FEDERAL AGRICULTURAL MORTGAGE CORP - 10-K filing on 2016-03-10

Income Taxes - INCOME TAXES

12 Months Ended

Dec. 31, 2015

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, 2015, 2014, and 2013 were as follows:

Table 10.1



	For the Year Ended December 31,
	2015		2014			2013
	(in thousands)
Current income tax expense	$	30,247	$	9,803		$	27,082
Deferred income tax (benefit)/expense	3,992		(6,979		)	6,670
Income tax expense	$	34,239	$	2,824		$	33,752

A reconciliation of tax at the statutory federal tax rate to the income tax expense for the years ended December 31, 2015, 2014, and 2013 is as follows:

Table 10.2



	For the Year Ended December 31,
	2015			2014			2013
	(dollars in thousands)
Tax expense at statutory rate	$	37,827		$	25,587		$	45,943
Non-taxable dividend income	—			(1,587		)	(2,116		)
Income from non-controlling interest	(1,874		)	(7,766		)	(7,766		)
Loss on retirement of preferred stock	(1,901		)	—			—
Valuation allowance	33			(13,542		)	(2,693		)
Other	154			132			384
Income tax expense	$	34,239		$	2,824		$	33,752
Statutory tax rate	35.0		%	35.0		%	35.0		%

The components of the deferred tax assets and liabilities as of December 31, 2015 and 2014 were as follows:

Table 10.3



	As of December 31,
	2015			2014
	(in thousands)
Deferred tax assets:
Basis differences related to financial derivatives	$	28,395		$	30,921
Basis differences related to securities	2,866			4,218
Unrealized losses on available-for-sale securities	5,660			—
Allowance for losses	2,297			3,545
Stock-based compensation	2,833			2,443
Capital loss carryforwards and other than temporary impairment	2,099			2,105
Valuation allowance	(2,099		)	(2,105		)
Other	1,444			1,205
Total deferred tax assets	43,495			42,332
Deferred tax liability:
Unrealized gains on available-for-sale securities	—			8,448
Basis difference in subsidiary	300			195
Other	279			298
Total deferred tax liability	579			8,941
Net deferred tax asset	$	42,916		$	33,391

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 as of December 31, 2015 and 2014, 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, $0.1 million and $63.7 million of capital loss carryforwards expired on December 31, 2015 and 2014, respectively, and Farmer Mac removed $39,000 and $22.3 million, respectively, 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, 2015, the amount of capital loss carryforwards was $5.9 million. These capital loss carryforwards will expire in 2016.

As of December 31, 2015 and 2014, Farmer Mac did not identify any uncertain tax positions.

The following table presents the changes in unrecognized tax benefits for the years ended December 31, 2015, 2014, and 2013:

Table 10.4



	For the Year Ended December 31,
	2015		2014			2013
	(in thousands)
Beginning balance	$	—	$	1,148		$	1,046
Decreases based on tax positions related to prior years	—		(1,148		)	—
Increases based on tax positions related to current year	—		—			102
Ending balance	$	—	$	—		$	1,148

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 2013 through 2015 remain subject to examination.