FEDERAL AGENCIES OBJECT TO THE REQUIREMENT THAT AGENCY HEAD DECLARE UNDER PENALTY OF PERJURY THAT DATA SUPPLIED TO IRS IS ACCURATE.

Rudnick also argues that further clarification in the proposed amendments is needed for contracts where no payment is actually made by the agency. Since Freddie Mac arranges for servicing of mortgages but does not control the flow of funds from which the servicer is compensated, Freddie Mac is not obligated "to make payment of money (or other property)," under proposed regulation section 1.6050M- 1(b)(2)(i). "The regulations should make clear," says Rudnick, "that an entity that does not actually make the payment, and has no control over the payment, should not be deemed to make such payments for purposes of the section 6050M reporting rules."

On behalf of the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the following comments are submitted with respect to the regulations proposed on June 28, 1988 under section 6050M of the Internal Revenue Code of 1986, as amended. In this regard, enclosed is a copy of prior comments submitted on behalf of Freddie Mac, dated July 6, 1987, regarding the section 6050M regulations.

1. FREDDIE MAC SHOULD NOT BE SUBJECT TO THE SECTION 6050M REPORTING REQUIREMENTS

Our most significant comment restates our view, as set forth in our July, 1987 comment letter, that Freddie Mac should not be covered by these reporting requirements. These reporting requirements, intended to assist in the collection of delinquent Federal income taxes, are only applicable to Federal executive agencies, not purely private sector entities. The reasons for Congress to so limit such reporting must have been based on Congressional perception of the status of either the payors or the recipients. The two logical reasons for limiting the class of reporting payors, though never stated, may have been that: (1) Federal agencies may not otherwise be subject to extensive tax reporting regimes; or, more likely (2) it is somewhat ludicrous to have the United States, through its agencies, continue to make direct payments of its own funds to parties in default on their tax liabilities to the United States. As to the class of payees, there may have been a perception that there is something unique about the class of persons with whom Federal agencies contract such that they are an appropriate targeted group for this type reporting.

Without commenting on the substance of the provision in the above regards, the reasons that Freddie Mac should not be required to report (restated in summary form) are:

Freddie Mac does not expend funds of the United States. All of its activities are conducted using funds generated from its own capital and profits. Further, the United States has no ownership or other interest in Freddie Mac. Thus, any ability of the United States to collect delinquent taxes from payments to be made by Freddie Mac to contractors is no different than its ability with respect to any purely private sector entity.

Freddie Mac is a taxpayer subject to Federal tax reporting requirements applicable to all taxpayers. While Freddie Mac technically may be a "Federal executive agency," its activities are exclusively commercial. Freddie Mac does not engage in activities commonly associated with such agencies, e.g., it does not make grants or award government contracts.

Freddie Mac generally deals with sophisticated financial institutions. These entities are not typical of those which receive grants or contracts from other Federal agencies. There can be no special reason (relative to any other entity) to subject Freddie Mac's contractual relationships with these types of institutions to the reporting requirements.

The costs of compliance, and the knowledge by Freddie Mac customers that this reporting occurs could create a serious adverse competitive impact for Freddie Mac, one that is totally unwarranted in light of the purpose of the statute.

Based upon the above (as more fully set forth in the enclosed letter), we urge that the section 6050M reporting requirements be made inapplicable to Freddie Mac.

2. FURTHER CLARIFY EXEMPTION FOR CONTRACTS WHERE NO PAYMENT IS ACTUALLY MADE BY THE AGENCY

When Freddie Mac purchases mortgages it arranges for servicing functions (e.g., collection) with respect to the mortgages to be conducted by the seller or another entity, referred to as the servicer. Since inception of the Freddie Mac purchase program (and as is usual in the case of servicing arrangements) the servicer receives the total payment on the mortgage from the obligor (in most cases, a homeowner), and retains its fee for services prior to remitting the difference to Freddie Mac. Freddie Mac thus receives only a net amount, and does not control the flow of funds from which the servicer is compensated. In view of the fact that Freddie Mac does not pay the servicer, and its lack of control over such funds, these contracts should not be subject to the reporting requirements under the proposed regulations. Simply stated, Freddie Mac is not obligated "to make payment of money (or other property)." Prop. Reg. section 1.6050M-1(b)(2)(i). The regulations should make clear that an entity that does not actually make the payment, and has no control over the payment, should not be deemed to make such payments for purposes of the section 6050M reporting rules.

