The Treasury Department's decision to take over Fannie Mae and Freddie Mac and put them under conservatorship has prompted questions about the implications for accountants and their clients.
The two mortgage companies had reportedly used accounting rules that allowed them to overstate the amount of capital they had on hand. The government takeover put holders of their common stock in a disadvantageous position, with share prices plunging below the dollar mark after the takeover was announced.
"It's not so much a tax question as an economic question," said Tom Ochsenschlager, vice president of taxation at the American Institute of CPAs. "Can the existing shareholders start taking a deduction this year? They're taking a capital loss in their investment in the common stock. It's pretty clear for the average investor, you can't take a loss until you recognize a loss."
He suggested that some shareholders might take the opportunity to sell the stock to offset capital gains.
The government takeover also prompted some special rulemaking. When Treasury Secretary Henry Paulson announced the move, he had the Internal Revenue Service issue a notice that allows the two companies to retain all of their net operating losses so they can continue to write them off over the next 20 years.
The Fannie and Freddie bailout also has larger implications for the ability of accountants to properly value mortgage holdings, given today's plunging real estate market. "I do sense it as being evidence of the challenges that financial professionals have in this evolving model of valuing intangible assets such as mortgages and mortgage-backed securities," said David Lifson, managing partner of Hays & Co., and former president of the New York State Society of CPAs. "It was always a challenge, but the challenge has increased with the advances in our society in the last 20 years."
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