Note 10 - Income Taxes Level 1 (Notes)

12 Months Ended

Dec. 31, 2019

Income Taxes

Income Tax Provision

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



	Year Ended December 31,
(In thousands)	2019		2018			2017
Current provision (benefit)	$	19,522	$	(42,398	)	$	59,122
Deferred provision	157,162		120,573			166,527
Total income tax provision	$	176,684	$	78,175		$	225,649

The reconciliation of taxes computed at the statutory tax rate of 21% in 2019 and 2018 and 35% in 2017 to the provision for income taxes is as follows:



	Year Ended December 31,
(In thousands)	2019			2018			2017
Provision for income taxes computed at the statutory tax rate	$	178,289		$	143,679		$	121,358
Change in tax resulting from:
Repurchase premium on convertible notes	—			—			(96		)
State tax provision (benefit), net of federal impact	(293		)	5,570			(15,641		)
Valuation allowance	1,941			(1,856		)	18,197
Remeasurement of net deferred tax assets due to the TCJA	—			—			102,617
Impact related to settlement of IRS Matter	—			(73,585		)	—
Other, net	(3,253		)	4,367			(786		)
Provision for income taxes	$	176,684		$	78,175		$	225,649

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)	2019			2018
Deferred tax assets:
Accrued expenses	$	11,642		$	17,487
Unearned premiums	34,394			34,686
Differences in fair value of financial instruments	—			1,115
Net unrealized loss on investments	—			16,297
State income taxes	65,917			67,069
Loss reserves	1,920			1,044
Goodwill and intangibles	36,282			35,068
Deferred policy acquisition and ceding commission costs	11,190			15,288
Share-based compensation	11,238			10,776
Lease liability	13,293			—
Other	11,188			13,091
Total deferred tax assets	197,064			211,921
Deferred tax liabilities:
Differences in fair value of financial instruments	5,708			—
Net unrealized gain on investments	29,303			—
Depreciation	12,803			12,201
Contingency reserve	137,983			—
Other	15,914			3,581
Total deferred tax liabilities	201,711			15,782
Less: Valuation allowance	66,437			64,496
Net deferred tax asset (liability)	$	(71,084	)	$	131,643

Current and Deferred Taxes

As of December 31, 2019, we recorded a net current income tax payable of $39.1 million, which primarily relates to applying the standards of accounting for uncertainty in income taxes. Certain entities within our consolidated group have generated net deferred tax assets of approximately $65.8 million, relating primarily to state and local NOL carryforwards which, if unutilized, will expire during various future tax periods.

As a mortgage guaranty insurer, we are eligible for a tax deduction, subject to certain limitations, under Internal Revenue Code Section 832(e) for amounts required by state law or regulation to be set aside in statutory contingency reserves. The deduction is allowed only to the extent that we purchase non-interest bearing U.S. Mortgage Guaranty Tax and Loss Bonds issued by the U.S. Department of the Treasury in an amount equal to the tax benefit derived from deducting any portion of our statutory contingency reserves. As of December 31, 2019, we held $134.8 million of these bonds, which are included as prepaid income taxes within other assets in our consolidated balance sheets. The corresponding deduction of our statutory contingency reserves resulted in the recognition of a net deferred tax liability, which is included in other liabilities in our consolidated balance sheets.

Valuation Allowances

We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our deferred tax assets will be realized in future periods. 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 deferred tax assets relating to these state and local NOLs and other state timing adjustments, we retained a valuation allowance of $66.4 million at December 31, 2019 and $64.5 million at December 31, 2018.

IRS Matter

In July 2018, we finalized a settlement with the IRS related to adjustments we had been contesting that resulted from the examination by the IRS of our 2000 through 2007 consolidated federal income tax returns. This settlement with the IRS resolved the issues and concluded all disputes related to the IRS Matter. During 2018, we recorded tax benefits of $73.6 million, which includes both the impact of the settlement with the IRS as well as the reversal of certain previously accrued state and local tax liabilities. In 2018, under the terms of the settlement, Radian utilized its “qualified deposits” with the U.S. Department of the Treasury to settle its $31 million obligation to the IRS, and during the first quarter of 2019, the IRS refunded to Radian the remaining $57.2 million that was previously on deposit. See Note 9 for additional information about these qualified deposits.

Unrecognized Tax Benefits

As of December 31, 2019, we have $17.8 million of unrecognized tax benefits, including $1.3 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, of which $1.3 million and $2.2 million were recorded for the years ended December 31, 2019 and 2017, respectively. In 2018, we recorded an income tax benefit of $61.6 million for interest and penalties primarily related to our IRS settlement.

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



	Year Ended December 31,
(In thousands)	2019		2018
Balance at beginning of period	$	33,552	$	123,951
Tax positions related to the current year:
Increases	3,215		5,058
Tax positions related to prior years:
Increases	441		26,465
Decreases	—		(43,146		)
Settlements with taxing authorities	—		(52,353		)
Lapses of applicable statute of limitation	—		(26,423		)
Balance at end of period	$	37,208	$	33,552

Our total net unrecognized tax benefits increased by $3.7 million from December 31, 2018 to December 31, 2019, primarily due to the impact of unrecognized tax benefits associated with our recognition of certain premium income. Over the next 12 months, our unrecognized tax benefits may decrease by approximately $7.5 million due to the expiration of the applicable statute of limitations relating to the 2015 and 2016 tax years. The statute of limitations related to our federal consolidated income tax return remains open for tax years 2015-2018. Additionally, among the entities within our consolidated group, various tax years remain open to potential examination by state and local taxing authorities.