Income Taxes

Income Tax Provision (Benefit)

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



	Year Ended December 31,
(In thousands)	2016		2015		2014
Current provision (benefit)	$	4,546	$	120	$	(26,575	)
Deferred provision (benefit)	170,887		156,170		(825,843		)
Total income tax provision (benefit)	$	175,433	$	156,290	$	(852,418	)

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



	Year Ended December 31,
(In thousands)	2016			2015			2014
Provision for income taxes computed at the statutory tax rate	$	169,290		$	153,240		$	142,504
Change in tax resulting from:
Repurchase premium on convertible notes	9,988			(6,674		)	—
State tax (benefit)	(8,974		)	(7,619		)	(451		)
Valuation allowance	10,663			11,931			(995,008		)
Other, net	(5,534		)	5,412			537
Provision (benefit) for income taxes	$	175,433		$	156,290		$	(852,418	)

Deferred Tax Assets and Liabilities

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



	December 31,
(In thousands)	2016		2015
DTAs:
Accrued expenses	$	41,219	$	38,456
Unearned premiums	67,538		87,609
NOL	179,128		342,002
Differences in fair value of financial instruments	—		7,767
Net unrealized loss on investments	6,285		9,801
State income taxes	51,875		46,914
Partnership investments	73,918		74,309
Loss reserves	3,801		4,720
Alternative minimum tax credit carryforward	7,367		5,923
Other	49,511		34,241
Total DTAs	480,642		651,742
DTLs:
Convertible and other long-term debt	2,212		16,654
Differences in fair value of financial instruments	1,758		—
Depreciation	10,626		6,397
Other	7,356		14,516
Total DTLs	21,952		37,567
Less: Valuation allowance	46,892		36,230
Net DTA	$	411,798	$	577,945

Current and Deferred Taxes

As of December 31, 2016, we recorded a net current income tax payable of $130.9 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 $3.5 million. Before consideration of uncertain tax positions, we have approximately $653.8 million of U.S. NOL carryforwards, $7.4 million of alternative minimum tax credit carryforwards and $5.6 million of research and development tax credit carryforwards as of December 31, 2016. To the extent not utilized, the U.S. NOL carryforwards will expire during tax years 2030 through 2032, the research and development tax credit carryforwards will expire during tax years 2031 through 2036 and the alternative minimum tax credit carryforwards have no expiration date. Certain entities within our consolidated group have also generated DTAs of approximately $52 million, relating primarily to state and local NOL carryforwards which, if unutilized, will expire during various future tax periods.

Valuation Allowances

At each balance sheet date, we assess our need for a valuation allowance against our DTA, based on whether it is more likely than not that all or some portion of our DTA will not be realized. We weigh the potential effect of positive and negative evidence, with the weight given to the evidence commensurate with the extent to which it can be objectively verified. In the fourth quarter of 2014, we reversed substantially all of our previously established DTA valuation allowance based on our analysis of significant positive, objectively verifiable evidence that outweighed all negative evidence and supported a conclusion that it was more-likely-than-not that substantially all of the Company’s DTAs will be realized.

In evaluating negative evidence, consideration was given to the extensive U.S. NOL Carryforward period. Based on management’s projections, including adverse scenarios considered in our sensitivity analysis, we expect to fully utilize our U.S. NOL Carryforward over approximately the next two years. Additionally, we currently have no Section 382 or other limitations on our ability to utilize our existing NOL.

We have determined that certain non-insurance entities within Radian may continue to generate taxable losses on a separate company basis in the near term and may not be able to fully utilize certain state and local NOLs on their state and local tax returns. Therefore, with respect to DTAs relating to these state and local NOLs and other state timing adjustments, we retained a valuation allowance of $46.9 million at December 31, 2016 and $36.2 million at December 31, 2015.

Tax Benefit Preservation Plan

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, 2016, 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.

