Fannie Mae 2007 Annual Report Download - page 104

Provision for Federal Income Taxes
The provision for federal income taxes was a net benefit of $3.1 billion for 2007, reflecting a tax benefit from
our pre-tax loss for the year. In comparison, we recorded a provision for federal income taxes of $166 million
and $1.3 billion for 2006 and 2005, respectively. Our effective income tax rate, excluding the provision or
benefit for taxes related to extraordinary amounts, was 60%, 4% and 17% for 2007, 2006 and 2005,
respectively. The difference between our statutory income tax rate of 35% and our effective tax rate is
primarily due to the tax benefits we receive from our investments in LIHTC partnerships that help to support
our affordable housing mission. The variance in our effective income tax rate over the past three years is
primarily due to the effect of fluctuations in our pre-tax earnings, which affects the relative tax benefit of tax-
exempt income and tax credits. As disclosed in “Notes to Consolidated Financial Statements—Note 11,
Income Taxes,” our effective tax rate would have been 40%, 29% and 30% for 2007, 2006 and 2005,
respectively, if we had not received the tax benefits from our investments in LIHTC partnerships.
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 will depend on the amount of our future federal income tax liability. In
addition, our ability to use tax credits in any given year may be limited by the corporate alternative minimum
tax rules, which ensure that corporations pay at least a minimum amount of federal income tax annually.
Because of the net loss we recorded in 2007, there is an increased risk that we may not be able to fully utilize
these tax credits. We were not able to use all of the tax credits we received for 2007 and 2006 in the years the
credits were generated because our income tax liability, after applying all such credits, would have been
reduced below the minimum tax amount. We expect our effective tax rate to continue to vary significantly
from our 35% statutory rate, assuming we are able to use all of the tax credits generated. If we are limited in
our use of the tax credits related to our investments in LIHTC partnerships and we conclude that the economic
return from selling the investment is likely to be greater than the benefit we would receive from continuing to
hold these investments, we may also sell certain LIHTC investments, as we did in 2007.
We recorded net deferred tax assets of $13.0 billion and $8.5 billion as of December 31, 2007 and 2006,
respectively, arising to a large extent from differences in the timing of the recognition of derivatives fair value
gains and losses for financial statement and income tax purposes. We currently have not recorded a valuation
allowance against our net deferred tax assets as we anticipate it is more likely than not that the results of
future operations will generate sufficient taxable income to allow us to realize the entire tax benefit. If we
continue to experience losses or sustained significant decreases in our earnings, we may not be able to realize
all of our deferred tax assets, which would require that we establish a valuation allowance that could
materially adversely affect our earnings, financial condition and capital position.
BUSINESS SEGMENT RESULTS
We provide a more complete description of our business segments in “Part I—Item 1—Business—Business
Segments.” Results of our three business segments are intended to reflect each segment as if it were a stand-
alone business. We describe the management reporting and allocation process used to generate our segment
results in “Notes to Consolidated Financial Statements—Note 15, Segment Reporting.” During 2007, we
changed our methodology for the allocation of indirect administrative expenses, primarily the expenses related
to our corporate overhead functions, to align these expenses more closely to the corporate activities provided
for each segment. As a result of this change, our Single-Family segment is expected to absorb a higher
amount of indirect administrative costs. We summarize our segment results for 2007, 2006 and 2005 in the
tables below and provide a discussion of these results.
Single-Family Business
Our Single-Family business generated a net loss of $858 million in 2007, and net income of $2.0 billion and
$2.6 billion in 2006 and 2005, respectively. The primary sources of revenue for our Single-Family business is
guaranty fee income and trust management income. Other sources of revenue include technology and other fee
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