Income Taxes

The components of our consolidated income tax benefit from continuing operations are as follows:



	Year Ended December 31,
(In thousands)	2014			2013			2012
Current (benefit) provision	$	(26,575	)	$	352		$	(56,140	)
Deferred (benefit) provision	(825,843		)	(31,847		)	7,817
Total income tax benefit	$	(852,418	)	$	(31,495	)	$	(48,323	)

The reconciliation of taxes computed at the statutory tax rate of 35% to the benefit for income taxes on continuing operations is as follows:



	Year Ended December 31,
(In thousands)	2014			2013			2012
Provision (benefit) for income taxes computed at the statutory tax rate	$	142,504		$	(60,671	)	$	(95,350	)
Change in tax resulting from:
Tax-exempt municipal bond interest and dividends received deduction (net of proration)	(1,286		)	(1,494		)	(1,818		)
Foreign tax expense (benefit)	270			(1		)	54
State tax (benefit) expense	(693		)	1,460			4,002
Unrecognized tax expense (benefit)	407			1,696			(2,906		)
Deferred inventory adjustment related to fair value of derivatives and other financial instruments	—			—			(23,217		)
Valuation allowance	(995,008		)	24,546			71,072
Other, net	1,388			2,969			(160		)
Benefit for income taxes	$	(852,418	)	$	(31,495	)	$	(48,323	)

The significant components of our net deferred tax assets and liabilities from continuing operations are summarized as follows:



	December 31,
(In thousands)	2014		2013
DTAs:
Accrued expenses	$	60,858	$	74,968
Unearned premiums	82,800		50,779
PDR	780		625
NOL	475,095		628,573
Differences in fair value of derivative and other financial instruments	—		31,812
Rescission premium	3,151		5,964
State and Local NOL Carryforwards	34,851		33,095
Foreign tax credit carryforward	6,015		6,015
Depreciation	70		6,783
Partnership investments	74,179		74,569
Loss reserves	6,362		13,586
Outside basis difference of investment in subsidiary	14,084		—
Foreign currency	97		—
Alternative minimum tax credit carryforward	2,286		—
Other	37,878		31,547
Total DTAs	798,506		958,316
DTLs:
Deferred policy acquisition costs	4,203		10,410
Convertible and other long-term debt	38,750		47,579
Differences in fair value of derivative and other financial instruments	352		—
Net unrealized gain on investments	26,145		18,163
Foreign currency	—		18
Other	10,981		5,609
Total DTLs	80,431		81,779
Less: Valuation allowance	17,874		858,635
Net DTA	$	700,201	$	17,902

As of December 31, 2014, we recorded a net current income tax payable of approximately $132.8 million, which primarily consists of liabilities related to applying the standards of accounting for uncertainty in income taxes and a current federal income tax recoverable of approximately $3.5 million. Before consideration of uncertain tax positions, we have approximately $1.5 billion of U.S. NOL Carryforwards, $6.0 million of foreign tax credit carryforwards and approximately $2.3 million of alternative minimum tax credit carryforwards as of December 31, 2014. To the extent not utilized, the U.S. NOL Carryforwards will expire during tax years 2028 through 2032 and the foreign tax credit carryforwards will expire during tax years 2018 through 2020. The alternative minimum tax credit carryforwards have no expiration date. Certain entities within our consolidated group have also generated DTAs of approximately $34.9 million relating to state and local NOL Carryforwards, which if unutilized, will expire during various future tax periods.

Since December 31, 2010, when we initially concluded that a valuation allowance was required against substantially all of our existing net DTA, as required under the accounting standard regarding accounting for income taxes, we have continued to weigh the potential effect of positive and negative evidence at each balance sheet date, giving consideration as to whether that evidence is objectively verifiable and thus how much weight shall be given to that evidence. The primary negative evidence that has been considered has been our cumulative losses in recent years and potential stress scenarios with respect to our forecasts of future taxable income. We also consider positive evidence when assessing the need for a valuation allowance, such as future reversals of existing taxable temporary differences, future projections of taxable income, taxable income within the applicable carryback and carryforward periods, and potential tax planning strategies. The recognition of our DTA ultimately depends on the existence of sufficient taxable income of the appropriate character (ordinary income or capital gains) within the applicable carryback and carryforward periods provided under the tax law. Factors impacting the reversal of our valuation allowance include the continued improvement in operating results and increased certainty regarding our projected incurred losses, as discussed in more detail below, and our ability to sustain profitability over a significant time period in amounts that are sufficient to support a conclusion that it is more likely than not that all or a portion of our DTAs will be realized.

