Income Taxes

12 Months Ended

Dec. 31, 2014

Note 11: Income Taxes

Income (loss) from operations before provision (benefit) for income taxes consisted of:

	Years Ended December 31,
In millions	2014		2013		2012
Domestic	$	574	$	435	$	1,486
Foreign		67		(19)		112
Income (loss) before income taxes	$	641	$	416	$	1,598

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, France, Spain, and various state and local jurisdictions. Income tax expense (benefit) on income (loss) and shareholders’ equity consisted of:

		Years Ended December 31,
In millions		2014		2013		2012
Current taxes:
	Federal	$	-	$	-	$	3
	State		10		8		2
	Foreign		12		1		(6)
Deferred taxes:
	Federal		48		165		350
	Foreign		2		(8)		15
Provision (benefit) for income taxes			72		166		364
Income taxes charged (credited) to shareholders' equity related to:
	Change in unrealized gains (losses) on AFS securities		89		(81)		86
	Change in AFS securities with OTTI		(29)		4		42
	Change in foreign currency translation		(13)		1		(2)
	Share-based compensation		2		4		7
Total income taxes charged (credited) to shareholders' equity			49		(72)		133
Total effect of income taxes		$	121	$	94	$	497

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, 2014, 2013 and 2012 is presented in the following table:

		Years Ended December 31,
		2014	2013	2012
Federal income tax computed at the statutory rate		35.0%	35.0%	35.0%
Increase (reduction) in taxes resulting from:
	Tax-exempt interest	(0.5)%	(1.1)%	(0.7)%
	Mark-to-market on warrants	(1.6)%	3.8%	(0.7)%
	Change in valuation allowance	(13.5)%	(12.6)%	(5.6)%
	Change in uncertain tax positions	(9.1)%	2.8%	(0.1)%
	State income tax, net of federal benefit	0.5%	2.0%	0.1%
	Out-of-period adjustment	0.0%	0.0%	(3.8)%
	Foreign taxes	(0.5)%	(0.8)%	(1.2)%
	Basis difference in foreign subsidiary	0.0%	11.4%	0.0%
	Other	0.9%	(0.6)%	(0.2)%
Effective tax rate		11.2%	39.9%	22.8%

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, 2014 and 2013 are presented in the following table:

		As of December 31,
In millions		2014		2013
Deferred tax liabilities:
	Unearned premium revenue	$	196	$	220
	Deferral of cancellation of indebtedness income		91		114
	Deferred acquisition costs		72		87
	Net unrealized gains in accumulated other comprehensive income		4		-
	Basis difference in foreign subsidiaries		59		48
	Other		1		9
Total gross deferred tax liabilities			423		478

Deferred tax assets:
	Compensation and employee benefits		30		31
	Loss and loss adjustment expense reserves		69		85
	Net operating loss and tax credit carryforwards		1,150		917
	Capital loss carryforward and other-than-temporary impairments		6		93
	Net unrealized losses on insured derivatives		93		400
	Net losses on financial instruments at fair value and foreign exchange		37		47
	Net unrealized losses in accumulated other comprehensive income		-		30
	Alternative minimum tax credit carryforward		22		22
	Net deferred taxes on VIEs		25		55
Total gross deferred tax assets			1,432		1,680
	Valuation allowance		-		93
Net deferred tax asset		$	1,009	$	1,109

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 generation 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, 2014, the Company reported a net deferred tax asset of $1.0 billion, with no valuation allowance. As of December 31, 2013, there was a valuation allowance of $93 million against a portion of the deferred tax asset. The valuation allowance related to losses from asset impairments. The decrease in the valuation allowance was primarily due to the sales of previously impaired assets and a tax planning strategy to use unrealized gains that are included in “Accumulated other comprehensive income (loss)” on the Company’s consolidated balance sheets against any remaining asset impairments.

In accordance with ASU 2013-11, the netting of deferred taxes between different taxpaying jurisdictions is not permitted. As of December 31, 2014, there was also a non U.S. deferred tax liability of $18 million included in “Other liabilities” on the Company’s consolidated balance sheet.

