14.	Income taxes

Net deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows:

	2011			2010
	(In thousands)

Total deferred tax assets	$	683,645		$	651,568
Total deferred tax liabilities		(86,490	)		(249,989	)

Net deferred tax asset before valuation allowance		597,155			401,579
Valuation allowance		(608,761	)		(410,333	)
Net deferred tax liability	$	(11,606	)	$	(8,754	)

The components of the net deferred tax liability as of December 31, 2011 and 2010 are as follows:

	2011			2010
	(In thousands)

Convertible debentures	$	(15,785	)	$	(25,864	)
Net operating loss		506,614			432,827
Loss reserves		60,478			85,425
Unrealized (appreciation) depreciation in investments		(42,009	)		(31,379	)
Mortgage investments		18,944			17,934
Deferred compensation		17,447			19,080
Investments in joint ventures		(3,018	)		(165,598	)
Premium deficiency reserves		47,186			62,638
Loss due to "other than temporary" impairments		11,068			14,160
Other, net		(3,770	)		(7,644	)

Net deferred tax asset before valuation allowance		597,155			401,579
Valuation allowance		(608,761	)		(410,333	)
Net deferred tax liability	$	(11,606	)	$	(8,754	)

We review the need to adjust the deferred tax asset valuation allowance on a quarterly basis. We analyze several factors, among which are the severity and frequency of operating losses, our capacity for the carryback or carryforward of any losses, the expected occurrence of future income or loss and available tax planning alternatives. Based on our analysis and the level of cumulative operating losses, we have reduced our benefit from income tax through the recognition of a valuation allowance.

Beginning with the first quarter of 2009, any benefit from income taxes, relating to operating losses, has been reduced or eliminated by the establishment of a valuation allowance. During 2009, our deferred tax asset valuation allowance was reduced by the deferred tax liability related to $102.3 million of income that was recorded in other comprehensive income. During 2010, our deferred tax valuation allowance was increased due to a decrease in the deferred tax liability related to $63.5 million of losses that were recorded in other comprehensive income. During 2011, our deferred tax asset valuation allowance was reduced due to an increase in the deferred tax liability related to $2.3 million of income that was recorded in other comprehensive income. In the event of future operating losses, it is likely that the valuation allowance will be adjusted by any taxes recorded to equity for changes in other comprehensive income.

The effect of the change in valuation allowance on the benefit from income taxes was as follows:

	2011			2010			2009
	(In thousands)

Benefit from income taxes	$	(196,835	)	$	(145,334	)	$	(681,266	)
Change in valuation allowance		198,428			149,669			238,490

Tax provision (benefit)	$	1,593		$	4,335		$	(442,776	)

The increase in the valuation allowance that was included in other comprehensive income was zero, $22.2 million and zero for the years ended December 31, 2011, 2010 and 2009, respectively. The total valuation allowance as of December 31, 2011, December 31, 2010 and December 31, 2009 was $608.8 million, $410.3 million and $238.5 million, respectively.

Legislation enacted in 2009 expanded the carryback period for certain net operating losses from 2 years to 5 years. A total benefit for income taxes of $282.0 million was recorded during 2009 in the Consolidated Statement of Operations for the carryback of 2009 losses. The refund related to these benefits was received in the second quarter of 2010.

Giving full effect to the carryback of net operating losses for federal income tax purposes, we have approximately $1,448 million of net operating loss carryforwards on a regular tax basis and $582 million of net operating loss carryforwards for computing the alternative minimum tax as of December 31, 2011. The increase in net operating carryforwards from operating losses during 2011 was partially offset by a onetime inclusion of taxable income. The taxable income related to the cancellation of indebtedness triggered by the conclusion of bankruptcy proceedings for C-BASS, a joint venture investment. Any unutilized carryforwards are scheduled to expire at the end of tax years 2029 through 2031.

The following summarizes the components of the provision for (benefit from) income taxes:

	2011			2010			2009
	(In thousands)

Current	$	598		$	1,618		$	(621,170	)
Deferred		(945	)		(19	)		175,194
Other		1,940			2,736			3,200

Provision for (benefit from) income taxes	$	1,593		$	4,335		$	(442,776	)

We received zero, $289.1 million and $437.5 million in federal income tax refunds in 2011, 2010 and 2009, respectively. Proceeds received in 2010 were primarily from the carryback of 2009 losses. Proceeds received in 2009 were primarily from the redemption of tax and loss bonds. We did not own any tax and loss bonds at December 31, 2011, 2010, or 2009.