During 2013 and 2014, we experienced significant positive trends in our mortgage insurance portfolio and in our core operating results. These positive trends are objectively verifiable as evidenced by GAAP operating profitability, reductions in mortgage insurance defaults and claims submitted, and improvement in the composition of our insured portfolio. In December 2014, we executed an agreement of sale for our wholly-owned financial guaranty subsidiary, Radian Asset Assurance. Based on expected net proceeds of approximately $790 million, while the pending Radian Asset Assurance sale generated a discrete GAAP pre-tax loss of approximately $468 million during the fourth quarter of 2014, it also reduces uncertainty of future results related to potential future defaults on these exposures.

Although the accounting standard regarding accounting for income taxes indicates that cumulative losses are a strong indicator of negative evidence, it does not define this term or the length of time to consider when calculating a cumulative loss position. While not a bright line, three years (i.e., current year plus two preceding years) is typically considered a reasonable starting point. We calculate our cumulative loss position as the cumulative pre-tax earnings (loss) for the most recent three years, adjusted for permanent differences and changes in OCI. As of December 31, 2014, our cumulative loss position was approximately $16 million, which represents a significant decrease from the cumulative loss as of December 31, 2010, when the valuation allowance was first established, of approximately $2.8 billion.

In evaluating negative evidence, consideration was also given to the U.S. NOL Carryforward period which extends through the end of 2028. Based on management’s projections, including adverse scenarios considered in our sensitivity analysis, we expect to utilize the NOL Carryforward of approximately $1.5 billion within several years. Additionally, we currently have no Internal Revenue Code Section 382 (“Section 382”) or other limitations on our ability to utilize our existing NOL.

After analyzing all positive and negative evidence available as noted above, we believe there is significant positive, objectively verifiable evidence that outweighs all negative evidence and supports a conclusion that it is more-likely-than-not that substantially all of the Company’s DTAs will be realized. In evaluating the weight of evidence, we considered the concept of “core earnings” and the potential profitability of such earnings. Absent the uncertainty and conditions existing in previous years and given the ability to generate profits based on our improved book of business, forecasts related to our core business are significantly more positive, and more certain, than in prior years. In reaching our conclusions, we determined that certain non-insurance entities within the Group may continue to generate taxable losses on a separate company basis in the near term and may not be able to utilize certain state and local NOLs on their state and local tax returns. Therefore, we continue to believe that a valuation allowance of approximately $17.9 million with respect to DTAs relating to these state and local NOLs is appropriate.

In July 2013, the FASB issued an update to the accounting standard regarding income taxes. This update provides guidance concerning the balance sheet presentation of an unrecognized tax benefit when a Carryforward is available. This accounting standard requires an entity to present its DTAs for the Carryforwards net of its liability related to unrecognized tax benefits. A gross presentation will be required when the Carryforwards are not available under the tax law of the applicable jurisdiction or when the Carryforwards would not be used by the entity to settle any additional income taxes resulting from disallowance of the uncertain tax position. This update is effective for fiscal years and interim periods within such years beginning after December 15, 2013. We adopted this update in the first quarter of 2014. The adoption of this update did not affect the recognition or measurement of uncertain tax positions and did not have a significant impact on our consolidated financial statements or disclosures.

Our ability to fully use our tax assets such as NOLs and tax credit Carryforwards would be substantially limited if we experience an “ownership change” within the meaning of Section 382. Section 382 rules governing when a change in ownership occurs are complex and subject to interpretation; however, in general, an ownership change would occur if any five percent shareholders, as defined under Section 382, collectively increase their ownership by more than 50 percentage points over a rolling three-year period. As of December 31, 2014, we have not experienced an ownership change under Section 382. However, if we were to experience a change in ownership under Section 382 in a future period, then we may be limited in our ability to fully utilize our NOL and tax credit Carryforwards in future periods.

On October 8, 2009, we adopted the Plan, which, as amended, was approved by our stockholders at our 2010 and 2013 annual meetings. We also adopted the Bylaw Amendment and at our 2010 annual meeting, our stockholders approved the Charter Amendment, which our stockholders reapproved at our 2013 annual meeting. The Plan, the Bylaw Amendment and the Charter Amendment were implemented in order to protect our ability to utilize our NOLs and other tax assets and prevent an “ownership change” under U.S. federal income tax rules by restricting or discouraging certain transfers of our common stock that would: (i) create or result in a person becoming a five-percent shareholder under Section 382; or (ii) increase the stock ownership of any existing five-percent shareholder under Section 382.