Tax Sharing Agreement

The Company has a tax sharing agreement among its members effective January 1, 1987. The agreement was amended and restated effective September 8, 2011 to change the method of calculating each domestic insurer’s tax liability to the method permitted by paragraph 3(a) of Department Circular Letter #33 (1979). The agreement was submitted to the NYSDFS for review and non-disapproval pursuant to Section 1505 of the New York Insurance Law (“NYIL”). The Company’s tax sharing agreement is filed as an exhibit to this Form 10-K for informational purposes only. Refer to “Note 2: Significant Accounting Policies” for further discussion on the Company’s tax sharing agreement.

Out-of-Period Adjustment

During the fourth quarter of 2012, the Company completed a balance sheet focused analysis to enhance efficiency and accuracy with its deferred income tax balances, and as a result, identified errors to the current and deferred income tax balances. The Company evaluated the materiality of these errors in accordance with SEC Staff Accounting Bulletin No. 99, Materiality, and SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, and concluded that these errors, individually and in the aggregate, were immaterial to the year ended December 31, 2012 and all prior periods to which these errors relate. Accordingly, the Company recorded these adjustments in its consolidated financial statements for the year ended December 31, 2012 by increasing “Net income (loss)” by $60 million.

Treatment of Undistributed Earnings of Certain Foreign Subsidiaries—“Accounting for Income Taxes—Special Areas”

In the fourth quarter of 2013, U.S. deferred income taxes were provided on the differences in the book and tax basis in the Company’s carrying value of MBIA UK and certain other entities since the Company no longer intends to permanently reinvest these earnings. The impact is reflected in the Company’s 2013 tax provision.

Accounting for Uncertainty in Income Taxes

The Company’s policy is to record and disclose any change in UTB and related interest and/or penalties to income tax in the consolidated statements of operations. The Company includes interest as a component of income tax expense. All amounts below are reflected before any applicable tax benefit.

In millions

Unrecognized tax benefit as of January 1, 2012		$	47
The gross amount of the increase/(decrease) in the UTB as a result of tax positions taken:
	During a prior year		26
The amounts of decreases in the UTB as a result of the applicable statute of limitations			(26)
Unrecognized tax benefit as of December 31, 2012		$	47
The gross amount of the increase/(decrease) in the UTB as a result of tax positions taken:
	During the current year		18
The amounts of decreases in the UTB related to settlements with taxing authorities			-
Unrecognized tax benefit as of December 31, 2013		$	65
The gross amount of the increase/(decrease) in the UTB as a result of tax positions taken:
	During a prior year		(61)
	During the current year		-
The amounts of decreases in the UTB related to settlements with taxing authorities			(4)
The reduction in the UTB as a result of the applicable statute of limitations			-
Unrecognized tax benefit as of December 31, 2014		$	-

The Company does not anticipate any additional amount to reverse in the next twelve months based on settling certain issues.

MBIA and its U.S. subsidiaries file a U.S. consolidated federal income tax return. Federal income tax returns for 2011 through 2013 are subject to examination. The reserve for UTB has decreased during 2014 based on certain positive developments, including the conclusion from an Internal Revenue Service initiated survey of the 2011 consolidated return of MBIA Inc. and its subsidiaries, which has resulted in no change to taxable income. In the fourth quarter of 2014, the Company settled certain state and local examinations which further decreased the reserve.

The tax authorities in the United Kingdom are currently auditing MBIA UK for tax years 2005 through 2012. On January 24, 2014, the Company provided an independent report to HM Revenue & Customs (“HMRC”). On April 8, 2014, HMRC responded with comments. On June 2, 2014, the Company responded to HMRC’s letter dated April 8, 2014. As of December 31, 2014, no response has been received from HMRC and there has been no resolution.

During 2013, the Company met with New York State Department of Taxation and Finance to discuss the Company’s respective tax positions regarding certain issues related to the 2008 tax year. In the fourth quarter of 2014, the Company settled with the state.

As of December 31, 2014, the Company’s NOL is approximately $3.2 billion. The NOL will expire between tax years 2029 through 2034. As of December 31, 2014, the Company has an alternative minimum tax credit carryforward of $22 million, which does not expire.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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