14.	Income Taxes

Net deferred tax assets and liabilities as of December 31, 2014 and 2013 are as follows:

	2014			2013
	(In thousands)

Total deferred tax assets	$	933,576		$	1,043,477
Total deferred tax liabilities		(33,789	)		(42,158	)

Net deferred tax asset before valuation allowance		899,787			1,001,319
Valuation allowance		(902,289	)		(1,004,256	)
Net deferred tax liability	$	(2,502	)	$	(2,937	)

The components of the net deferred tax liability as of December 31, 2014 and 2013 are as follows:

	2014			2013
	(In thousands)

Unearned premium reserves	$	12,296		$	(1,073	)
Benefit plans		(13,900	)		(26,111	)
Net operating loss		845,616			915,378
Loss reserves		23,069			36,236
Unrealized (appreciation) depreciation in investments		(2,800	)		29,230
Mortgage investments		15,346			13,450
Deferred compensation		11,955			15,994
Premium deficiency reserves		8,313			16,961
Other, net		(108	)		1,254

Net deferred tax asset before valuation allowance		899,787			1,001,319
Valuation allowance		(902,289	)		(1,004,256	)
Net deferred tax liability	$	(2,502	)	$	(2,937	)

We review the need to maintain 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, the expiration dates of the carryforwards, the cyclical nature of our operating results, and available tax planning strategies. Based on our analysis and the current level of cumulative operating losses, we continue to reduce our benefit from income tax through the recognition of a valuation allowance.

It is reasonably possible that the valuation allowance will be reversed in the foreseeable future. Specifically, if we continue to recognize meaningful levels of sustainable pre-tax income, it is likely that the valuation allowance would be reversed during 2015. In the period in which the valuation allowance is reversed, we would recognize a tax benefit which will increase our earnings for that period. In future years, after the valuation allowance has been reversed and until such time as our net operating loss carryforwards are exhausted or expired, our provision for income tax would substantially exceed the amount of cash tax payments.

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

	2014			2013			2012
	(In thousands)

Provision for (benefit from) income taxes before valuation allowance	$	91,607		$	(17,239	)	$	(330,740	)
Change in valuation allowance		(88,833	)		20,935			329,175

Provision for (benefit from) income taxes	$	2,774		$	3,696		$	(1,565	)

The change in the valuation allowance that was included in other comprehensive income was a decrease of $13.1 million, an increase of $17.3 million, and an increase of $28.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. The total valuation allowance as of December 31, 2014, December 31, 2013 and December 31, 2012 was $902.3 million, $1,004.2 million, and $966.0 million, respectively.

Giving full effect to the carryback of net operating losses for federal income tax purposes, we have approximately $2,417 million of net operating loss carryforwards on a regular tax basis and $1,529 million of net operating loss carryforwards for computing the alternative minimum tax as of December 31, 2014. 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:

	2014		2013		2012
	(In thousands)

Current	$	2,391	$	916	$	(4,251	)
Deferred		1		7		90
Other		382		2,773		2,596

Provision for (benefit from) income taxes	$	2,774	$	3,696	$	(1,565	)

We paid (received) $1.3 million, $0.1 million, and ($7.0) million in federal income tax in 2014, 2013 and 2012, respectively.

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

	2014			2013			2012


Federal statutory income tax rate		35.0	%		(35.0	)%		(35.0	) %
Valuation allowance		(34.9	)		45.4			35.4
Tax exempt municipal bond interest		(0.4	)		(3.7	)		(0.8	)
Other, net		1.4			1.3			0.2

Effective income tax rate		1.1	%		8.0	%		(0.2	)%

As previously disclosed, the Internal Revenue Service (“IRS”) completed examinations of our federal income tax returns for the years 2000 through 2007 and issued proposed assessments for 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. We appealed these assessments within the IRS and in August 2010, we reached a tentative settlement agreement with the IRS which was not finalized.

On September 10, 2014, we received Notices of Deficiency (commonly referred to as “90 day letters”) covering the 2000-2007 tax years. The Notices of Deficiency reflect taxes and penalties related to the REMIC matters of $197.5 million and at December 31, 2014, there would also be interest related to these matters of approximately $168.4 million. In 2007, we made a payment of $65.2 million to the United States Department of the Treasury which will reduce any amounts we would ultimately owe. The Notices of Deficiency also reflect additional amounts due of $261.4 million, which are primarily associated with the disallowance of the carryback of the 2009 net operating loss to the 2004-2007 tax years. We believe the IRS included the carryback adjustments as a precaution to keep open the statute of limitations on collection of the tax that was refunded when this loss was carried back, and not because the IRS actually intends to disallow the carryback permanently.

We filed a petition with the U.S. Tax Court contesting most of the IRS' proposed adjustments reflected in the Notices of Deficiency and the IRS has filed an answer to our petition which continues to assert their claim. Litigation to resolve our dispute with the IRS could be lengthy and costly in terms of legal fees and related expenses. We can provide no assurance regarding the outcome of any such litigation or whether a compromised settlement with the IRS will ultimately be reached and finalized. 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, 2014, those state taxes and interest would approximate $47.4 million. In addition, there could also be state tax penalties. Our total amount of unrecognized tax benefits as of December 31, 2014 is $106.2 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, available assets and statutory capital. In this regard, see Note 1 – “Nature of Business – Capital-GSEs.”

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. In October 2014, we received a Revenue Agent’s Report from the IRS related to the examination of our federal income tax returns for the years 2011 and 2012. The results of these examinations had 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:

	2014		2013		2012
			(In thousands)

Balance at beginning of year	$	105,366	$	104,550	$	110,080
Additions based on tax positions related to the current year		-		-		-
Additions for tax positions of prior years		864		816		511
Reductions for tax positions of prior years		-		-		(4,041	)
Settlements		-		-		(2,000	)
Balance at end of year	$	106,230	$	105,366	$	104,550

The total amount of the unrecognized tax benefits, related to our aforementioned REMIC issue, that would affect our effective tax rate is $93.6 million. We recognize interest accrued and penalties related to unrecognized tax benefits in income taxes. During 2014, we recognized $0.8 million in interest. As of December 31, 2014 and 2013, we had $26.9 million and $26.1 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. It is reasonably possible that our 2000-2007 federal tax case will be resolved, other than through litigation. If it is resolved under terms similar to our previous settlement agreement, our total unrecognized tax benefits would be reduced by $106.2 million during 2015. After taking into account prior payments and the effect of available net operating loss carrybacks, any net cash outflows would approximate $25 million.