3. EFFECTIVE DATE

The regulations are proposed to be effective for contracts entered into on or before October 1, 1988. The treatment of contracts entered into before that date is reserved. Prop. Reg. sections 1.6050M-1(f)(1)-(2). If any reporting is to occur for contracts prior to that date, such reporting should be limited to those items explicitly enumerated in section 6050M(a)(1).

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If a formal hearing is to be held with respect to this matter, we request the opportunity to express our views in this regard.

Sincerely,

On behalf of the Federal Home Loan Mortgage Corporation ("Freddie Mac"), we would like to address certain concerns about the potential scope of regulations implementing the reporting requirements of section 6050M of the Internal Revenue Code of 1986 (the "Code"). Specifically we are concerned about how the provision will apply to an entity, such as Freddie Mac, whose activities are more like those of a private sector business operation than the usual Federal executive department. Depending upon the scope of the regulations, the compliance burden imposed on Freddie Mac could be overwhelming in terms of cost and effort, a result that could not have been intended and is not necessary in light of the purpose of section 6050M.

Section 6050M, enacted as part of the Tax Reform Act of 1986, requires the head of every Federal executive agency to file a return with the Internal Revenue Service ("Service") containing information regarding each person with which the agency enters into a contract. The stated Congressional purpose for the reporting requirement is to facilitate the collection of delinquent taxes from contractors who receive payments from Federal executive agencies. ¹ The definition of Federal executive agency includes a Government corporation, 5 U.S.C. section 105 (1966). We think that Freddie Mac is a Government corporation and, hence, is covered by the reporting requirements.

Freddie Mac is a corporate instrumentality of the United States, created pursuant to the Federal Home Loan Mortgage Corporation Act (Title III of the Emergency Home Finance Act of 1970, as amended, 12 U.S.C. sections 1451-1459). Freddie Mac was established primarily to increase the availability of mortgage credit for the financing of housing. The corporation seeks to provide a greater degree of liquidity for residential mortgage investments primarily by assisting in the maintenance of a secondary market for conventional mortgage loans. Its primary business activity consists of purchasing such loans and issuing securities supported by Freddie Mac credit (either a guarantee or Freddie Mac debt). In the course of that activity, Freddie Mac enters into numerous purchase and sale contracts with entities that sell loans to Freddie Mac, servicing contracts and contracts for the purchase and underwriting of securities issued by Freddie Mac. In addition, Freddie Mac has a securities dealing and trading group. Accordingly, the nature of Freddie Mac's contracts are akin to those associated with a securities dealing firm. Freddie Mac already is subject to all of the Code's other reporting requirements applicable to those business transactions. Freddie Mac also has the usual contractual relationships associated with the operation of any corporation, including those relating to its office facilities, shareholders and general overhead. A literal interpretation of section 6050M would in effect require Freddie Mac to file its books and records. It seems inconceivable that Congress intended such a result.

The statute provides that the agency must file the name, address and taxpayer identification number of every party to a contract. While under certain circumstances, that would be burdensome, compliance would not be overwhelming. However, section 6050M(a)(2) provides regulatory authority pursuant to which the Service may issue Treasury regulations requiring agencies to report any other information. IRS Advance Notice 87-1 states that the Service anticipates that temporary regulations will require federal executive agencies to report "the beginning effective date of the contract and expected date of completion of the contract; total gross amount payable to the contractor under the contract throughout the duration of the contract; date(s) when payment(s) will be made or can reasonably be expected to be made, to the contractor under the contract; and mailing address and identification (by title) of the person to whom requests for an offset against any unpaid tax liability of the contractor can be sent." IRS Advance Notice 87-1. These requirements alone would be overwhelming, and the Service has the authority to impose additional ones. Essentially all of Freddie Mac's business is based upon usual business contracts. The effect of the regulations could be to have Freddie Mac file all of its books and records, a result that could not have been intended, and does not appear to have been contemplated by the drafters of section 6050M.

