Income Taxes

12 Months Ended

Dec. 31, 2013

Income Taxes

We operate as a government-sponsored enterprise. We are subject to federal income tax, but we are exempt from state and local 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 as of the end of each quarter, 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;


•	the cumulative net income or 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;


•	the funding available to us under the senior preferred stock purchase agreement; and


•	the carryforward periods for net operating losses, capital losses and tax credits.

As of December 31, 2012, we had a valuation allowance against our deferred tax assets of $58.9 billion. 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 was more likely than not that our deferred tax assets, except the deferred tax assets relating to capital loss carryforwards, would 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.

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 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 would not expire until 2030 through 2031. We anticipated that we would utilize all of these carryforwards upon filing our 2013 federal income tax return.

Releasing the majority of the valuation allowance 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.

As of December 31, 2013, we continued to conclude that the positive evidence in favor of releasing the allowance outweighed the negative evidence against releasing the allowance and that it was more likely than not that our deferred tax assets, except the deferred tax assets relating to capital loss carryforwards, would be realized. As of December 31, 2013, we had no additional valuation allowance except for the $525 million of the valuation allowance we retained that pertains to our capital loss carryforwards, which we believe will expire unused. We recognized a benefit for federal income taxes of $45.4 billion in our consolidated statement of operations and comprehensive income for the year ended December 31, 2013 due to the release of the valuation allowance, partially offset by our 2013 provision for federal income taxes. The balance of our net deferred tax assets was $47.6 billion as of December 31, 2013 compared with net deferred tax liabilities of $509 million as of December 31, 2012.

The following table displays our deferred tax assets, deferred tax liabilities and valuation allowance as of December 31, 2013 and 2012.



		As of December 31,
		2013				2012
	(Dollars in millions)
Deferred tax assets:
Allowance for loan losses and basis in acquired property, net			$	20,918			$	26,263
Mortgage and mortgage-related assets			16,350				14,912
Debt and derivative instruments			3,958				5,450
Partnership credits			4,172				5,933
Partnership and other equity investments			1,255				1,610
Net operating loss and alternative minimum tax credit carryforwards			330				2,586
Other, net			1,972				2,084
Total deferred tax assets			48,955				58,838
Deferred tax liabilities:
Unrealized gains on AFS securities, net			868				496
Other, net			2				—
Total deferred tax liabilities			870				496
Valuation allowance			(525		)		(58,851		)
Net deferred tax assets (liabilities)			$	47,560			$	(509	)

As of December 31, 2013, we had no net operating loss carryforwards, $1.6 billion of capital loss carryforwards that expire in 2014 through 2018, $4.4 billion of partnership tax credit carryforwards that expire in various years through 2033 and $330 million of alternative minimum tax credit carryforwards that have an indefinite carryforward period.

Benefit for Income Taxes

The following table displays the components of our benefit for federal income taxes for the years ended December 31, 2013, 2012 and 2011.



	For the Year Ended December 31,
	2013				2012			2011
	(Dollars in millions)
Current income tax (provision) benefit		$	(3,067	)		$	—		$	90
Deferred income tax benefit ⁽¹⁾		48,482				—			—
Benefit for federal income taxes		$	45,415			$	—		$	90

__________


⁽¹⁾	Amount excludes the income tax effect of items recognized directly in “Fannie Mae stockholders’ equity (deficit).”

We did not have any settlements with the IRS in 2013 or 2012. During 2011, we received a refund of $1.1 billion from the IRS related to the carryback of our 2009 operating loss to the 2008 and 2007 tax years. In addition, we effectively settled our 2007 and 2008 tax years with the IRS and, as a result, we recognized an income tax benefit of $90 million in our consolidated statement of operations and comprehensive loss for 2011.

The following table displays the difference between our effective tax rates and the statutory federal tax rates for the years ended December 31, 2013, 2012 and 2011, respectively.



	For the Year Ended December 31,
	2013				2012				2011
Statutory corporate tax rate		35.0		%		35.0		%		35.0		%
Tax-exempt interest		(0.2	)			(0.7	)			0.9
Equity investments in affordable housing projects		(1.5	)			(3.9	)			4.8
Other		0.2				0.2				1.0
Valuation allowance		(151.3	)			(30.6	)			(41.2	)
Effective tax rate		(117.8	)	%		—		%		0.5		%

Our effective tax rate is the benefit for federal income taxes expressed as a percentage of income or loss before federal income taxes. Our effective tax rate was different from the federal statutory rate of 35% for the year ended December 31, 2013 due primarily to the release of our valuation allowance for our net deferred tax assets that resulted in the recognition of $58.3 billion in our benefit for income taxes. Our effective tax rate was different from the federal statutory rate of 35% for the year ended December 31, 2012 due primarily to the decrease to our valuation allowance for our net deferred tax assets that resulted in the recognition of $5.3 billion in our benefit for income taxes, fully offset by a corresponding decrease in our deferred tax assets. Our effective tax rate was different from the federal statutory rate of 35% for the year ended December 31, 2011 due primarily to the increase to our valuation allowance for our net deferred tax assets that resulted in the recognition of $7.0 billion in our provision for income taxes, fully offset by a corresponding increase in our deferred tax assets. Our effective tax rate for the year ended December 31, 2011 was further impacted by the release of a portion of the valuation allowance for deferred tax assets resulting from a settlement agreement reached with the IRS for our unrecognized tax benefits for the tax years 2007 through 2008.

Unrecognized Tax Benefits

We had $514 million, $648 million, and $758 million of unrecognized tax benefits as of December 31, 2013, 2012 and 2011, respectively. Of these amounts, we had $60 million as of December 31, 2010 that was resolved favorably in 2011 and reduced our effective tax rate in 2011. There were no unrecognized tax benefits as of December 31, 2013 and 2012 that would reduce our effective tax rate in future periods. As of December 31, 2013 and 2012, we had no accrued interest payable related to unrecognized tax benefits. For the years ended December 31, 2013, 2012 and 2011, we had no interest expense related to unrecognized tax benefits and did not have any tax expense related to tax penalties.

The IRS is currently examining our federal income tax returns related to the 2009 and 2010 tax years. We reasonably expect to conclude the audit with the IRS by the end of 2014. As a result of this conclusion, it is reasonably possible that a $514 million reduction of our gross balance of unrecognized tax benefits may occur within the next 12 months. In 2011, we effectively settled our federal income tax returns for the tax years 2007 and 2008 with the IRS, which resulted in a $105 million reduction in our gross balance of unrecognized tax benefits.

The following table displays the changes in our unrecognized tax benefits for the years ended December 31, 2013, 2012 and 2011, respectively.



	For the Year Ended December 31,
	2013				2012				2011
	(Dollars in millions)
Unrecognized tax benefits as of January 1		$	648			$	758			$	864
Gross increases—tax positions in prior years		—				—				1
Gross decreases—tax positions in prior years		(134		)		(110		)		(2		)
Settlements		—				—				(105		)
Unrecognized tax benefits as of December 31⁽¹⁾		$	514			$	648			$	758

__________


⁽¹⁾	Amounts exclude tax credits of $220 million as of December 31, 2013 and exclude tax credits and net operating losses of $648 million and $758 million as of December 31, 2012 and 2011, respectively.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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