IRS Issues Guidance on Fannie and Freddie Stock

The Treasury Department and the Internal Revenue Service have issued guidance on indirect ownership of preferred stock in mortgage lenders Fannie Mae and Freddie Mac.

Revenue Procedure 2008-64 provides that certain gains and losses from indirect ownership of Fannie and Freddie preferred stock can be treated as ordinary income and loss. Many financial institutions have invested in Fannie and Freddie preferred stock indirectly through certain adjustable rate preferred programs and other vehicles. The revenue procedure includes guidance describing when these financial institutions receive ordinary treatment on:

* Gains and losses on this stock recognized by a trust or other entity taxed as a partnership in which the financial institution is a partner;

* Gains and losses on the sale of an interest in a partnership that owns this stock;

* Gains and losses on the sale of this stock that the financial institution received in a distribution from a partnership;

* Gains and losses on this stock recognized by certain subsidiaries of financial institutions; and,

* Gains and losses on the sale of this stock that the financial institution received in certain "transferred basis" transactions.

Rev. Proc. 2008-64 is effective immediately.