14.	Income Taxes

Net deferred tax assets and liabilities as of December 31, 2012 and 2011 are as follows:

	2012			2011
	(In thousands)

Total deferred tax assets	$	997,784		$	683,645
Total deferred tax liabilities		(44,350	)		(86,490	)

Net deferred tax asset before valuation allowance		953,434			597,155
Valuation allowance		(965,987	)		(608,761	)
Net deferred tax liability	$	(12,553	)	$	(11,606	)

The components of the net deferred tax liability as of December 31, 2012 and 2011 are as follows:

	2012			2011
	(In thousands)

Convertible debentures	$	(3,470	)	$	(15,785	)
Net operating loss		866,700			506,614
Loss reserves		55,615			60,478
Unrealized (appreciation) depreciation in investments		(14,448	)		(42,009	)
Mortgage investments		14,602			18,944
Deferred compensation		13,288			17,447
Premium deficiency reserves		25,823			47,186
Loss due to "other than temporary" impairments		1,088			11,068
Other, net		(5,764	)		(6,788	)

Net deferred tax asset before valuation allowance		953,434			597,155
Valuation allowance		(965,987	)		(608,761	)
Net deferred tax liability	$	(12,553	)	$	(11,606	)

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 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. During 2012, our deferred tax valuation allowance was increased due to a decrease in the deferred tax liability related to $80.1 million of losses that were 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:

	2012			2011			2010
	(In thousands)

Benefit from income taxes	$	(330,740	)	$	(196,835	)	$	(145,334	)
Change in valuation allowance		329,175			198,428			149,669

(Benefit from) provision for income taxes	$	(1,565	)	$	1,593		$	4,335

The increase in the valuation allowance that was included in other comprehensive income was $28.1 million, zero, and $22.2 million for the years ended December 31, 2012, 2011 and 2010, respectively. The total valuation allowance as of December 31, 2012, December 31, 2011 and December 31, 2010 was $966.0 million, $608.8 million and $410.3 million, respectively.

Giving full effect to the carryback of net operating losses for federal income tax purposes, we have approximately $2,477 million of net operating loss carryforwards on a regular tax basis and $1,595 million of net operating loss carryforwards for computing the alternative minimum tax as of December 31, 2012. Any unutilized carryforwards are scheduled to expire at the end of tax years 2029 through 2032.

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

	2012			2011			2010
	(In thousands)

Current	$	(4,251	)	$	598		$	1,618
Deferred		90			(945	)		(19	)
Other		2,596			1,940			2,736

(Benefit from) provision for income taxes	$	(1,565	)	$	1,593		$	4,335

We received $7.0 million and $289.1 million in federal income tax refunds in 2012 and 2010, respectively. Proceeds received in 2010 were primarily from the carryback of 2009 losses.

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

	2012		2011			2010


Federal statutory income tax benefit rate	(35.0)	%		(35.0)	%		(35.0)	%
Valuation allowance	35.4			41.0			41.6
Tax exempt municipal bond interest	(0.8)			(5.4)			(10.5)
Other, net	0.2			(0.3)			5.1

Effective income tax (benefit) rate	(0.2)	%		0.3	%		1.2	%

The Internal Revenue Service ("IRS") completed examinations of our federal income tax returns for the years 2000 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, when computed on the amount of the assessment, is substantial. Depending on the outcome of this matter, 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 to the United States Department of the Treasury related to this assessment. In August 2010, we reached a tentative settlement agreement with the IRS which was not finalized. We currently expect to receive a statutory notice of deficiency (commonly referred to as a "90-day letter") for the disputed amounts after the first quarter of 2013. We would then be required to litigate their validity in order to avoid payment to the IRS of the entire amount assessed. Any such litigation could be lengthy and costly in terms of legal fees and related expenses. We continue to believe that our previously recorded tax provisions and liabilities 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."

In March 2012, we received a Revenue Agent's Report from the IRS related to the examination of our federal income tax returns for the years 2008 and 2009. In January 2013, we received a Revenue Agent's Report from the IRS related to the examination of our federal income tax return for the year 2010. The adjustments that are proposed by the IRS are temporary in nature and will 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
	2012			2011		2010
				(In thousands)

Balance at beginning of year	$	110,080		$	109,282	$	91,117
Additions based on tax positions related to the current year		-			-		-
Additions for tax positions of prior years		511			798		18,165
Reductions for tax positions of prior years		(4,041	)		-		-
Settlements		(2,000	)		-		-
Balance at end of year	$	104,550		$	110,080	$	109,282

The total amount of the unrecognized tax benefits, related to our aforementioned REMIC issue, that would affect our effective tax rate is $92.0 million. We recognize interest accrued and penalties related to unrecognized tax benefits in income taxes. During 2012, we recognized $(1.4) million in interest. As of December 31, 2012 and 2011, we had $25.3 million and $26.7 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.