In 2013, our effective tax rate differs from the statutory rate of 35% primarily due to the release of the valuation allowance against our net deferred tax assets. In 2012 and 2011, our effective tax rate differs from the statutory tax rate of 35% primarily due to the valuation allowance on a portion of our net deferred tax assets and the recognition of uncertain tax positions.
Deferred Tax Assets and Liabilities
During 2013, we released our valuation allowance previously recorded on our net deferred tax asset. Deferred tax assets are created when: (a) expenses are recognized for financial reporting purposes prior to the corresponding recognition of expenses for tax reporting purposes; and/or (b) income is recognized for tax reporting purposes prior to the corresponding recognition of income for financial reporting purposes. The table below presents the balance of significant deferred tax assets, liabilities, and the valuation allowance at December 31, 2013 and 2012.
As of December 31, 2013, we had a net operating loss carryforward of $11.4 billion and a LIHTC carryforward of $3.6 billion that will expire over multiple years beginning in 2030 and 2027, respectively. Our AMT credit carryforward of $445 million will not expire.
Valuation Allowance Against Net Deferred Tax Assets
As discussed below, after weighing all of the evidence at September 30, 2013, we determined that the positive evidence relating to the realizability of our deferred tax assets, particularly the evidence that was objectively verifiable, outweighed the negative evidence. Accordingly, we concluded that it is more likely than not that our deferred tax assets will be realized and we released the valuation allowance against our net deferred tax assets.
On a quarterly basis, we determine whether a valuation allowance is necessary on our net deferred tax asset. In doing so, we consider all evidence available, both positive and negative, in determining whether, based on the weight of the evidence, it is more likely than not that the deferred tax assets will be realized. In conducting our assessment at September 30, 2013, we evaluated all available objective evidence including, but not limited to: (a) our three-year cumulative income position; (b) the trend of our financial and tax results; (c) the amount of taxable income reported in our 2012 federal income tax return; (d) our tax net operating loss and tax credit carryforwards and the length of carryforward periods available to utilize these assets under current tax law; and (e) our access to capital under the agreements associated with conservatorship. Furthermore, we evaluated all available subjective evidence, including but not limited to: (a) difficulty in predicting unsettled circumstances related to the conservatorship; (b) our estimated 2013 taxable income; and (c) forecasts of future book and tax income. Our consideration of the evidence requires significant judgment regarding estimates and assumptions that are inherently uncertain, particularly about our future business structure and financial results.
We are not permitted to consider the impacts proposed legislation may have on our business operations or the mortgage industry in our analysis because the timing and certainty of those actions are unknown and beyond our control.
The positive evidence at September 30, 2013, that outweighed the negative evidence included the following:
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• | Our three-year cumulative income position; |
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• | The strong positive trend in our financial performance over six consecutive quarters; |
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• | The 2012 taxable income reported in our federal tax return which was filed in 2013; |
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• | Our forecasted 2013 and future period taxable income; |
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• | Our net operating loss carryforwards do not begin to expire until 2030; and |
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• | The continuing positive trend in the housing market. |
When comparing evidence available at 2013 versus 2012, we noted a number of positive developments. During 2013, we filed our 2012 federal tax return, which reflected taxable income. This was our first year reporting taxable income since 2007. Furthermore, we continued an improved trend in earnings. Our current base forecast of taxable income also improved resulting in a decline in the number of years of projected income required in order to fully realize our net deferred tax asset. These positive developments in addition to the positive evidence discussed above resulted in our conclusion to release the valuation allowance against our net deferred tax assets at September 30, 2013. Given the continued positive trend in our financial performance through the fourth quarter, we determined that a valuation allowance against our net deferred tax asset was not necessary at December 31, 2013.
In future quarters we will continue to evaluate our ability to realize the net deferred tax asset. If evidence in future periods changes such that it is more likely than not that part or all of the net deferred tax asset will not be realized, we will reestablish a valuation allowance at that time.
We have evaluated all income tax positions and determined that there are no uncertain tax positions that require reserves as of December 31, 2013.
The IRS is currently examining our income tax returns for tax years 2008 through 2011. We are currently working with the IRS to finalize the stipulation of settled issues and closing agreement for years 1998 through 2010 related to our tax accounting method for certain hedging transactions, and expect that a final decision can be entered within the next 12 months. For additional information, see “NOTE 17: LEGAL CONTINGENCIES.”
We have accrued gross interest receivable of $529 million and $523 million as of December 31, 2013 and 2012, respectively, related to payments on account with the IRS. We anticipate refunds of accrued interest receivable upon final settlement of the Statutory Notices for the 1998 to 2005 tax years.
For a discussion of our significant accounting policies related to income taxes, please see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Income Taxes.”
