Note 7: Federal Income Taxes

For the year ended December 31, 2012, the Company recorded a loss of approximately $15.8 million. The Company has not recorded an income tax expense or benefit for the years ended December 31, 2012 or 2011. The Company recorded an income tax benefit for the period ended December 31, 2010 due to forgiveness of indebtedness exchanged for certain tax benefits.


	2012		2011		2010
Current federal income tax expense	$	—	$	—		33,401
Provision for doubtful federal income tax receivable		—		—		(46,428)
Deferred federal income tax (benefit) expense		—		—		—

Federal income tax benefit	$	—	$	—	$	(13,027)

The items accounting for the difference between income taxes computed at the US federal statutory rate and our effecive rate were as follows:


	Successor		Predecessor		Predecessor		Predecessor
	Period from March 20, 2012 through December 31, 2012		Period from January 1, 2012 through March 19, 2012		Year ended December 31, 2011		Year ended December 31, 2010
Income tax at the federal statutory rate of 35%		(35)%		(35)%		(35)%		(35)%
Effect of:
Tax benefit recovered from parent in bankruptcy		—		—		—		(610)
Fresh start accounting adjustments		—		—		(3)		(7)
Worthless stock deduction		(23,718)		—		—		—
Cancelation of debt		2,401		—		—		439
Reduction in NOL due to 382 Limitation		4,518		—		—		—
Change in valuation allowance		16,834		35		38		42

Effective Rate		— %		— %		— %		(171)%

The Company files a consolidated federal income tax return. Pursuant to a tax sharing agreement, WMMRC’s federal income tax liability is calculated on a separate return basis determined by applying 35 percent to taxable income, in accordance with the provisions of the Internal Revenue Code that apply to mortgage insurance companies. WMIHC, as WMMRC’s parent, pays federal income taxes on behalf of WMMRC and settles the federal income tax obligation on a current basis in accordance with the tax sharing agreement. WMMRC made no tax payments to WMIHC during the year ending December 31, 2012, 2011 or 2010 associated with the Company’s tax liability from the preceding year.

On November 23, 2010, the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), approved a Stipulation and Agreement between WMI and WMMRC that provides for the forgiveness of the note payable and associated accrued interest to WMI (WMMRC’s ultimate parent at that time) totaling $13.0 million at the date of the agreement, in exchange for certain tax benefits outstanding prior to WMI’s bankruptcy. Due to the WMI’s status in bankruptcy, WMMRC had deemed this uncollectible and expensed this future benefit in a prior year. As such, during 2010, WMMRC recorded a current tax benefit of $13.0 million.

Deferred federal income taxes arise from temporary differences between the valuation of assets and liabilities as determined for financial reporting purposes and income tax purposes. Temporary differences principally relate to discounting of loss reserves, net operating losses and unrealized gains and losses on investments. As of December 31, 2012 and 2011, the Company recorded a valuation allowance equal to 100 percent of the net deferred federal income tax asset due to uncertainty regarding the Company’s ability to realize these benefits in the future. The amount of deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income are revised.

The components of the net deferred tax asset as of December 31, 2012, 2011 and 2010, are as follows:


	2012		2011		2010
Deferred federal income tax asset:
Losses and loss adjustments expenses	$	2,832	$	4,097	$	5,906
Net operating loss carryforward		2,088,461		5,013		43
Accruals and reserves		18,276		—		—
Accrual class action settlement		—		1,400		1,400

Total deferred federal income tax asset		2,109,569		10,510		7,349
Deferred federal income tax liabilities:
Net unrealized gains on investments		1,946		1,774		2,764
Total deferred federal income tax liabilities		1,946		1,774		2,764
Less: Valuation allowance		2,107,623		8,736		4,585

Net deferred federal income tax asset	$	—	$	—	$	—

On March 19, 2012, WMIHC emerged from bankruptcy. Prior to emergence, WMI abandoned the stock of WMB, thereby generating a worthless stock deduction of approximately $8.37 billion which gives rise to an NOL for the current year. Under Section 382 of the Internal Revenue Code, and based on the Company’s analysis, we believe that the Company experienced an “ownership change” (generally defined as a greater than 50 percent change (by value) in our equity ownership over a three-year period) on March 19, 2012, and the Company’s ability to use the Company’s pre-change of control NOLs and other pre-change tax attributes against our post-change income was limited. The Section 382 limitation is applied annually so as to limit the use of our pre-change NOLs to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. Due to applicable limitations under IRC Section 382 and a reduction of tax attributes due to cancellation of indebtedness, a portion of these NOLs were limited and will expire unused. We believe that the total available and utilizable NOL carry forward at December 31, 2012 is approximately $5.97 billion. At December 31, 2012 there was no limitation on the use of these NOLs. These NOLs will begin to expire in 2029. The Company’s ability to utilize the NOLs or realize any benefits related to the NOLs is subject to a number of risks.

The Company accounts for uncertain tax positions in accordance with the income taxes accounting guidance. The Company has analyzed filing positions in the federal and state jurisdiction where it is required to file tax returns, as well as the open tax years in these jurisdictions. Tax years 2008 to present are subject to examination by the Internal Revenue Service. The Company believes that its federal income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain federal income tax positions have been recorded. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes. The Company did not incur any federal income tax related interest income, interest expense or penalties for the periods ended December 31, 2012, 2011 and 2010.