Last week’s revelation — that Freddie Mac could owe as much as $750 million in back taxes if the IRS is successful in its challenge to the company’s treatment of 2001 transactions — had been disclosed for more than a month.
The Internal Revenue Service (IRS) is auditing the Freddie’s 2001 tax return and could challenge its tax treatment on a series of transactions known as “linked swaps,” Freddie said in an information statement supplement dated September 25.
Linked swaps refer to a series of nine sets of paired trade transactions, in which Freddie reported and paid taxes treating each pair as a single transaction, according to the statement. An investigative report released this summer said these transactions had the effect of transferring approximately $420 million in operating earnings from 2001 into later years.
If the IRS determines the transaction taxes need adjustment, a tax bill of $750 million, plus interest, could result and “have a material adverse impact on Freddie,” reported the GSE (government-sponsored enterprise).
Despite Freddie’s disclosing the information over a month ago, investors might have not known of the possible tax bill if not for the recent GSE Activity Report published by Federal Financial Analytics Inc. Last week’s announcement at the Mortgage Bankers Association of America’s Annual conference that Freddie might extend its November deadline for the release of its financial restatement reportedly sparked the interest of Federal Financial, leading it to dig deeper into Freddie’s data.
Washington D.C.-based Federal Financial says it “works to protect clients from the range of risks that result from poor anticipation and analysis of U.S. policy.” The company notes that as Freddie and cousin Fannie Mae “continue to grow geometrically, their hegemony of the mortgage market and the potential for systemic risk also grow.”
In addition to Freddie and Fannie, Federal Financial lists Bank of America, Wells Fargo, and Countrywide Home Loans among its clients and subscribers.
In a phone interview, Freddie spokeswoman Sharon McHale pointed out that the tax audit is an internal process the IRS performs every year on every corporation. She added that the tax contingency was disclosed as part of Freddie’s cautious ongoing effort to inform investors of any financial act the company may undergo, and that the company still believes it won’t have to pay this sum.
“We are quite confident that the tax treatment we applied is the correct one and even have opinions from two outside counsel saying the same thing,” said McHale. “They believe if we ever did need to litigate this in tax court…that [we] would prevail.”
In the informational supplement, it was also disclosed that the U.S. Department of Labor is reviewing “certain” issues pertaining to Freddie’s 401(k) Thrift Savings Plan related to the restatement.
McHale said the Labor department did not give Freddie details as to what the focus of the review was.
Upon MortgageDaily.com requests, the IRS declined to comment on Freddie’s situation and the Department of Labor simply said it didn’t deny or confirm it was investigating Freddie.
As Freddie has previously reported, its financial restatement could show increased earnings at or above $4.5 billion. The earnings were underreported in the 2000-2002 period with intentions of being accounted in future years so company earnings could appear stable.
