Income Taxes

12 Months Ended

Dec. 31, 2017

Note 11: Income Taxes

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

	Years Ended December 31,
In millions	2017		2016		2015
Domestic	$	(638)	$	(362)	$	303
Foreign		(23)		23		(14)
Income (loss) before income taxes	$	(661)	$	(339)	$	289

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

		Years Ended December 31,
In millions		2017		2016		2015
Current taxes:
	Federal	$	4	$	4	$	-
	State		-		1		1
	Foreign		-		-		2
Deferred taxes:
	Federal		945		(8)		97
	Foreign		(5)		2		9
Provision (benefit) for income taxes			944		(1)		109
Income taxes charged (credited) to shareholders' equity related to:
	Change in unrealized gains (losses) on AFS securities		(1)		8		(30)
	Change in AFS securities with OTTI		1		5		-
	Change in foreign currency translation		21		1		(14)
	Share-based compensation		-		-		9
Total income taxes charged (credited) to shareholders' equity			21		14		(35)
Total effect of income taxes		$	965	$	13	$	74

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, 2017, 2016 and 2015 is presented in the following table:

		Years Ended December 31,
		2017	2016	2015
Federal income tax computed at the statutory rate		35.0%	35.0%	35.0%
Increase (reduction) in taxes resulting from:
	Tax Reform/Change in Tax Rate	(71.4)%	0.0%	0.0%
	Mark-to-market on warrants	1.4%	(1.5)%	(1.2)%
	Change in valuation allowance	(116.9)%	(2.2)%	0.0%
	Nondeductible compensation	0.0%	(1.4)%	2.7%
	Deferred inventory adjustments	0.8%	3.6%	0.0%
	Foreign Taxes	8.2%	0.0%	0.0%
	Basis difference in foreign subsidiary	0.0%	(33.0)%	0.0%
	Other	0.1%	(0.3)%	1.2%
Effective tax rate		(142.8)%	0.2%	37.7%

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. Valuation allowances are established to reduce deferred tax assets to the amount that more likely than not will be realized.

The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2017 and 2016 are presented in the following table:


		As of
In millions		December 31, 2017		December 31, 2016
Deferred tax liabilities:
	Unearned premium revenue	$	75	$	143
	Deferral of cancellation of indebtedness income		14		46
	Deferred acquisition costs		21		42
	Net unrealized gains in accumulated other comprehensive income		-		4
	Partnership basis difference		11		36
	Basis difference in foreign subsidiaries		1		64
	Net deferred taxes on VIEs		38		-
	Other		-		27
Total gross deferred tax liabilities			160		362

Deferred tax assets:
	Compensation and employee benefits		11		19
	Accrued interest		131		177
	Loss and loss adjustment expense reserves		87		142
	Net operating loss		582		929
	Foreign tax credits		62		7
	Other-than-temporary impairments		22		4
	Net unrealized losses on insured derivatives		14		29
	Net losses on financial instruments at fair value and foreign exchange		13		-
	Net unrealized losses in accumulated other comprehensive income		5		6
	Alternative minimum tax credit carryforward		-		26
	Other		3		-
Total gross deferred tax assets			930		1,339
	Valuation allowance		770		7
Net deferred tax asset		$	-	$	970

On June 26, 2017, S&P downgraded the financial strength rating of National, which led the Company to cease its efforts to actively pursue writing new financial guarantee business. In addition to National’s cessation of new business activity, there was an increase in loss and LAE due to changes in assumptions on certain Puerto Rico credits. As a result of the increase in loss and LAE, the Company has a three-year cumulative loss, which is considered significant negative evidence in the assessment of its ability to use its deferred tax assets. In addition, the Company considered all available positive and negative evidence as required by GAAP, to estimate if sufficient taxable income will be generated to use its deferred tax assets. After considering all positive and negative evidence, including the Company’s inability to objectively identify and forecast future sources of taxable income, the Company concluded in the second quarter of 2017 it did not have sufficient positive evidence to support its ability to use its deferred tax assets before they would expire. Accordingly, the Company has a full valuation allowance against its net deferred tax asset of $770 million in 2017. The Company will continue to analyze the valuation allowance on a quarterly basis.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”), which among other items reduces the federal corporate tax rate to 21% effective January 1, 2018. As a result, during the fourth quarter of 2017, the Company revalued its net tax deferred tax asset using the newly enacted tax rate of 21% and recorded a $472 million reduction to both its net deferred tax asset and valuation allowance.

The Company’s revaluation of its net deferred tax asset is subject to further clarifications of the new law that cannot be estimated at this time. However, as further clarification of the new law is determined, any adjustment would be offset with a valuation allowance resulting in no change to the Company’s net deferred tax asset. The Company does not anticipate future cash expenditures as a result of the reduction to its net deferred tax asset.

Under the Act, NOLs of property and casualty insurance companies retain their current two-year carryback and 20-year carryforward periods and will not be subject to the 80 percent taxable income limitation and indefinite lived carryforward period applicable to general corporate NOLs. Therefore, NOLs generated after 2017 by the Company’s insurance companies and non-insurance companies will be treated differently under the Act.

Due to held for sale accounting of MBIA UK as of December 31, 2016, $36 million of deferred tax liabilities has been reported within “Liabilities held for sale” 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. 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”

During 2017, the Company sold MBIA UK and reversed any deferred income taxes with respect to the differences in the book and tax basis in the Company’s carrying value of MBIA UK. The Company’s amount of undistributed earnings of certain foreign subsidiaries was not material as of December 31, 2017.

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, 2017 and 2016, the Company had no UTB.

Federal income tax returns through 2011 have been examined or surveyed.

As of December 31, 2017, the Company’s NOL is approximately $2.8 billion. The NOL will expire between tax years 2031 through 2037. As of December 31, 2017, the Company has a foreign tax credit carryforward of $62 million, which will expire between tax years 2019 through 2027. As of December 31, 2017, the Company has an alternative minimum tax (“AMT”) credit carryforward of $30 million, which does not expire. As a result of tax reform, AMT credits are now fully refundable no later than 2022. The AMT credit has been reclassed out of the deferred tax asset and into other assets as the AMT credits are now a receivable.