Income Taxes

12 Months Ended

Dec. 31, 2015

Note 11: Income Taxes

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

	Years Ended December 31,
In millions	2015		2014		2013
Domestic	$	303	$	574	$	435
Foreign		(14)		67		(19)
Income (loss) before income taxes	$	289	$	641	$	416

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		2015		2014		2013
Current taxes:
	Federal	$	-	$	-	$	-
	State		1		10		8
	Foreign		2		12		1
Deferred taxes:
	Federal		97		48		165
	Foreign		9		2		(8)
Provision (benefit) for income taxes			109		72		166
Income taxes charged (credited) to shareholders' equity related to:
	Change in unrealized gains (losses) on AFS securities		(30)		89		(81)
	Change in AFS securities with OTTI		-		(29)		4
	Change in foreign currency translation		(14)		(13)		1
	Share-based compensation		9		2		4
Total income taxes charged (credited) to shareholders' equity			(35)		49		(72)
Total effect of income taxes		$	74	$	121	$	94

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, 2015, 2014 and 2013 is presented in the following table:

		Years Ended December 31,
		2015	2014	2013
Federal income tax computed at the statutory rate		35.0%	35.0%	35.0%
Increase (reduction) in taxes resulting from:
	Mark-to-market on warrants	(1.2)%	(1.6)%	3.8%
	Change in valuation allowance	0.0%	(13.5)%	(12.6)%
	Change in uncertain tax positions	0.0%	(9.1)%	2.8%
	Non deductible compensation	2.7%	0.0%	0.0%
	Basis difference in foreign subsidiary	0.0%	0.0%	11.4%
	Other	1.2%	0.4%	(0.5)%
Effective tax rate		37.7%	11.2%	39.9%

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, 2015 and 2014 are presented in the following table:

		As of December 31,
In millions		2015		2014
Deferred tax liabilities:
	Unearned premium revenue	$	159	$	196
	Deferral of cancellation of indebtedness income		68		91
	Deferred acquisition costs		56		72
	Net unrealized gains in accumulated other comprehensive income		-		4
	Partnership basis difference		30		45
	Basis difference in foreign subsidiaries		40		59
	Other		91		55
Total gross deferred tax liabilities			444		522

Deferred tax assets:
	Compensation and employee benefits		19		30
	Accrued interest		137		99
	Loss and loss adjustment expense reserves		119		69
	Net operating loss and tax credit carryforwards		972		1,150
	Other-than-temporary impairments		5		6
	Net unrealized losses on insured derivatives		35		93
	Net losses on financial instruments at fair value and foreign exchange		45		37
	Net unrealized losses in accumulated other comprehensive income		15		-
	Alternative minimum tax credit carryforward		22		22
	Net deferred taxes on VIEs		14		25
Total gross deferred tax assets			1,383		1,531
	Valuation allowance		-		-
Net deferred tax asset		$	939	$	1,009

The Company came to the conclusion that it is more likely than not that its net deferred tax asset will be fully realized after weighing all positive and negative evidence available as required under GAAP. The positive evidence that was considered included the cumulative operating income the Company has earned over the last three years, and the significant unearned premium income to be included in taxable income. The positive evidence outweighs any negative evidence that exists. As such, the Company believes that no valuation allowance is necessary in connection with this deferred tax asset. The Company will continue to analyze the need for a valuation allowance on a quarterly basis.

In accordance with accounting guidance for income taxes, the netting of deferred taxes between different taxpaying jurisdictions is not permitted. As of December 31, 2015, there was also a non -U.S. deferred tax liability of $12 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”). Refer to “Note 2: Significant Accounting Policies” for further discussion on the Company’s tax sharing agreement.

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. As of December 31, 2015 and 2014, the Company had no UTB outstanding.

In millions

Unrecognized tax benefit as of January 1, 2013		$	47
The gross amount of the increase/(decrease) in the UTB as a result of tax positions taken:
	During a prior year		18
The amounts of decreases in the UTB as a result of the applicable statute of limitations			-
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)
Unrecognized tax benefit as of December 31, 2014		$	-
The gross amount of the increase/(decrease) in the UTB as a result of tax positions taken:
	During the current year		-
The amounts of decreases in the UTB related to settlements with taxing authorities			-
The reduction in the UTB as a result of the applicable statute of limitations			-
Unrecognized tax benefit as of December 31, 2015		$	-

MBIA and its U.S. subsidiaries file a U.S. consolidated federal income tax return. Federal income tax returns through 2011 have been examined or surveyed.

The tax authorities in the United Kingdom have audited MBIA UK for tax years 2005 through 2012. In April of 2015, MBIA UK received correspondence from the HM Revenue & Customs closing the audit for the years under examination with no change in taxable income.

As of December 31, 2015, the Company’s NOL is approximately $2.8 billion. The NOL will expire between tax years 2029 through 2034. As of December 31, 2015, the Company’s foreign tax credit (“FTC”) is approximately $9 million. The FTC will expire between years 2019 through 2025. As of December 31, 2015, the Company has an alternative minimum tax credit carryforward of $22 million, which does not expire.