Income Taxes

For the years ended December 31, 2014, 2013 and 2012, the Company recorded income tax expense (benefit) of $(9.0) million, $159.4 million and $(13.3) million, respectively. The decrease in the income tax expense (benefit) for the year ended December 31, 2014 as compared to 2013 results primarily from the decrease in income (loss) before income taxes offset by the impact on income taxes for non-deductible expenses such as the impairment of goodwill. The increase in the income tax expense for the year ended December 31, 2013 as compared to 2012 results primarily from the increase in income before income taxes and the Company's presence starting in 2013 in new state jurisdictions that have higher state tax rates. The presence in these new state jurisdictions was driven by business and asset acquisitions in 2013.

Income tax expense (benefit) consists of the following components (in thousands):



	For the Years Ended December 31,
	2014			2013		2012
Current
Federal	$	25,417		$	54,093	$	8,376
State and local	979			7,840		680
Current income tax expense	26,396			61,933		9,056
Deferred
Federal	(33,788		)	84,974		(20,695		)
State and local	(1,620		)	12,444		(1,678		)
Deferred income tax expense (benefit)	(35,408		)	97,418		(22,373		)
Total income tax expense (benefit)	$	(9,012	)	$	159,351	$	(13,317	)

Income tax expense (benefit) at the Company’s effective tax rate differed from the statutory tax rate as follows (in thousands):



	For the Years Ended December 31,
	2014			2013		2012
Income (loss) before income taxes	$	(119,340	)	$	412,818	$	(35,451	)

Tax provision at statutory tax rate of 35%	(41,769		)	144,486		(12,408		)
Effect of:
Goodwill impairment	28,794			—		—
State and local income tax	(1,649		)	12,828		(1,266		)
Permanent acquisition costs	—			—		610
Contingent earn-out payments	—			1,680		—
Penalties	5,140			202		(89		)
Other	472			155		(164		)
Total income tax expense (benefit)	$	(9,012	)	$	159,351	$	(13,317	)

The following table summarizes the components of deferred tax assets and liabilities (in thousands):



	December 31,
	2014			2013
Deferred tax assets
Reverse loans	$	43,285		$	41,330
Intangible assets	30,701			19,929
Accrued legal fees	28,916			—
Excess servicing spread liability	26,610			—
Accrued expenses	26,202			26,260
Servicer and protective advances	24,580			7,940
Curtailment liability	24,173			21,635
Mandatory call obligation	20,596			20,169
Other	39,283			43,859
Total deferred tax assets	264,346			181,122
Valuation allowance	(3,096		)	(7,453		)
Total deferred tax assets, net of valuation allowance	261,250			173,669
Deferred tax liabilities
Servicing rights	(182,560		)	(143,087		)
Net investment in residential loans	(57,906		)	(53,715		)
Goodwill	(48,130		)	(35,080		)
Discount on Convertible Notes	(24,799		)	(27,969		)
Intangible assets	(14,480		)	(12,369		)
Other	(19,992		)	(23,056		)
Total deferred tax liabilities	(347,867		)	(295,276		)
Deferred tax liability, net	$	(86,617	)	$	(121,607	)

The following table summarizes the activity in the valuation allowance on deferred tax assets (in thousands):



	For the Years Ended December 31,
	2014			2013			2012
Balance at beginning of year	$	7,453		$	30,712		$	29,899
Charges to income tax expense	24			72			894
Deductions	(4,381		)	(23,331		)	(81		)
Balance at end of year	$	3,096		$	7,453		$	30,712

The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if it is determined, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. If the Company did conclude that a valuation allowance was required, the resulting loss could have a material adverse effect on its financial condition and results of operations.

The valuation allowance recorded at December 31, 2012 related primarily to certain capital loss carryforwards, net operating loss carryforwards, tax basis differences for real estate owned and non-deductible interest for which the Company concluded it was more likely than not that these items would not be realized in the ordinary course of operations before they expire. During the year ended December 31, 2013, pre-REIT capital loss carryforwards expired. As such, these carryforwards and the related valuation allowance were written off. There was no impact to the Company’s effective tax rate as a result of this change in the valuation allowance. In addition, the Company wrote off the valuation allowance related to certain non-deductible interest and the valuation allowance related to certain state tax net operating losses. The net impact of these changes had an immaterial effect on the Company’s effective tax rate for the year ended December 31, 2013. During the year ended December 31, 2014, the Company lost the ability to claim the tax basis difference related to certain real estate owned due to the expiration of the statute of limitations and the liquidation of these properties. As such, the basis difference and the related valuation allowance were written off. There was no impact to the Company's effective tax rate during the year ended December 31, 2014 as the result of this change in the valuation allowance. The valuation allowance at December 31, 2014 is primarily attributable to net operating loss carry forwards where the Company believes it is more likely than not that these deferred tax assets will not be realized in the ordinary course of operations before they expire. Other than for those deferred tax assets that have a valuation allowance, management believes it is more likely than not that forecasted income together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets.

At December 31, 2014, the Company had net operating loss carryforwards of $8.9 million that will expire in 2028 through 2031.

Uncertain Tax Positions

The Company recognizes tax benefits in accordance with the accounting guidance concerning uncertainty in income taxes. This guidance establishes a more-likely-than-not recognition threshold that must be met before a tax benefit can be recognized in the financial statements.

A reconciliation of the beginning and ending balances of the total liability for unrecognized tax benefits is as follows (in thousands):



	For the Years Ended December 31,
	2014		2013			2012
Gross unrecognized tax benefits at the beginning of the year	12,523		$	17,537		$	9,026
Increases (reductions) related to prior year tax positions	(1,571	)	(5,921		)	8,602
Increases related to current year tax positions	1,377		2,044			1,255
Reductions as a result of a lapse of the statute of limitations	(3,624	)	(1,137		)	(1,346		)
Gross unrecognized tax benefits at the end of the year	8,705		$	12,523		$	17,537

The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized is $4.9 million and $6.1 million at December 31, 2014 and 2013, respectively. For the years ended December 31, 2014, 2013 and 2012, income tax expense includes $1.8 million, $0.7 million and $1.0 million, respectively, for interest and penalties accrued on the liability for unrecognized tax benefits. At December 31, 2014 and 2013, accrued interest and penalties were $6.2 million and $8.0 million, respectively, which are included in payables and accrued liabilities on the consolidated balance sheets.

The Company’s tax years that remain subject to examination by the IRS are 2011 through 2014 and by various states are 1999 through 2014.