Because of the relatively unique nature of Freddie Mac's activities as compared to most Federal executive agencies, most of Freddie Mac's contracts should be exempted from the operation of the statute. Since the bulk of Freddie Mac's contracts relates to business activity no different in substance from that of other business corporations, Freddie Mac's particular status as an instrumentality does not serve as a meaningful basis for concern that parties to contracts with Freddie Mac are any less likely to pay their taxes than those that deal with other business entities. Further, in contrast to other executive agencies, Freddie Mac uses its own funds (rather than those of the United States) to make payments in its business. Moreover, there is no guidance as to what or how anything would be accomplished even if the Service was aware of a contracting party who owed tax. We know of no authority pursuant to which Freddie Mac could withhold payment from a contractor based upon the contractor's Federal tax delinquency.

Although Freddie Mac appears technically to be a Federal executive agency as defined in the statute, Freddie Mac does not engage in activities commonly associated with such agencies. Freddie Mac does not make grants, award government contracts or otherwise allocate United States government funds to the private sector. While there is no specific guidance in the statute or legislative history, it is reasonable to assume that those were the types of activities that are intended to be covered by section 6050M. Freddie Mac, in contrast, is engaged in a trade or business involving commercial transactions, and the contracts associated with that business are no different from normal business contracts of any private sector business corporation. It does not use federal monies to make payments. Because the reporting requirements do not apply to other corporations or private businesses, to the extent Freddie Mac is conducting a trade or business the reporting requirements should not apply to Freddie Mac.

To the extent that section 6050M was meant to apply to Federal agencies making grants, awarding contracts, or otherwise allocating funds, the statute should not apply to Freddie Mac for at least two reasons. First, the parties with whom Freddie Mac conducts its business are atypical of those who receive grants or contracts from other Federal agencies. Thus, if the statute, by isolating persons who contract with the government, was intended to isolate a particular group of persons (for whatever reason), those are not the persons with whom Freddie Mac deals. The parties with whom Freddie Mac conducts business in the ordinary course are sophisticated financial entities that are most often federally regulated entities regularly subject to audits. Contractual relationships with these types of institutions should therefore not be subject to the statute to the extent entered into with such institutions in the ordinary course of Freddie Mac's business.

If it is determined that section 6050M is to apply to Freddie Mac (despite the unique nature of its activities as compared to most Federal executive agencies), we would like to address other issues. We understand Congressional concern that the Federal government not make payments to parties that owe taxes that have not been paid. In that regard, however, application of the statute to Freddie Mac would not make sense. In contrast to the U.S. government, Freddie Mac is not owed any unpaid taxes. Further, the U.S. government has no ownership or other interest in Freddie Mac. The common stock of Freddie Mac is owned by the twelve Federal Home Loan Banks, and its preferred stock is owned by financial institutions and traded on the New York Stock Exchange. A payment by Freddie Mac is not the same as a payment by, for instance, an executive department, which is using Federal monies. We know of no authority pursuant to which Freddie Mac could collect delinquent taxes from those parties. Further, even if Freddie Mac were given the authority to withhold delinquent taxes, it would be impossible for Freddie Mac to collect the money based upon the current structure of cash flows pursuant to most contracts. For example, most of the transactions into which Freddie Mac enters have a service component. When it purchases mortgages in order to package and resell them, it delegates its servicing function to the savings and loan association or other seller who becomes known as the seller/servicer. The seller/servicer receives its compensation for servicing by retaining the difference between the amount paid by the mortgagor and the amount remitted to Freddie Mac. There is no exchange of cash which would enable Freddie Mac to collect the money due for delinquent taxes. Further, Freddie Mac's ability to conduct business could be seriously impaired to the extent that it could be required to withhold payments pursuant to its contracts. As an example, envision the situation in which Freddie Mac and a mortgage seller arrive at a mortgage purchase settlement, and Freddie Mac must inform the seller that Freddie Mac will remit a portion of the amount it had agreed to pay to the United States instead (because the party had a delinquent tax liability). This is not a state of affairs faced by anyone else engaged in business, and should not have to be faced by Freddie Mac.

Since the purpose for the reporting requirement is to facilitate the collection of delinquent taxes from contractors who receive payments from Federal executive agencies, its application to Freddie Mac makes little sense. There appears to be a need for a policy-based interpretation of the reach of the section. In light of these potentially burdensome reporting requirements, we would appreciate the opportunity to meet with you at the earliest practical date to discuss the matters described in this letter and any other matters which you find relevant. Please feel free to contact me to arrange a meeting to discuss these matters, or if you have any questions.

Very truly yours,