Treasury and IRS Issue New Guidance Regarding the Tax Treatment of Transactions Involving Certain Preferred Stock Holdings in Fannie Mae and Freddie Mac

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In the midst of the Wall Street meltdown an important tax break has been given to our struggling financial institutions and others. As part of the Emergency Economic Stability Act of 2008 (?EESA?), Congress has authorized the treatment of losses and gains by an ?applicable financial institution? that relate to ?applicable preferred stock? as ordinary losses and income. This is significant because prior law dictated that losses and gains tied to the sale or exchange of ?applicable preferred stock? be treated as capital losses and gains. C corporations are not able to utilize their capital losses to offset any of their ordinary income. Although C corporations generally can carry these capital losses back up to three years and forward up to five years they still need to generate capital gains to be able to utilize these capital losses.

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