Fannie Mae 2006 Annual Report Download - page 283

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, 2006, 2005 and 2004.
2006 2005 2004
For the Year Ended
December 31,
(Dollars in millions)
Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 745 $ 874 $ 2,651
Deferred income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . (579) 403 (1,627)
Provision for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 166 $1,277 $ 1,024
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 $182 million and $2.4 billion for the years ended
December 31, 2006 and 2005, respectively, as a result of these tax effects. Additionally, the table above does
not reflect the tax impact of extraordinary gains (losses) as this amount is recorded in the consolidated
statements of income, net of tax effect. We recorded tax expense of $7 million and $29 million for the years
ended December 31, 2006 and 2005, respectively, and a tax benefit of $4 million for the year ended
December 31, 2004 related to extraordinary gains (losses).
The following table displays the difference between our effective tax rates and the statutory federal tax rates
for the years ended December 31, 2006, 2005 and 2004.
2006 2005 2004
For the Year Ended
December 31,
Statutory corporate tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0%
Tax-exempt interest and dividends-received deductions . . . . . . . . . . . . . . . . . . . . . . . . (6.0) (4.0) (5.4)
Equity investments in affordable housing projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25.0) (13.1) (14.5)
Penalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 2.4
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.1) (1.0) (0.3)
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9% 16.9% 17.2%
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, 2006, 2005 and 2004 is different from
the federal statutory rate of 35% primarily due to the benefits of our holdings of our investments in housing
projects eligible for the low-income housing tax credit and other equity investments that provide tax credits as
well as our holdings of tax-exempt investments. 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.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)