The reconciliation of the federal statutory income tax benefit rate to the effective income tax (benefit) rate is as follows:

	2011			2010			2009


Federal statutory income tax benefit rate		(35.0	) %		(35.0	) %		(35.0	) %
Valuation allowance		41.0			41.6			13.5
Tax exempt municipal bond interest		(5.4	)		(10.5	)		(3.6	)
Other, net		(0.3	)		5.1			-

Effective income tax (benefit) rate		0.3	%		1.2	%		(25.1	) %

The Internal Revenue Service (“IRS”) completed separate examinations of our federal income tax returns for the years 2000 through 2004 and 2005 through 2007 and issued assessments for unpaid taxes, interest and penalties related to our treatment of the flow-through income and loss from an investment in a portfolio of residual interests of Real Estate Mortgage Investment Conduits (“REMICs”). This portfolio has been managed and maintained during years prior to, during and subsequent to the examination period. The IRS indicated that it did not believe that, for various reasons, we had established sufficient tax basis in the REMIC residual interests to deduct the losses from taxable income. The IRS assessment related to the REMIC issue is $190.7 million in taxes and penalties. There would also be applicable interest, which may be substantial. Additional state income taxes along with any applicable interest may become due when a final resolution is reached and could also be substantial. We appealed these assessments within the IRS and, in 2007, we made a payment of $65.2 million with the United States Department of the Treasury related to this assessment. In August 2010, we reached a tentative settlement agreement with the IRS. Because net operating losses that we incurred in 2009 were carried back to taxable years that were included in the settlement agreement, it was subject to review by the Joint Committee on Taxation of Congress. Following that review, the IRS indicated that it is reconsidering the terms of the settlement. We are attempting to address the IRS' concerns, but there is a risk that we may not be able to settle the proposed adjustments with the IRS or, alternatively, that the terms of any final settlement will be more costly to us than the currently proposed settlement. In the event that we are unable to reach any settlement of the proposed adjustments, we would be required to litigate their validity in order to avoid a full concession to the IRS. Any such litigation could be lengthy and costly in terms of legal fees and related expenses. We adjusted our tax provision and liabilities for the effects of the tentative settlement agreement in 2010. The IRS' reconsideration of the terms of the settlement agreement did not change our belief that the previously recorded items are appropriate. However, we would need to make appropriate adjustments, which could be material, to our tax provision and liabilities if our view of the probability of success in this matter changes, and the ultimate resolution of this matter could have a material negative impact on our effective tax rate, results of operations, cash flows and statutory capital. In this regard, see Note 1 – “Nature of business -Capital.”

The IRS is currently conducting an examination of our federal income tax returns for the years 2008 and 2009, which is scheduled to be completed in 2012. The adjustments that are currently proposed by the IRS are temporary in nature and would have no material effect on the financial statements.

Under current guidance, when evaluating a tax position for recognition and measurement, an entity shall presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. The interpretation adopts a benefit recognition model with a two-step approach, a more-likely-than-not threshold for recognition and derecognition, and a measurement attribute that is the greatest amount of benefit that is cumulatively greater than 50% likely of being realized. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Unrecognized tax benefits
	2011		2010		2009
	(In thousands)

Balance at beginning of year	$	109,282	$	91,117	$	87,965
Additions based on tax positions related to the current year		-		-		258
Additions for tax positions of prior years		798		18,165		2,894
Reductions for tax positions of prior years		-		-		-
Settlements		-		-		-
Balance at end of year	$	110,080	$	109,282	$	91,117

The total amount of the unrecognized tax benefits that would affect our effective tax rate is $97.5 million. We recognize interest accrued and penalties related to unrecognized tax benefits in income taxes. During 2011, we recognized $0.8 million in interest. As of December 31, 2011 and 2010, we had $26.7 million and $25.9 million of accrued interest related to uncertain tax positions, respectively. The statute of limitations related to the consolidated federal income tax return is closed for all years prior to 2000. Although the IRS is reconsidering the terms of our settlement agreement with them, as discussed above, if approved our total amount of unrecognized tax benefits would be reduced by $104.0 million during 2012, while after taking into account prior payments and the effect of available NOL carrybacks, any net cash outflows would approximate $23 million.