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, 2011, 2010 and 2009 were as follows:



	For the Year Ended December 31,
	2011			2010			2009
	(in thousands)
Current income tax expense	$	24,736		$	14,321		$	16,902
Deferred income tax (benefit)/expense	(18,939		)	(524		)	35,615
Income tax expense	$	5,797		$	13,797		$	52,517

A reconciliation of tax at the statutory federal tax rate to the income tax expense for the years ended December 31, 2011, 2010 and 2009 is as follows:



	For the Year Ended December 31,
	2011			2010			2009
	(dollars in thousands)
Tax expense at statutory rate	$	15,627		$	23,274		$	53,241
Non-taxable dividend income	(2,116		)	(2,183		)	(1,934		)
Income from non-controlling interest	(7,766		)	(7,248		)	—
Valuation allowance	(254		)	(235		)	1,120
Other	306			189			90
Income tax expense	$	5,797		$	13,797		$	52,517
Statutory tax rate	35.0		%	35.0		%	35.0		%
Effective tax rate	13.0		%	20.7		%	34.5		%

The components of the deferred tax assets and liabilities as of December 31, 2011 and 2010 were as follows:



	As of December 31,
	2011			2010
	(in thousands)
Deferred tax assets:
Basis differences related to financial derivatives	$	45,517		$	27,518
Allowance for losses	6,131			7,040
Stock-based compensation	2,941			2,725
Capital loss carryforwards	39,399			37,887
Valuation allowance	(39,399		)	(37,887		)
Lower of cost or fair value adjustment on loans held for sale	—			3,110
Amortization of premiums on capital investments	1,220			2,987
Valuation allowance	(1,220		)	(2,987		)
Other	3,057			3,225
Total deferred tax assets	57,646			43,618
Deferred tax liability:
Basis differences related to securities	12,139			12,821
Unrealized gains on available-for-sale securities	42,738			9,841
Basis difference in subsidiary	2,916			4,789
Other	103			1,637
Total deferred tax liability	57,896			29,088
Net deferred tax (liability)/asset	$	(250	)	$	14,530

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 $40.6 million and $40.9 million as of December 31, 2011 and 2010, respectively, which was attributable to non-deductible capital losses 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. As of December 31, 2011, the amount of capital loss carryforwards was $112.2 million. Of these capital loss carryforwards, $106.2 million will expire in 2014, $0.1 million in 2015 and $5.9 million in 2016.

As of December 31, 2011 and 2010, both the recorded liability for uncertain tax positions and the corresponding deferred tax asset were $1.2 million and $1.5 million, respectively.

The following table presents the changes in unrecognized tax benefits for the years ended December 31, 2011, 2010 and 2009:



	For the Year Ended December 31,
	2011			2010		2009
	(in thousands)
Beginning balance	$	1,454		$	1,392	$	934
(Decreases)/increases based on tax positions related to current year	(279		)	62		458
Ending balance	$	1,175		$	1,454	$	1,392

The resolution of the unrecognized tax benefits presented above represents temporary differences and, therefore, would not result in a change to the Corporation's effective tax rate. As of December 31, 2011 and 2010, accrued interest payable and the associated interest expense related to unrecognized tax benefits was immaterial and is presented as a component of income taxes. Farmer Mac does not expect to be subject to, and has not recorded tax penalties. In addition, Farmer Mac does not expect any significant changes to occur in its unrecognized tax benefits within the next 12 months. Tax years 2008 through 2011 remain subject to examination.