In 2009, we adopted a Tax Benefit Preservation Plan (the “Plan”), which, as amended, was approved by our stockholders at our 2010, 2013 and 2016 annual meetings. We also adopted certain amendments to our amended and restated bylaws (the “Bylaw Amendment”) and at our 2010, 2013 and 2016 annual meetings, our stockholders approved certain amendments to our amended and restated certificate of incorporation (the “Charter Amendment”). These steps were taken to protect our ability to utilize our NOLs and other tax assets and to attempt to prevent an “ownership change” under U.S. federal income tax rules by discouraging and in most cases restricting 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. The continued effectiveness of the Plan, the Bylaw Amendment and the Charter Amendment are subject to periodic examination by the Board and the reapproval of the Plan and the Charter Amendment by our stockholders every three years. There can be no assurance that our stockholders will reapprove the Plan and the Charter Amendment if we elect to present them to our stockholders again in the future.

IRS Matter

As previously disclosed, 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 has proposed denying the associated tax benefits of these items. We appealed these proposed adjustments to Appeals and made “qualified deposits” with the U.S. Treasury of $85 million in June 2008 relating to the 2000 through 2004 tax years and $4 million in May 2010 relating to the 2005 through 2007 tax years in order to avoid the accrual of incremental above-market-rate interest with respect to the proposed adjustments.

We attempted to reach a compromised settlement with Appeals, but in September 2014 we received Notices of Deficiency covering the 2000 through 2007 tax years that assert unpaid taxes and penalties of $157 million. The Deficiency Amount has not been reduced to reflect our NOL carryback ability. As of December 31, 2016, there also would be interest of approximately $136 million related to these matters. Depending on the outcome, additional state income taxes, penalties and interest (estimated in the aggregate to be approximately $35 million as of December 31, 2016) also may become due when a final resolution is reached. The Notices of Deficiency also reflected additional amounts due of $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 Tax Court to litigate the Deficiency Amount. On September 1, 2015, we received a notice that the case had been scheduled for trial. However, the parties jointly filed, and the Tax Court approved, motions for continuance in this matter to postpone the trial date. Also, in February 2016, the Tax Court approved a joint motion to consolidate for trial, briefing and opinion our case with a similar case involving MGIC Investment Corporation. During 2016, we held several meetings with the IRS in an attempt to reach a compromised settlement on the issues presented in our dispute. In January 2017, the parties informed the Tax Court that they believe they have reached a basis for a compromised settlement on the primary issues present in the case. The resolution must be reported to the JCT for review and cannot be finalized until the IRS considers the views, if any, expressed by the JCT about the matter. If we are unable to complete a compromised settlement, then the ongoing 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 currently 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.

Unrecognized Tax Benefits

As of December 31, 2016, we have $68.1 million of unrecognized tax benefits, including $63.5 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 $1.8 million, $0.8 million and $2.5 million were recorded for the years ended December 31, 2016, 2015 and 2014, respectively.

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



	Year Ended December 31,
(In thousands)	2016			2015
Balance at beginning of period	$	124,246		$	120,223
Tax positions related to the current year:
Increases	1,203			6,461
Decreases	(1,835		)	(336		)
Tax positions related to prior years:
Increases	22,389			22,734
Decreases	(1,406		)	(2,102		)
Lapses of applicable statute of limitation	(21,569		)	(22,734		)
Balance at end of period	$	123,028		$	124,246

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 $20.9 million during 2016. 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 $21.6 million due to the expiration of the applicable statute of limitations for the taxable period ended December 31, 2012, the related amounts continued to impact subsequent years, resulting in a corresponding increase to the unrecognized tax benefits related primarily to the 2013 taxable year.

As discussed above, we believe we have reached a basis for a compromised settlement with the IRS on the primary issues present in our case. The resolution must be reported to the JCT for review and cannot be finalized until the IRS considers the views, if any, expressed by the JCT about the matter. However, over the next 12 months, if we are able to achieve a compromised settlement with the IRS, then it is estimated that approximately $70.0 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 (1)	2000 - 2007, 2013 - 2015
Significant State and Local Jurisdictions (2)	2000 - 2015

______________________


(1)	For the 2000 through 2007 calendar tax years, we petitioned the 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)	California, Florida, Georgia, New York, Ohio, Pennsylvania and New York City.