Fannie Mae 2004 Annual Report Download - page 320

11. Income Taxes
We operate as a government-sponsored enterprise. We are subject to federal income tax, but we are exempt
from state and local income taxes. The following table displays the components of our provision for federal
income taxes for the years ended December 31, 2004, 2003 and 2002.
2004 2003 2002
For the Year Ended December 31,
(Restated)(Restated)
(Dollars in millions)
Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,651 $3,216 $ 2,935
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,627) (782) (2,095)
Provision for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,024 $2,434 $ 840
The table above excludes the income tax effect of our minimum pension liability, unrealized gains and losses
of AFS securities and guaranty assets and buy-ups, since the tax effect of those items is recognized directly in
“Stockholders’ equity.” Stockholders’ equity increased by $500 million and $3.3 billion for the years ended
December 31, 2004 and 2003, respectively, and decreased by $3.5 billion for the year ended December 31,
2002, as a result of these tax effects. Additionally, the table above does not reflect the tax impact of
extraordinary gains (losses) or cumulative effect of change in accounting principle as these amounts are
recorded in the consolidated statements of income, net of tax effect. We recorded a tax benefit of $4 million
for the year ended December 31, 2004 and tax expense of $103 million for the year ended December 31, 2003
related to extraordinary gains (losses). In addition, for the year ended December 31, 2003, we recorded tax
expense of $20 million related to the cumulative effect of change in accounting principle.
The following table displays the difference between our effective tax rates and the statutory federal tax rates
for the years ended December 31, 2004, 2003 and 2002.
2004 2003 2002
(Restated)(Restated)
For the Year Ended December 31,
Statutory corporate tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0%
Tax-exempt interest and dividends received deductions . . . . . . . . . . . . . . . . . . (5.4) (3.0) (6.9)
Equity investments in affordable housing projects . . . . . . . . . . . . . . . . . . . . . (14.5) (7.4) (11.8)
Penalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 — —
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.3) (0.9) 1.4
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.2% 23.7% 17.7%
The effective tax rate is the provision for federal income taxes, excluding the tax effect of extraordinary items
and cumulative effect of change in accounting principle, expressed as a percentage of income before federal
income taxes. The effective tax rate for the years ended December 31, 2004, 2003 and 2002 is different from
the federal statutory rate of 35% primarily due to the benefits of our holdings of tax-exempt investments as
well as our investments in housing projects eligible for the low-income housing tax credit and other equity
investments that provide tax credits. In 2004, offsetting these decreases to the effective tax rate was the tax
impact of the $400 million civil penalty agreed to with OFHEO and the SEC that is non-deductible for tax
purposes. The higher effective rate in 2003 as compared to 2004 and 2002 relates to our higher earnings in
2003.
F-69
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)