We are contesting adjustments resulting from the examination by the IRS of our 2000 through 2007 consolidated federal income tax returns. The IRS opposes the recognition of certain tax losses and deductions that were generated through our investment in a portfolio of non-economic REMIC residual interests and proposed adjustments denying the associated tax benefits of these items. We appealed the proposed adjustments to Appeals and made “qualified deposits” with the U.S. Treasury of approximately $85 million in June 2008 relating to the 2000 through 2004 tax years and approximately $4 million in May 2010 relating to the 2005 through 2007 tax years in order to avoid the accrual of above-market-rate interest with respect to the proposed adjustments.

We made several attempts to reach a compromised settlement with Appeals, but in January 2013, we were notified that Appeals had rejected our latest settlement offer and planned to issue formal Notices of Deficiency (known as “90-day letters”). On September 4, 2014, we received Notices of Deficiency covering the 2000 through 2007 tax years that assert unpaid taxes and penalties related to the REMIC matters of approximately $157 million and exclude any potential benefit related to our NOL carryback ability. As of December 31, 2014, there also would be interest of approximately $115 million related to these matters. Depending on the outcome, additional state income taxes, penalties and interest (estimated in the aggregate to be approximately $30 million as of December 31, 2014) also may become due when a final resolution is reached. The Notices of Deficiency also reflected additional amounts due of approximately $105 million, which are primarily associated with the disallowance of the previously filed carryback of our 2008 NOL to the 2006 and 2007 tax years. We currently believe that the disallowance of our 2008 NOL carryback is a precautionary position by the IRS and that we will ultimately maintain the benefit of this NOL carryback claim. On December 3, 2014, we petitioned the U.S. Tax Court to litigate the Deficiency Amount. The litigation could take several years to resolve and may result in substantial legal 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. We believe that an adequate provision for income taxes has been made for the potential liabilities that may result from this matter. However, if the ultimate resolution of this matter produces a result that differs materially from our current expectations, there could be a material impact on our effective tax rate, results of operations and cash flows.

As of December 31, 2014, we have approximately $61.1 million of unrecognized tax benefits, including approximately $60.9 million of interest and penalties, that would affect the effective tax rate, if recognized. Our policy for the recognition of interest and penalties associated with uncertain tax positions is to record such items as a component of our income tax provision (benefit), of which approximately $2.5 million, $5.4 million and ($0.8) million were recorded as of December 31, 2014, 2013 and 2012, respectively.

A reconciliation of the beginning and ending unrecognized tax benefits is as follows:



	Year Ended December 31,
(In thousands)	2014			2013
Balance at beginning of period	$	119,236		$	114,013
Tax positions related to the current year:
Increases	2,352			2,363
Tax positions related to prior years:
Increases	24,361			29,962
Decreases	(1,546		)	(3,615		)
Lapses of applicable statute of limitation	(24,180		)	(23,487		)
Balance at end of period	$	120,223		$	119,236

In previous years, we took a return position in various jurisdictions that we are not required to remit taxes with regard to the income generated from our investment in certain partnership interests. Although we believe that these tax positions are more likely than not to succeed if adjudicated, measurement of the potential amount of liability for state and local taxes and the potential for penalty and interest thereon is performed on a quarterly basis. Our net unrecognized tax benefits related to prior years increased by approximately $22.8 million during 2014. This net increase primarily reflects the impact of unrecognized tax benefits associated with our recognition of certain premium income. Although unrecognized tax benefits for this item decreased by approximately $24.2 million due to the expiration of the applicable statute of limitations for the taxable period ended December 31, 2010, the related amounts continued to impact subsequent years resulting in a corresponding increase to the unrecognized tax benefits related primarily to the 2011 taxable year.

As discussed above, in December 2014, we petitioned the U.S. Tax Court to litigate the IRS Notices of Deficiency received on September 4, 2014. Over the next 12 months, if we determine that a compromised settlement cannot be reached with the IRS, then it is estimated that approximately $73.6 million of unrecognized tax benefits in the above tabular reconciliation may be reversed pursuant to the accounting standard for uncertain tax positions.

In the event we are not successful in defense of our tax positions taken for U.S. federal income tax purposes, and for which we have recorded unrecognized tax benefits, then such adjustments originating in NOL or NOL carryback years may serve as a reduction to our existing NOL.

The following calendar tax years, listed by major jurisdiction, remain subject to examination:



U.S. Federal Corporation Income Tax	2000 - 2007(1), 2011 - 2013
Significant State and Local Jurisdictions (2)	1999 - 2013

_________________________


(1)	We petitioned the U.S. Tax Court to litigate the IRS Notices of Deficiency resulting from the examination of our 2000 through 2007 consolidated federal income tax returns. This litigation relates to the recognition of certain tax benefits associated with our investment in a portfolio of non-economic REMIC residual interests.


(2)	Arizona, California, Florida, Georgia, New York, Ohio, Pennsylvania and New York City.