14.	Income Taxes

Net deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:

	2013			2012
	(In thousands)

Total deferred tax assets	$	1,043,477		$	997,784
Total deferred tax liabilities		(42,158	)		(44,350	)

Net deferred tax asset before valuation allowance		1,001,319			953,434
Valuation allowance		(1,004,256	)		(965,987	)
Net deferred tax liability	$	(2,937	)	$	(12,553	)

The components of the net deferred tax liability as of December 31, 2013 and 2012 are as follows:

	2013			2012
	(In thousands)

Benefit plans	$	(26,111	)	$	77
Net operating loss		915,378			866,700
Loss reserves		36,236			55,615
Unrealized (appreciation) depreciation in investments		29,230			(14,448	)
Mortgage investments		13,450			14,602
Deferred compensation		15,994			13,288
Premium deficiency reserves		16,961			25,823
Other, net		181			(8,223	)

Net deferred tax asset before valuation allowance		1,001,319			953,434
Valuation allowance		(1,004,256	)		(965,987	)
Net deferred tax liability	$	(2,937	)	$	(12,553	)

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 existence and current level of taxable operating income, the expected occurrence of future income or loss and available tax planning strategies. Based on our analysis and the level of cumulative operating losses, we continue to reduce our benefit from income tax through the recognition of a valuation allowance.

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

	2013			2012			2011
	(In thousands)

Benefit from income taxes	$	(17,239	)	$	(330,740	)	$	(196,835	)
Change in valuation allowance		20,935			329,175			198,428

Provision for (benefit from) income taxes	$	3,696		$	(1,565	)	$	1,593

The increase in the valuation allowance that was included in other comprehensive income was $17.3 million, $28.1 million and zero for the years ended December 31, 2013, 2012 and 2011, respectively. The total valuation allowance as of December 31, 2013, December 31, 2012 and December 31, 2011 was $1,004.2 million, $966.0 million and $608.8 million, respectively.

Giving full effect to the carryback of net operating losses for federal income tax purposes, we have approximately $2,616 million of net operating loss carryforwards on a regular tax basis and $1,731 million of net operating loss carryforwards for computing the alternative minimum tax as of December 31, 2013. Any unutilized carryforwards are scheduled to expire at the end of tax years 2029 through 2033.

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

	2013		2012			2011
	(In thousands)

Current	$	916	$	(4,251	)	$	598
Deferred		7		90			(945	)
Other		2,773		2,596			1,940

Provision for (benefit from) income taxes	$	3,696	$	(1,565	)	$	1,593

We paid (received) $0.1 million, ($7.0) million and zero in federal income tax in 2013, 2012 and 2011, respectively.

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

	2013			2012			2011

Federal statutory income tax benefit rate		(35.0	)%		(35.0	)%		(35.0	) %
Valuation allowance		45.4			35.4			41.0
Tax exempt municipal bond interest		(3.7	)		(0.8	)		(5.4	)
Other, net		1.3			0.2			(0.3	)

Effective income tax rate		8.0	%		(0.2	)%		0.3	%

The Internal Revenue Service (“IRS”) completed examinations of our federal income tax returns for the years 2000 through 2007 and issued proposed 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”). 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 proposed assessments for taxes and penalties related to these matters is $197.5 million and at December 31, 2013, there would also be interest of approximately $154.5 million. In addition, depending on the outcome of this matter, additional state income taxes and state interest may become due when a final resolution is reached. As of December 31, 2013, those state taxes and interest would approximate $46.0 million. In addition, there could also be state tax penalties.

Our total amount of unrecognized tax benefits as of December 31, 2013 is $105.4 million, which represents the tax benefits generated by the REMIC portfolio included in our tax returns that we have not taken benefit for in our financial statements, including any related interest. 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.”

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. The IRS is pursuing this matter in full and absent a settlement we currently expect to be in litigation on this matter in 2014. Any such litigation could be lengthy and costly in terms of legal fees and related expenses.

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
	2013		2012			2011
	(In thousands)

Balance at beginning of year	$	104,550	$	110,080		$	109,282
Additions based on tax positions related to the current year		-		-			-
Additions for tax positions of prior years		816		511			798
Reductions for tax positions of prior years		-		(4,041	)		-
Settlements		-		(2,000	)		-
Balance at end of year	$	105,366	$	104,550		$	110,080

The total amount of the unrecognized tax benefits, related to our aforementioned REMIC issue, that would affect our effective tax rate is $92.8 million. We recognize interest accrued and penalties related to unrecognized tax benefits in income taxes. During 2013, we recognized $0.8 million in interest. As of December 31, 2013 and 2012, we had $26.1 million and $25.3 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.