Income Taxes

Total income taxes were as follows:



Year Ended December 31,	2015			2014			2013
	(in millions)
Provision (benefit) for income taxes related to continuing operations	$	(471	)	$	224		$	325
Income taxes related to adjustments included in common shareholder’s equity:
Unrealized gains (losses) on securities available-for-sale, not other-than-temporarily impaired, net	—			—			(62		)
Unrealized gains (losses) on other-than-temporarily impaired debt securities available-for-sale	—			—			(1		)
Unrealized gains on cash flow hedging instruments	21			24			143
Changes in funded status of postretirement benefit plans	25			(2		)	8
Foreign currency translation adjustments	—			—			(10		)
Total income taxes	$	(425	)	$	246		$	403

Provision (benefit) for income taxes related to our continuing operations all of which were in the United States were:



Year Ended December 31,	2015			2014		2013
	(in millions)
Current provision (benefit)	$	56		$	108	$	(917	)
Deferred provision (benefit)	(527		)	116		1,242
Total income provision (benefit)	$	(471	)	$	224	$	325

The significant components of deferred provision (benefit) attributable to income from continuing operations were:



Year Ended December 31,	2015			2014			2013
	(in millions)
Deferred income tax provision excluding the effects of other components	$	28		$	473		$	1,443
Increase in Federal operating loss carryforwards	(479		)	(366		)	(141		)
Decrease in State valuation allowances	(171		)	(53		)	(51		)
Decrease in State operating loss carryforwards and other temporary differences	95			42			11
(Increase) decrease in foreign and general business tax credits	—			20			(20		)
Deferred income tax provision (benefit)	$	(527	)	$	116		$	1,242

In the table above, for 2015, the decrease in State valuation allowances is mainly due to the impact of moving solely to reliance on projected future taxable income to support the recognition of certain State deferred tax assets and the effects of re-valuing our deferred tax assets for New York City Tax Reform that was enacted April 13, 2015. For 2014, the decreases in State operating loss carryforwards and other temporary differences and the corresponding decreases in valuation allowances relate mainly to changes in estimates as a result of filing the 2013 State tax returns and filing amended State tax returns upon the closing of the Federal audits for the 2006 - 2009 tax years, the expiration of State net operating losses, and the effects of re-valuing our deferred tax assets for New York State Tax Reform that was enacted March 31, 2014. For 2013, the decrease in State valuation allowance pertains mainly to states with net operating losses that were utilized against 2012 taxable income on returns filed in 2013.

A reconciliation of income tax expense (benefit) compared with the amounts at the U.S. Federal statutory rate was as follows:



Year Ended December 31,	2015					2014					2013
	(dollars are in millions)
Tax provision (benefit) at the U.S. Federal statutory income tax rate	$	(303	)	(35.0	)%	$	270		35.0	%	$	363		35.0	%
Increase (decrease) in rate resulting from:
State and local taxes, net of Federal benefit	(14		)	(1.6	)	12			1.6		9			.9
Adjustment with respect to tax for prior periods⁽¹⁾	(16		)	(1.8	)	38			4.9		11			1.1
Adjustment of tax rate used to value deferred taxes⁽²⁾	(40		)	(4.6	)	(52		)	(6.7	)	(5		)	(.5	)
Change in valuation allowance⁽³⁾	(90		)	(10.4	)	(28		)	(3.6	)	(11		)	(1.1	)
Uncertain tax positions⁽⁴⁾	(4		)	(.5	)	(2		)	(.3	)	(10		)	(1.0	)
Other non-deductible/non-taxable items⁽⁵⁾	(4		)	(.5	)	(11		)	(1.4	)	(29		)	(2.8	)
Other	—			(.1	)	(3		)	(.4	)	(3		)	(.3	)
Total income tax expense (benefit)	$	(471	)	(54.5	)%	$	224		29.1	%	$	325		31.3	%

⁽¹⁾

For 2015, the amount relates to an adjustment to a deferred tax balance sheet account as a result of the Federal audit for the 2012 tax year. For 2014, the amount relates to changes in estimates as a result of filing the Federal and State income tax returns and a change in State tax expense as a result of filing amended State tax returns upon the closing of the Federal audits for the 2006 - 2009 tax years. For 2013, the amount relates to corrections to current and deferred tax balance sheet accounts and changes in estimates as a result of filing the Federal and State income tax returns.


⁽²⁾	For 2015, the amount mainly relates to the effects of revaluing our deferred tax assets for New York City Tax Reform that was enacted on April 13, 2015. For 2014, the amount primarily relates to the effects of revaluing our deferred tax assets as a result of New York State Tax Reform that was enacted on March 31, 2014.

⁽³⁾

For 2015, the amount is due to the release of valuation allowance reserves on previously unrecognized State net operating loss carryforwards and temporary differences. For 2014, the amount relates to changes in valuation allowance reserves in States with net operating loss carryforward periods of 12 to 20 years and a release of valuation allowance reserves as a result of filing amended State tax returns upon the closing of the Federal audits for the 2006-2009 tax years. For 2013, the amount relates to changes in valuation allowance in States with net operating loss carryforward periods of 12 to 20 years.


⁽⁴⁾	For 2015, 2014 and 2013, the amounts primarily relate to the conclusion of State audits and expiration of State statutes of limitations.


⁽⁵⁾	For 2014, the amount primarily relates to tax exempt income and nondeductible penalties. For 2013, the amount includes a change in the estimated deductibility of accrued costs for certain regulatory matters that were accrued during 2011.

