Tuesday, September 9, 2008

Paulson Had Special Future Tax Break Written For Fannie and Freddie

How's this for a smack on the side of the head. Not only does the government bailout Freddie Mac and Fannie Mae, but if they become profitable down the road, they won't have to pay income taxes on billions of those earnings. This  tax break will amount to tax free earnings for roughly  the first $14 billion of any future Freddie and Fannie net income. Treasury Secretary Paulson had the special tax rule written for Freddie and Fannie, so that they will be eligible for the huge tax break. It won't apply to any other companies.

Paulson ... had the IRS issue Notice 2008-76, which essentially allows the two government-sponsored enterprises to retain all of their [net-operating losses] NOLs, despite a change of control of ownership, tax expert Robert Willens told CFO.com.

Under the tax code — specifically Section 382 — NOLs are severely limited when there is a change of control. But not for Fannie and Freddie, thanks to the change in rules, just for them. The rule is generally in place to prevent acquiring companies from buying up targets just to gain access to their NOLs. The NOLs for Fannie and Freddie are substantial. Over the last four quarters, Fannie and Freddie recorded about $14 billion in aggregate losses.

"I am not saying that the IRS ruling is a good thing, or a bad thing, it is just unusual," added Willens. "Then again, this is a very unusual situation."

One has to wonder what bizarre justification Paulson will have to come up with to explain, after putting billions of dollars of taxpayer money at risk to bailout Freddie and Fannie, that he then grants Frannie and Freddie special privileges so that they won't have to pay taxes on billions of dollars in income. 

Paulson's Formula: Use taxpayer money to bailout Freddie and Fannie. Write in special tax breaks so that Freddie and Fannie, if they turn profitable again (Thanks to the taxpayer bailout), won't have to pay billions taxes.

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