-down preferred stock were fully tax deductible.
Subsequent to the formation of Freddie Mac’s REIT subsidiaries, the Department of the Treasury issued final regulations that retroactively would limit the tax benefits attributable to the REIT preferred stock and challenged Freddie Mac’s position that the REIT dividends were fully deductible. The company has since changed its position that the REIT dividends were fully deductible and, under the Closing Agreement, has agreed to the limitation contained in the Treasury regulations.
Agreement with the IRS
Freddie Mac and the IRS have agreed that Freddie Mac will only be entitled to deductions attributable to the step-down preferred stock transactions as if it had borrowed the funds directly from the REITs’ preferred shareholders.
Effect of Agreement on Freddie Mac Financial Results
The Closing Agreement with the IRS will result in changes to the 2004 financial results released by Freddie Mac on March 31, 2005. The changes will be reflected in the 2004 consolidated financial statements to be included in the annual report that the company expects to issue in June 2005.
As the result of the Closing Agreement, Freddie Mac will increase its previously reported net income for 2004 by approximately $110 million to $2.9 billion, as compared to the previously released $2.8 billion. Specifically, the company will record in the first quarter of 2004 a reduction in tax reserves of approximately $98 million, and in the second through fourth quarters of 2004 a reduction in tax reserves of approximately $4 million each quarter. These reserve reductions will result in corresponding increases to income in the stated periods. In 2005 and thereafter, Freddie Mac will record in its consolidated financial statements tax benefits related to REIT preferred stock dividend payments in a manner consistent with the Closing Agreement.
The information in this press release and other information will be included in our Information Statement Supplement dated May 12, 2005 [PDF 125K ], which will be posted on the Investor Relations page of our Web site.
Freddie Mac’s press releases sometimes contain forward-looking statements pertaining to management's current expectations as to our future business plans, results of operations and/or financial condition. Management's expectations for the company’s future necessarily involve a number of assumptions and estimates, and various factors could cause actual results to differ materially from these expectations. These assumptions and factors are discussed in our Information Statement dated September 24, 2004 and Information Statement Supplement dated March 31, 2005, which are available on the Investor Relations page of our Web site at www.FreddieMac.com/investors.
Source: Freddie Mac