INCOME TAXES

Farmer Mac is subject to federal income taxes but is exempt from state and local income taxes. The components of the federal income tax expense for the years ended December 31, 2012, 2011, and 2010 were as follows:



	For the Year Ended December 31,
	2012			2011			2010
	(in thousands)
Current income tax expense	$	24,138		$	24,736		$	14,321
Deferred income tax (benefit)/expense	(1,982		)	(18,939		)	(524		)
Income tax expense	$	22,156		$	5,797		$	13,797

A reconciliation of tax at the statutory federal tax rate to the income tax expense for the years ended December 31, 2012, 2011, and 2010 is as follows:



	For the Year Ended December 31,
	2012			2011			2010
	(dollars in thousands)
Tax expense at statutory rate	$	31,891		$	15,627		$	23,274
Non-taxable dividend income	(2,116		)	(2,116		)	(2,183		)
Income from non-controlling interest	(7,766		)	(7,766		)	(7,248		)
Valuation allowance	6			(254		)	(235		)
Other	141			306			189
Income tax expense	$	22,156		$	5,797		$	13,797
Statutory tax rate	35.0		%	35.0		%	35.0		%

The components of the deferred tax assets and liabilities as of December 31, 2012 and 2011 were as follows:



	As of December 31,
	2012			2011
	(in thousands)
Deferred tax assets:
Basis differences related to financial derivatives	$	44,963		$	45,517
Allowance for losses	5,911			6,131
Stock-based compensation	2,111			2,941
Capital loss carryforwards	39,272			39,399
Valuation allowance	(39,272		)	(39,399		)
Lower of cost or fair value adjustment on loans held for sale	2,080			—
Amortization of premiums on capital investments	1,352			1,220
Valuation allowance	(1,352		)	(1,220		)
Other	2,333			3,057
Total deferred tax assets	57,398			57,646
Deferred tax liability:
Basis differences related to securities	13,160			12,139
Unrealized gains on available-for-sale securities	39,829			42,738
Basis difference in subsidiary	1,118			2,916
Other	168			103
Total deferred tax liability	54,275			57,896
Net deferred tax asset/(liability)	$	3,123		$	(250	)

A valuation allowance is required to reduce a deferred tax asset to an amount that is more likely than not to be realized. Future realization of the tax benefit from a deferred tax asset depends on the existence of sufficient taxable income of the appropriate character. After the evaluation of both positive and negative objective evidence regarding the likelihood that its deferred tax assets will be realized, Farmer Mac established a valuation allowance of $40.6 million and as of December 31, 2012 and 2011, which was attributable to non-deductible capital losses on investment securities. Farmer Mac did not establish a valuation allowance for the remainder of its deferred tax assets because it believes it is more likely than not that those deferred tax assets will be realized. In determining its deferred tax asset valuation allowance, Farmer Mac considered its taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback and carryforward periods available under the tax law. As of December 31, 2012, the amount of capital loss carryforwards was $112.2 million. Of these capital loss carryforwards, $106.2 million will expire in 2014, $0.1 million in 2015, and $5.9 million in 2016.

As of December 31, 2012 both the recorded liability for uncertain tax positions and the corresponding deferred tax asset were $1.0 million. As of December 31, 2011 both the recorded liability for uncertain tax positions and the corresponding deferred tax asset were $1.2 million.

The following table presents the changes in unrecognized tax benefits for the years ended December 31, 2012, 2011, and 2010:



	For the Year Ended December 31,
	2012			2011			2010
	(in thousands)
Beginning balance	$	1,175		$	1,454		$	1,392
(Decreases)/increases based on tax positions related to current year	(129		)	(279		)	62
Ending balance	$	1,046		$	1,175		$	1,454

The resolution of the unrecognized tax benefits presented above represents temporary differences and, therefore, would not result in a change to the Corporation's effective tax rate. As of December 31, 2012 and 2011, accrued interest payable and the associated interest expense related to unrecognized tax benefits was immaterial and is presented as a component of income taxes. Farmer Mac does not expect to be subject to, and has not recorded tax penalties. In addition, Farmer Mac does not expect any significant changes to occur in its unrecognized tax benefits within the next 12 months. Tax years 2009 through 2012 remain subject to examination.