The components of the net deferred tax asset are presented in the following table:



	December 31, 2015			December 31, 2014
	(in millions)
Deferred Tax Assets:
Credit loss reserves	$	144		$	881
Receivables held for sale	541			—
Federal and State unused tax benefit carryforwards	1,719			1,335
Market value adjustment related to derivatives and long-term debt carried at fair value	275			449
Interests in Real Estate Mortgage Investment Conduits ⁽¹⁾	345			326
Accrued expenses not currently deductible	480			191
Other	235			280
Total deferred tax assets	3,739			3,462
Valuation allowance	(707		)	(878		)
Total deferred tax assets net of valuation allowance	3,032			2,584
Deferred Tax Liabilities:
Fee income	54			74
Other	55			66
Total deferred tax liabilities	109			140
Net deferred tax asset	$	2,923		$	2,444

⁽¹⁾

Real Estate Mortgage Investment Conduits ("REMIC") are investment vehicles that hold commercial and residential mortgages in trust and issue securities representing an undivided interest in these mortgages. We hold portfolios of noneconomic residual interests in a number of REMICs through one of our subsidiaries. This item represents the tax basis in such interests which has accumulated as a result of tax rules requiring the recognition of income related to such noneconomic residuals.

The deferred tax valuation allowance is attributed to the following deferred tax assets that based on the available evidence it is more-likely-than-not that the deferred tax asset will not be realized:



	December 31, 2015		December 31, 2014
	(in millions)
State unused tax benefit carryforwards	$	651	$	822
Deferred capital loss on sale to affiliates	56		56
Total	$	707	$	878

The State deferred tax assets against which a valuation allowance is maintained primarily relate to unused tax benefits associated with our run-off business for which recovery is highly unlikely.

A reconciliation of the beginning and ending amount of unrecognized tax benefits related to uncertain tax positions is as follows:



	2015			2014			2013
	(in millions)
Balance at beginning of year	$	93		$	111		$	165
Additions for tax positions of prior years	1			3			3
Reductions for tax positions of prior years	(3		)	(3		)	(41		)
Settlements	(1		)	(18		)	(8		)
Reductions for lapse of statute of limitations	(4		)	—			(8		)
Balance at end of year	$	86		$	93		$	111

The total amount of unrecognized tax benefits related to uncertain tax positions that, if recognized, would affect the effective tax rate was $57 million, $61 million and $73 million at December 31, 2015, December 31, 2014 and December 31, 2013, respectively. Included in the unrecognized tax benefits are certain items the recognition of which would not affect the effective tax rate, such as the tax effect of temporary differences and the amount of State taxes that would be deductible for U.S. Federal purposes. It is reasonably possible that there could be a change in the amount of our unrecognized tax benefits within the next 12 months due to settlements or statutory expirations in various State and local tax jurisdictions. We expect to conclude certain State and local audits covering a number of years in the first half of 2016. The expected tax benefit to continuing operations is in a range between $0 million and $20 million, including interest and penalties.

It is our policy to recognize accrued interest related to uncertain tax positions in interest income in the consolidated statement of income (loss) and to recognize penalties, if any, related to uncertain tax positions as a component of other servicing and administrative expenses in the consolidated statement of income (loss). Accruals for the payment of interest and penalties associated with uncertain tax positions totaled $14 million and $16 million at December 31, 2015 and December 31, 2014, respectively. Accrual for the payment of interest and penalties associated with uncertain tax positions decreased by $3 million during 2015.

Deferred tax assets and liabilities are recognized for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, for net operating and other losses and for State tax credits. Any Federal tax credits that cannot be currently utilized by the consolidated group are transferred to HSBC North America and reflected within the HSBC North America's deferred tax assets. Our net deferred tax assets, including deferred tax liabilities and valuation allowances, totaled $2,923 million and $2,444 million as of December 31, 2015 and December 31, 2014, respectively.

See Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," for further discussion regarding our accounting policy relating to the evaluation, recognition and measurement of the HNAH Group and HSBC Finance Corporation's deferred tax assets and liabilities. In evaluating the need for a valuation allowance at December 31, 2015, it has been determined that HNAH Group projections of future taxable income from U.S. operations based on management approved business plans provide sufficient and appropriate support for the recognition of our net deferred tax assets as noted above. At December 31, 2015, we have valuation allowances against certain State deferred tax assets and certain Federal tax loss carry forwards for which the aforementioned projections of future taxable income do not provide appropriate support. Prior to the third quarter of 2015, the evaluation of the need for a valuation allowance significantly discounted any future taxable income from U.S. operations and relied primarily on continued capital support from our parent, HSBC, and the implementation of tax planning strategies in relation to such support.

The Internal Revenue Service commenced its examination of our 2012 and 2013 Federal income tax returns in the first quarter of 2015 and is expected to conclude its examination in 2016.We remain subject to State and local income tax examinations for years 2003 and forward. We are currently under audit by various State and local tax jurisdictions. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and the closing of statute of limitations. Such adjustments are reflected in the tax provision.

At December 31, 2015, for Federal tax purposes, we had net operating loss carryforwards of $2,817 million of which $1,741 million expire in 2033, $590 million expire in 2034 and $486 million expire in 2035.

At December 31, 2015, for State tax purposes, we had apportioned and pre-tax rate effected net operating loss carryforwards of $13,156 million for which we have pre-tax valuation allowances totaling $11,200 million. These State net operating loss carryforwards expire as follows: $320 million in 2015 - 2020; $1,836 million in 2021 - 2025; $8,122 million in 2026 - 2030; and $2,878 million in 2031 and forward.

At December 31, 2015, for State tax purposes, we had general business tax credit carryforwards of $11 million for which we have valuation allowances totaling $5 million. These State credits expire as follows: $3 million expire in 2015 - 2019 and $8 million have no expiration period.