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Income Taxes
6 Months Ended
Jun. 30, 2013
Income Tax Disclosure [Abstract]  
Income Tax
Income Taxes
Deferred Tax Assets and Liabilities
We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We evaluate the recoverability of our deferred tax assets, weighing all positive and negative evidence, and are required to establish or maintain a valuation allowance for these assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary to support a conclusion that a valuation allowance is not needed.
Our framework for assessing the recoverability of deferred tax assets requires us to weigh all available evidence, including:
the sustainability of recent profitability required to realize the deferred tax assets;
whether or not there are cumulative net losses in our consolidated statements of operations in recent years;
unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years; and
the carryforward periods for net operating losses and tax credits.
After weighing all of the evidence, we determined that the positive evidence in favor of releasing the valuation allowance, particularly the evidence that was objectively verifiable, outweighed the negative evidence against releasing the allowance as of March 31, 2013. Therefore, we concluded that it is more likely than not that our deferred tax assets, except the deferred tax assets relating to capital loss carryforwards, will be realized. As a result, we released the valuation allowance on our deferred tax assets as of March 31, 2013, except for amounts that will be released against income before federal income taxes for the remainder of the year. However, we retained $491 million of the valuation allowance that pertains to our capital loss carryforwards, which we believe will expire unused. We recognized a benefit for federal income taxes of $48.6 billion in our condensed consolidated statements of operations and comprehensive income for the six months ended June 30, 2013 primarily due to the release of the valuation allowance.
The positive evidence that weighed in favor of releasing the allowance as of March 31, 2013 and ultimately outweighed the negative evidence against releasing the allowance was the following:
our profitability in 2012 and for the three months ended March 31, 2013 and our expectations regarding the sustainability of these profits;
our three-year cumulative income position as of March 31, 2013;
the strong credit profile of the loans we have acquired since 2009;
the significant size of our guaranty book of business and our contractual rights for future revenue from this book of business;
our taxable income for 2012 and our expectations regarding the likelihood of future taxable income; and
that our net operating loss carryforwards will not expire until 2030 through 2031 and we expect to utilize all of these carryforwards within the next few years.
As discussed in “Note 10, Income Taxes” in our 2012 Form 10-K, releasing all or a portion of the valuation allowance in any period after December 31, 2012 did not reduce the funding available to us under the senior preferred stock purchase agreement and therefore did not result in regulatory actions that would limit our business operations to ensure our safety and soundness. In addition, we transitioned from a three-year cumulative loss position over the three years ended December 31, 2012 to a three-year cumulative income position over the three years ended March 31, 2013. The change in these conditions during the three months ended March 31, 2013 removed negative evidence that supported maintaining the valuation allowance against our net deferred tax assets as of December 31, 2012. The balance of our net deferred tax assets was $48.7 billion as of June 30, 2013 compared with net deferred tax liabilities of $509 million as of December 31, 2012.
We expect that the remaining valuation allowance not related to capital loss carryforwards will be reduced against income before federal income taxes throughout the remaining periods of 2013 until that amount is reduced to zero as of December 31, 2013. The timing of the reduction of this remaining valuation allowance will be determined by our estimated income recognition for 2013.
Income before federal income taxes recorded in the remainder of 2013 may be greater or less than our estimate used for the three months ended March 31, 2013. For the three months ended June 30, 2013, we updated our estimate of income before federal income taxes for 2013 and determined it was greater than our estimate used as of March 31, 2013. Therefore, we recognized a provision for federal income taxes of $2.0 billion for the three months ended June 30, 2013. For the six months ended June 30, 2013, we recognized a benefit for federal income taxes of $48.6 billion. We did not recognize a benefit or provision for federal income taxes for the three or six months ended June 30, 2012. Starting in 2014, we expect that our effective tax rate will approach the statutory tax rate.