Fannie Mae 2004 Annual Report Download - page 123

receivable from tax authorities. The provision for income taxes does not include the tax effect related to
adjustments recorded in AOCI.
Our effective income tax rate, excluding the provision for taxes related to extraordinary amounts and the
cumulative effect of change in accounting principle, was reduced below our 35% statutory rate to 17%, 24%
and 18% in 2004, 2003 and 2002, respectively. The difference in our statutory rate and effective tax rate is
primarily due to the tax benefits we receive from our investments in LIHTC partnerships that help in
supporting our mission. As disclosed in “Notes to Consolidated Financial Statements—Note 11, Income
Taxes,” our effective tax rate would have been 32%, 31% and 30% in 2004, 2003 and 2002, respectively, had
we not received the tax benefits from our investments in LIHTC partnerships.
The variance in our effective income tax rate over the past three years is primarily due to the combined effect
of fluctuations in our pre-tax income, which affects the relative tax benefit of tax-exempt income and tax
credits, and an increase in the actual dollar amount of tax credits. Our effective income tax rate may vary
from period to period, depending on, among other factors, our earnings and the level of tax credits. We expect
tax credits resulting from our investments in LIHTC partnerships to grow in the future, which is likely to
reduce our effective tax rate. The extent to which we are able to use all of the tax credits generated by existing
or future investments in housing tax credit partnerships to reduce our federal income tax liability will depend
on the amount of our future federal income tax liability, which we cannot predict with certainty.
We recorded a net deferred tax asset of $6.1 billion and $4.1 billion as of December 31, 2004 and 2003,
respectively. We have not recorded a valuation allowance against our net deferred tax asset as we anticipate it
is more likely than not that the results of future operations will generate sufficient taxable income to realize
the entire tax benefit.
Extraordinary Gains (Losses), Net of Tax Effect
When we determine that we are the primary beneficiary of a VIE under FIN 46R, we are required to
consolidate the assets and liabilities of the VIE in our consolidated financial statements at fair value. Effective
with the adoption of FIN 46R, any difference between the then fair value and the previous carrying amount of
our interests in the VIE is recorded as an extraordinary gain (loss), net of tax effect, in our consolidated
statements of income. As a result of our adoption of FIN 46R in 2003, we recorded an extraordinary gain, net
of tax effect, of $195 million due to the consolidation of VIEs.
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