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 were expected to be released against income before federal income taxes for the remainder of the year. However, as of September 30, 2013, we retained $447 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 $47.2 billion in our condensed consolidated statements of operations and comprehensive income for the nine months ended September 30, 2013 primarily due to the release of the valuation allowance. We expect that the remaining valuation allowance not related to capital loss carryforwards will be released against income before federal income taxes during the three months ended December 31, 2013.

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. We anticipate that we will utilize all of these carryforwards by the end of 2013.

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 $48.3 billion as of September 30, 2013 compared with net deferred tax liabilities of $509 million as of December 31, 2012.

(Provision) Benefit for Federal Income Taxes

For the three months ended June 30, 2013 and September 30, 2013, we updated our estimates of income before federal income taxes for 2013 and determined they were greater than our estimate used as of March 31, 2013. Therefore, we recognized a provision for federal income taxes in both the three months ended June 30, 2013 and September 30, 2013 based on our updated estimates. For the nine months ended September 30, 2013, we recognized a benefit for federal income taxes of $47.2 billion. We did not recognize a provision or benefit for federal income taxes for the three or nine months ended September 30, 2012. Starting in 2014, we expect that our effective tax rate will approach the statutory tax rate.