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, 2014, 2013, and 2012 were as follows:

Table 10.1



	For the Year Ended December 31,
	2014			2013		2012
	(in thousands)
Current income tax expense	$	9,803		$	27,082	$	24,138
Deferred income tax (benefit)/expense	(6,979		)	6,670		(1,982		)
Income tax expense	$	2,824		$	33,752	$	22,156

A reconciliation of tax at the statutory federal tax rate to the income tax expense for the years ended December 31, 2014, 2013, and 2012 is as follows:

Table 10.2



	For the Year Ended December 31,
	2014			2013			2012
	(dollars in thousands)
Tax expense at statutory rate	$	25,587		$	45,943		$	31,891
Non-taxable dividend income	(1,587		)	(2,116		)	(2,116		)
Income from non-controlling interest	(7,766		)	(7,766		)	(7,766		)
Valuation allowance	(13,542		)	(2,693		)	6
Other	132			384			141
Income tax expense	$	2,824		$	33,752		$	22,156
Statutory tax rate	35.0		%	35.0		%	35.0		%

The components of the deferred tax assets and liabilities as of December 31, 2014 and 2013 were as follows:

Table 10.3



	As of December 31,
	2014			2013
	(in thousands)
Deferred tax assets:
Basis differences related to financial derivatives	$	30,921		$	22,349
Basis differences related to securities	4,218			2,509
Unrealized losses on available-for-sale securities	—			8,762
Allowance for losses	3,545			4,667
Stock-based compensation	2,443			1,916
Capital loss carryforwards	2,105			38,532
Valuation allowance	(2,105		)	(36,432		)
Amortization of premiums on capital investments	—			1,499
Valuation allowance	—			(1,499		)
Other	1,205			2,455
Total deferred tax assets	42,332			44,758
Deferred tax liability:
Unrealized gains on available-for-sale securities	8,448			—
Basis difference in subsidiary	195			353
Other	298			360
Total deferred tax liability	8,941			713
Net deferred tax asset	$	33,391		$	44,045

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 $2.1 million and $37.9 million, respectively, as of December 31, 2014 and 2013, which was attributable to capital loss carryforwards 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 and the impact of possible tax planning strategies. During 2014, Farmer Mac reduced its deferred tax valuation allowance by $13.5 million upon utilizing capital loss carryforwards. In addition, $63.7 million of capital loss carryforwards expired on December 31, 2014 and Farmer Mac removed $22.3 million of corresponding deferred tax assets and the related deferred tax asset valuation allowance. Deferred tax assets are measured at rates in effect when they arise. To the extent rates change, the deferred tax asset will be adjusted to reflect the new rate. A reduction in corporate tax rates would result in a reduction in the value of the deferred tax asset. As of December 31, 2014, the amount of capital loss carryforwards was $6.0 million. Of these capital loss carryforwards, $0.1 million will expire in 2015 and $5.9 million in 2016.

As of December 31, 2014 Farmer Mac did not identify any uncertain tax positions. As of December 31, 2013 both the recorded liability for uncertain tax positions and the corresponding deferred tax asset were $1.1 million.

The following table presents the changes in unrecognized tax benefits for the years ended December 31, 2014, 2013, and 2012:

Table 10.4



	For the Year Ended December 31,
	2014			2013		2012
	(in thousands)
Beginning balance	$	1,148		$	1,046	$	1,175
Decreases based on tax positions related to prior years	(1,148		)	—		—
Increases/(decreases) based on tax positions related to current year	—			102		(129		)
Ending balance	$	—		$	1,148	$	1,046

The resolution of the unrecognized tax benefits presented above represented temporary differences and, therefore, would not result in a change to Farmer Mac's effective tax rate. As of December 31, 2013, accrued interest payable and the associated interest expense related to unrecognized tax benefits was immaterial and was presented as a component of income taxes. Farmer Mac does not expect to be subject to, and has not recorded tax penalties. During 2014, the IRS examined Farmer Mac's uncertain tax positions reported in its 2011 tax return; as a result of the examination, Farmer Mac concluded it does not currently have any uncertain tax positions. Tax years 2012 through 2014 remain subject to examination.