Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Note 11: Income Taxes

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

	Years Ended December 31,
In millions	2020		2019		2018
Domestic	$	(578)	$	(357)	$	(287)
Foreign		—		—		(9)
Income (loss) before income taxes	$	(578)	$	(357)	$	(296)

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	2020		2019		2018
Current taxes:
Federal	$	—	$	—	$	—
State		—		2		1
Deferred taxes:
Federal		—		—		(1)
Foreign		—		—		—
Provision (benefit) for income taxes		—		2		—
Income taxes charged (credited) to shareholders’ equity related to:
Change in unrealized gains (losses) on AFS securities		—		—		5
Change in AFS securities with OTTI		—		—		—
Change in foreign currency translation		—		—		—
Total income taxes charged (credited) to shareholders’ equity		—		—		5
Total effect of income taxes	$	—	$	2	$	5

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate for the years ended December 31, 2020, 2019 and 2018 is presented in the following table:

	Years Ended December 31,
	2020		2019		2018
Federal income tax computed at the statutory rate		21.0%		21.0%		21.0%
Increase (reduction) in taxes resulting from:
Mark-to-market on warrants		0.0%		0.0%		(0.7)%
Change in valuation allowance		(20.3)%		(20.7)%		(20.9)%
State income tax, net of federal benefit		0.0%		(0.4)%		0.0%
Deferred inventory adjustments		0.0%		0.0%		(1.0)%
Other		(0.7)%		(0.5)%		1.6%
Effective tax rate		0.0%		(0.6)%		0.0%

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 basis 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, 2020 and 2019 are presented in the following table:

	As of
In millions	December 31, 2020		December 31, 2019
Deferred tax liabilities:
Unearned premium revenue	$	48	$	54
Deferred acquisition costs		10		13
Net unrealized gains and losses in accumulated other comprehensive income		25		—
Net deferred taxes on VIEs		53		51
Other		6		—
Total gross deferred tax liabilities		142		118
Deferred tax assets:
Compensation and employee benefits		9		8
Accrued interest		210		185
Partnership basis difference		10		10
Loss and loss adjustment expense reserves		98		101
Net operating loss		656		590
Foreign tax credits		61		61
Other-than-temporary impairments		—		2
Net unrealized gains and losses on insured derivatives		10		9
Net gains and losses on financial instruments at fair value and foreign exchange		54		21
Other		—		4
Total gross deferred tax assets		1,108		991
Valuation allowance		966		873
Net deferred tax asset	$	—	$	—

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of its existing deferred tax assets. A significant piece of objective negative evidence evaluated was the Company having a three-year cumulative loss. Such objective evidence limits the ability to consider other subjective evidence, such as the Company’s projections of pre-tax income. On the basis of this evaluation, the Company has recorded a full valuation allowance against its net deferred tax asset of $966 million and $873 million as of December 31, 2020 and 2019, respectively. The Company will continue to analyze the valuation allowance on a quarterly basis.

NOLs of property and casualty insurance companies are permitted to be carried back two years and carried forward 20 years, except where modified by the CARES Act as outlined below. NOLs of property and casualty insurance companies are not subject to the 80 percent taxable income limitation and indefinite lived carryforward period required by the Tax Cuts and Jobs Act applicable to general corporate NOLs.

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

The Company’s amount of undistributed earnings of certain foreign subsidiaries was not material as of December 31, 2020.

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, 2020 and 2019, the Company had no UTB.

Federal income tax returns through 2011 have been examined or surveyed. As of December 31, 2020, the Company’s NOL is approximately $3.1 billion. NOLs generated prior to tax reform and property and casualty NOLs generated after tax reform will expire between tax years 2031 through 2040. As of December 31, 2020, the Company has a foreign tax credit carryforward of $61 million, which will expire between tax years 2021 through 2030.

Section 382 of the Internal Revenue Code

On May 2, 2018, MBIA Inc.’s shareholders ratified an amendment to the Company’s By-Laws, which had been adopted earlier by MBIA Inc.’s Board of Directors. The amendment places restrictions on certain acquisitions of Company stock that otherwise may have increased the likelihood of an ownership change within the meaning of Section 382 of the Internal Revenue Code. With certain exceptions, the amendment generally prohibits a person from becoming a “Section 382 five-percent shareholder” by acquiring, directly or by attribution, 5% or more of the outstanding shares of the Company’s common stock.

Coronavirus Aid, Relief, and Economic Security Act

On March 27, 2020, as part of the business stimulus package in response to COVID-19, the U.S. government enacted the CARES Act. The CARES Act established new tax provisions including, but not limited to: (1) five-year carryback of NOLs generated in 2018, 2019 and 2020; (2) accelerated refund of alternative minimum tax (“AMT”) credit carryforwards; and (3) retroactive changes to allow accelerated depreciation for certain depreciable property. The legislation does not have a material impact on the Company’s tax positions due to the lack of taxable income in the carryback periods. As of December 31, 2020, the Company had received a cash benefit for its remaining AMT credits as provided by the CARES Act.

Consolidated Appropriations Act

On December 21, 2020, The Consolidated Appropriations Act (“Act”) passed by Congress to respond to the health and economic impacts of COVID-19. The Act includes a number of tax law changes, including the expansion of Employee Retention Credit, important changes to Paycheck Protection Program, and extension of a variety of expiring tax provisions. The legislation does not have a material impact on the Company’s tax position.