Income Taxes
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Dec. 31, 2011
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Income Taxes [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Taxes | Note 14: Income Taxes Income (loss) from operations before provision (benefit) for income taxes consisted of:
The Company files a consolidated tax return that includes all of its U.S. subsidiaries and foreign branches. The Company also files tax returns in the United Kingdom ("U.K."), France, Spain, and various state and local jurisdictions. Income tax expense (benefit) on income (loss) and shareholders' equity consisted of:
A reconciliation of the U.S. federal statutory tax rate of 35% to the Company's effective income tax rate for the years ended December 31, 2011, 2010 and 2009 is presented in the following table:
Deferred Tax Asset, Net of Valuation Allowance The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on tax assets and liabilities is recognized in income in the period that includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2011 and 2010 are presented in the following table:
The Company establishes a valuation allowance against its deferred tax asset when it is more likely than not that all or a portion of the deferred tax asset will not be realized. All evidence, both positive and negative, needs to be identified and considered in making the determination. Future realization of the existing deferred tax asset ultimately depends, in part, on the existence of sufficient taxable income of appropriate character (for example, ordinary income versus capital gains) within the carryforward period available under the tax law. As of December 31, 2011, the Company reported a net deferred tax asset of $1.7 billion. The $1.7 billion deferred tax asset is net of a $236 million valuation allowance. As of December 31, 2011, the Company had a full valuation allowance against the deferred tax asset related to losses from asset impairments and realized losses from sales of investments as these losses are considered capital losses, have a five year carryforward period, and can only be used to offset capital gain income. The 2011 valuation allowance reflects a decrease of $140 million from the 2010 valuation allowance of $376 million. The change in the valuation allowance for the year ended December 31, 2011 was primarily due to generation of capital gains on asset sales and the re-characterization of certain impairments as bad debts resulting in ordinary losses. The remaining valuation allowance reflects the fact that the Company cannot predict capital gains in future years.
The Company has concluded that it is more likely than not that the remaining deferred tax assets will be realized. In its conclusion, the Company considered the following evidence (both positive and negative):
After reviewing all of the evidence available, both positive and negative, MBIA believes that it has appropriately valued the recoverability of its deferred tax assets, net of the valuation allowance, as of December 31, 2011. The Company continues to assess the adequacy of its valuation allowance as additional evidence becomes available. The Company's recent financial results have been volatile which has impacted management's ability to accurately project future taxable income. Continued volatility or losses beyond those projected may cause the Company to conclude that certain of the deferred tax assets within the $1.7 billion as of December 31, 2011 may not be realizable. Treatment of Undistributed Earnings of Certain Foreign Subsidiaries—"Accounting for Income Taxes—Special Areas" No U.S. deferred income taxes have been provided on the differences in the book and tax basis in the Company's carrying value of MBIA UK and other entities because of the Company's practice and intent to permanently reinvest these earnings. The cumulative amounts of such differences were $15 million, $3 million and $57 million as of December 31, 2011, 2010 and 2009, respectively. The estimated tax liability with respect to this difference was $5 million as of December 31, 2011. Five-Year NOL Carryback On November 6, 2009, as part of The Worker, Homeownership, and Business Assistance Act of 2009, the NOL carryback provision of the Internal Revenue Code was amended to allow all businesses with NOLs in either 2008 or 2009 (but not both) to elect to claim refunds of taxes paid within the prior five years. In the fifth preceding year of the carryback period, the recovery is limited to 50% of taxable income for that carryback year. There is no such limitation to the first four preceding years of the carryback period.
In April 2010, the Company filed its 2009 tax return and elected to carryback its reported NOL under the five-year carryback provision. In the second quarter of 2010, the Company received a tax refund with respect to its carryback in the amount of $391 million which it allocated to the members of its affiliated group in accordance with the tax allocation agreement. In September 2010, the Company filed a superseding and final tax return which reported an additional tax loss. A subsequent carryback claim was filed before December 31, 2010 requesting an additional refund of $41 million, which has been received and allocated among the members of MBIA.
Accounting for Uncertainty in Income Taxes It is the Company's policy to record and disclose interest and penalties related to uncertainty in the accounting for income taxes as a component of income tax expense in the statements of operations. For the years ended December 31, 2011, 2010, and 2009, the Company recorded interest of $1.5 million, $0.6 million, and $0.5 million, respectively. As of December 31, 2011, 2010 and 2009 the amounts related to interest and penalties included in the consolidated balance sheets were not material. The following table presents the change in the UTB during 2009, 2010 and 2011:
For the years ended December 31, 2011, 2010, and 2009, the portion of the UTB that, if recognized, would affect the effective tax rate was approximately $47 million, $25 million, and $9 million, respectively. MBIA's major tax jurisdictions include the U.S. and the U.K. MBIA and its U.S. subsidiaries file a U.S. consolidated federal income tax return. The Internal Revenue Service ("IRS") has concluded its field work with respect to the examination of tax years 2004 through 2009. On January 12, 2012, the Joint Committee on Taxation notified the Company that the results of the IRS field examination were reviewed and accepted. The U.K. tax authorities are currently auditing tax years 2005 through 2009. The New York State tax authorities are currently auditing the New York State combined tax returns for the years 2005 through 2007. The Company expects the examinations to be concluded before December 31, 2012. The total amount of UTB is expected to decrease within the next 12 months due to finalizing adjustments and concluding all significant tax examinations. The range of this possible change to the amount of the unrecognized tax benefit is $20 million to $25 million. As of December 31, 2011, the Company has a 2008 capital loss carryforward of $155 million which will expire in 2013. The Company also has a cumulative NOL carryforward of $943 million, which will expire from tax years 2029 through 2031, and a minimum tax credit carryforward of $22 million, which has an unlimited carryforward period. |