The Treasury's financial rescue plan includes a tax change that would allow banks to treat Fannie Mae and Freddie Mac preferred stock as ordinary losses.

According to a report by Grant Thornton's national tax office, approximately 800 banks held Fannie Mae and Freddie Mac preferred stock when it became nearly worthless after the government took over the two companies. These financial institutions are being forced to write down their preferred shares, but under current law must treat the losses as capital losses.

The Treasury rescue plan as currently written would allow financial institutions and financial holding companies to treat losses from Fannie and Freddie preferred stock as ordinary losses if the stock were either sold between Jan. 1, 2008, and Sept. 6, 2008, or held as of Sept. 6, 2008.

There has been some discussion of how broadly to apply the preferred stock loss provision. Currently, it applies only to stock held directly on banks' ledgers, and not to any derivatives such as options and credit default swaps.

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