Income Taxes

For the years ended December 31, 2016, 2015 and 2014, the Company recorded income tax benefit of $260.7 million, $141.2 million and $9.0 million, respectively. The increase in income tax benefit for the year ended December 31, 2016 as compared to 2015 results primarily from the increase in loss before income taxes, partially offset by the valuation allowance. The increase in income tax benefit for the year ended December 31, 2015 as compared to 2014 results primarily from the increase in loss before income taxes offset by the impact on income taxes for non-deductible expenses such as the impairment of goodwill of the Reverse Mortgage reporting unit.

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



	For the Years Ended December 31,
	2016			2015			2014
Current
Federal	$	(69,204	)	$	46,331		$	25,417
State and local	1,870			8,759			979
Current income tax expense (benefit)	(67,334		)	55,090			26,396
Deferred
Federal	(153,598		)	(159,171		)	(33,788		)
State and local	(39,728		)	(37,155		)	(1,620		)
Deferred income tax benefit	(193,326		)	(196,326		)	(35,408		)
Total income tax benefit	$	(260,660	)	$	(141,236	)	$	(9,012	)

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



	For the Years Ended December 31,
	2016			2015			2014
Loss before income taxes	$	(789,818	)	$	(404,426	)	$	(119,340	)

Tax provision at statutory tax rate of 35%	(276,436		)	(141,549		)	(41,769		)
Effect of:
Valuation allowance	34,000			—			—
State and local income tax	(24,058		)	(16,979		)	(1,649		)
Goodwill impairment	—			19,789			28,794
Penalties	—			—			5,140
Other	5,834			(2,497		)	472
Total income tax benefit	$	(260,660	)	$	(141,236	)	$	(9,012	)

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



	December 31,
	2016			2015
Deferred tax assets
Net operating losses	$	112,553		$	36,014
Goodwill	111,865			—
Reverse loans	64,899			46,906
Servicer and protective advances	49,301			37,751
Curtailment liability	44,461			36,086
Intangible assets	32,750			37,013
Accrued expenses	25,022			23,824
Mandatory call obligation	19,695			19,768
Accrued legal contingencies and settlements	13,184			10,284
Servicing rights related liabilities	—			45,063
Other	65,175			48,668
Total deferred tax assets	538,905			341,377
Valuation allowance	(41,499		)	(2,999		)
Total deferred tax assets, net of valuation allowance	497,406			338,378
Deferred tax liabilities
Servicing rights	(135,125		)	(151,163		)
Net investment in residential loans	(33,126		)	(34,967		)
Discount on Convertible Notes	(12,515		)	(19,743		)
Intangible assets	(3,797		)	(9,723		)
Goodwill	—			(1,498		)
Other	(12,917		)	(13,234		)
Total deferred tax liabilities	(197,480		)	(230,328		)
Deferred tax assets, net	$	299,926		$	108,050

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



	For the Years Ended December 31,
	2016		2015
Balance at beginning of year	$	2,999	$	3,096
Charges to income tax expense	38,500		—
Deductions	—		(97		)
Balance at end of year	$	41,499	$	2,999

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. The Company concluded that a partial valuation allowance was necessary at December 31, 2016. In the future, if the Company concludes that a valuation allowance is required on all of the Company's deferred tax assets, the resulting expense could have a material adverse effect on its financial condition and results of operations.

The Company’s evaluation focused on identifying significant, objective evidence that it will more likely than not be able to realize its deferred tax assets in the future. The Company has concluded that the combination of future reversals of existing taxable temporary differences and expected future earnings exclusive of temporary differences in the next five years is not sufficient objective evidence to conclude that a valuation allowance on the deferred tax assets is not required. As a result, the Company recorded a partial valuation allowance against its deferred tax assets during the year ended December 31, 2016.

The Company considers both positive and negative evidence when evaluating the need for a valuation allowance. For the quarter ended December 31, 2016, the Company considered as significant negative evidence the existence of a three-year cumulative loss. While the Company had a three-year cumulative loss as of December 31, 2015, it did not at that point have a tax NOL carryforward that could not be carried back to prior years. This is no longer the case as of December 31, 2016, as the Company has exhausted its ability to carry net operating losses back to prior periods under existing law and can only carry these tax NOLs forward.

After adjusting for the future reversals of temporary differences and expected five years of earnings exclusive of temporary differences, the Company determined that it was not more likely than not that approximately $100.0 million of gross deferred tax assets would be realized, and therefore recorded a valuation allowance of $38.5 million.

The valuation allowance decreased marginally during the year ended December 31, 2015, as a result of the write-off of the net operating loss attributable to Marix upon its deconsolidation. There was no impact to the Company's effective tax rate during the year ended December 31, 2015 as the result of this change in the valuation allowance. The valuation allowance at December 31, 2015 is primarily attributable to net operating loss carryforwards 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 for which the Company has a valuation allowance, management believes it is more likely than not that it will recover the remaining deferred tax assets.

At December 31, 2016, the Company had total gross operating loss carryforwards of $294.6 million, resulting in net tax carryforwards of $112.6 million that will expire in 2028 through 2036. In addition, at December 31, 2016 the Company had capital loss carryforwards of $8.2 million that will expire in 2021 and tax credit carryforwards of $3.7 million that will expire in 2036.

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 consolidated 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,
	2016			2015			2014
Balance at the beginning of the year	$	58,148		$	8,705		$	12,523
Increases (reductions) related to prior year tax positions ⁽¹⁾	(52,230		)	33,858			(1,571		)
Increases related to current year tax positions	910			17,650			1,377
Reductions as a result of a lapse of the statute of limitations	(1,414		)	(2,065		)	(3,624		)
Balance at the end of the year	$	5,414		$	58,148		$	8,705

__________

(1)

During the year ended December 31, 2015, the Company determined that a tax accounting method as employed was not more likely than not to be realized, and therefore derecognized the tax position and recorded an offsetting deferred tax asset related to servicing rights. The Company filed for an accounting method change with the IRS during the first quarter of 2016 and, as a result, this uncertain tax position was reversed.

The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was $2.9 million and $8.3 million at December 31, 2016 and 2015, respectively. For the years ended December 31, 2016, 2015 and 2014, income tax expense (benefit) included $(2.4) million, $0.2 million and $1.8 million, respectively, for interest and penalties accrued on the liability for unrecognized tax benefits. At December 31, 2016 and 2015, accrued interest and penalties were $4.0 million and $6.4 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 2012 through 2016 and by various states are 2001 through 2016.