Income Taxes (As Restated)

For the years ended December 31, 2016, 2015, and 2014, the Company recorded income tax expense (benefit) of $44.0 million, $(141.2) million and $(9.0) million, respectively. The increase in income tax expense for the year ended December 31, 2016 as compared to income tax benefit for the year ended December 31, 2015 results primarily from an increase in the valuation allowance as discussed further below, partially offset by the increase in loss before income taxes. 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 expense (benefit) consists of the following components (in thousands):



	For the Years Ended December 31,
	2016			2015			2014
	(Restated)
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	93,902			(159,171		)	(33,788		)
State and local	17,472			(37,155		)	(1,620		)
Deferred income tax expense (benefit)	111,374			(196,326		)	(35,408		)
Total income tax expense (benefit)	$	44,040		$	(141,236	)	$	(9,012	)

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,
	2016			2015			2014
	(Restated)
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	343,200			—			—
State and local income tax	(28,558		)	(16,979		)	(1,649		)
Goodwill impairment	—			19,789			28,794
Penalties	—			—			5,140
Other	5,834			(2,497		)	472
Total income tax expense (benefit)	$	44,040		$	(141,236	)	$	(9,012	)

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



	December 31,
	2016			2015
	(Restated)
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	(346,199		)	(2,999		)
Total deferred tax assets, net of valuation allowance	192,706			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 (liabilities), net	$	(4,774	)	$	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
	(Restated)
Balance at beginning of year	$	2,999	$	3,096
Charges to income tax expense	343,200		—
Deductions	—		(97		)
Balance at end of year	$	346,199	$	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’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 considers both positive and negative evidence when evaluating the need for a valuation allowance which is highly judgmental and requires subjective weighting of such evidence.

In the Original Filing, the Company concluded that a partial valuation allowance was necessary at December 31, 2016. Subsequent to Original Filing, management discovered an error in the calculation of the valuation allowance on the deferred tax assets, which is discussed in further detail in Note 2. As a result of this error, it was determined that the valuation allowance should have been higher than what was originally recorded in the amount of $304.7 million. The Company has restated its consolidated financial statements as of and for the year ended December 31, 2016 to correct this error. The restatement reflects the corrected estimated net amount of deferred tax assets that are considered by management to be recoverable based on the amounts of deferred tax assets that are likely to be realized.

The cumulative impact of the non-cash adjustment to correct this error was a reduction in the net deferred tax assets balance of $299.9 million, an increase to deferred tax liabilities of $4.8 million and an increase in accumulated deficit of approximately $304.7 million as of December 31, 2016. Net loss increased for the year ended December 31, 2016 by $304.7 million, which increased the loss per share by $8.47.

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.