Note 5: Income Taxes

For the year ended December 31, 2017, the Company recorded net income of approximately $25.9 million compared to net income of $201.7 million for the year ended December 31, 2016 and a net loss of approximately $61.8 million for the year ended December 31, 2015. The Company has not recorded an income tax expense or benefit for the years ended December 31, 2017, 2016, or 2015.

	2017		2016		2015
Current federal income tax expense	$	—	$	—	$	—
Provision for doubtful federal income tax receivable		—		—		—
Deferred federal income tax expense		—		—		—
Federal income tax expense	$	—	$	—	$	—

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:

	Year Ended			Year Ended			Year Ended
	December 31, 2017			December 31, 2016			December 31, 2015
Income tax at the federal statutory rate		35.0	%		35.0	%		35.0	%
Effect of:
Dividends on preferred securities		80.7			3.4			(8.0	)
True-up of deferred assets		13.7			(0.5	)	—
Adjustments to NOL due to change in tax rate		10,766.6		—			—
Adjustments to capital loss carryforward due to expiration		662.9		—			—
Stock Based Compensation		(13.7	)	—			—
Change in valuation allowance		(11,545.2	)		(37.9	)		(27.0	)
Effective rate	— %			—%			—%

The Company files a consolidated federal income tax return. Pursuant to a tax sharing agreement, WMMRC’s federal income tax liability is calculated on a separate return basis determined by applying the applicable percentage 35% prior to the 2017 tax reform and 21% for future years to taxable income, in accordance with the provisions of the United States Internal Revenue Code of 1986, as amended (the “Code”), that apply to property and casualty insurance companies. WMIH, as WMMRC’s parent, pays federal income taxes on behalf of WMMRC and settles the federal income tax obligation on a current basis in accordance with the tax sharing agreement. WMMRC made no tax payments to WMIH during the years ended December 31, 2017, 2016, or 2015 associated with the Company’s tax liability from the preceding year.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act which reforms U.S. Tax legislation and related laws. One of the provisions of the new tax law reduces the Company’s U.S. federal corporate income tax rate from 35% to 21% resulting in a reduction of the deferred tax asset of $842.9 million and a corresponding change in the related valuation allowance. Our deferred tax assets, although fully reserved, have been revalued at the lower rate as of December 31, 2017. The Company continues to evaluate the impact of the new tax law on its financial condition and results of operations.

Deferred federal income taxes arise from temporary differences between the valuation of assets and liabilities as determined for financial reporting purposes and income tax purposes. Temporary differences principally relate to discounting of loss reserves, accruals, derivate liabilities, net operating losses, and unrealized gains and losses on investments. As of December 31, 2017, 2016, and 2015, the Company recorded a valuation allowance equal to 100% of the net deferred federal income tax asset due to uncertainty regarding the Company’s ability to realize these benefits in the future.

The components of the net deferred tax asset as of December 31, 2017, 2016 and 2015, respectively, are as follows:

	Year Ended			Year Ended		Year Ended
	December 31, 2017			December 31, 2016		December 31, 2015
Deferred federal income tax asset:
Net operating loss carryforward	$	2,107,353		$	2,104,944	$	2,102,482
Change in net operating loss due to change in tax rates		(842,941	)		—		—
Accruals and reserves		309			2,177		3,481
Derivative liability		—			—		19,117
Restricted stock grants		138			157		160
Net unrealized loss on investments		4			23		16
Capital loss carryforward		344			52,475		52,490
Total deferred federal income tax asset		1,265,207			2,159,776		2,177,746
Deferred federal income tax liabilities:
Losses and loss adjustments expense		304			500		411
Derivative asset		—			51,407		—
Total deferred federal income tax liabilities		304			51,907		411
Less: Valuation allowance		1,264,903			2,107,869		2,177,335
Net deferred federal income tax asset	$	—		$	—	$	—

On March 19, 2012, WMIH emerged from bankruptcy. Prior to emergence, WMI abandoned the stock of WMB, thereby generating a worthless stock deduction of approximately $8.4 billion which gives rise to an NOL for the year ended December 31, 2012. Under Section 382 of the Code (“Section 382”), and based on the Company’s analysis, we believe that the Company experienced an “ownership change” (generally defined as a greater than 50% change (by value) in our equity ownership over a three-year period) on March 19, 2012, and our ability to use our pre-change of control NOLs and other pre-change tax attributes against our post-change income was limited. The Section 382 limitation is applied annually so as to limit the use of our pre-change NOLs to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. Due to applicable limitations under Section 382 and a reduction of tax attributes due to cancellation of indebtedness, a portion of these NOLs were limited and will expire unused. We believe that the total available and utilizable NOL carry forward at December 31, 2017 is approximately $6.0 billion. At December 31, 2017, there was no limitation on the use of these NOLs. These NOLs will begin to expire in 2031. The Company’s ability to utilize the NOLs or realize any benefits related to the NOLs is subject to a number of risks.

As of December 31, 2017, WMIH has a capital loss carryforward of $1.6 million, most of which is subject to expiration in 2018. At December 31, 2016, the Company had $150 million of capital loss carryforward, $148.3 million of which expired in 2017.

In 2017, WMIH, adopted ASU 2016-09, which requires all excess tax benefits and tax deficiencies arising from share-based payments during the period to be recognized in income (rather than in equity) on a prospective basis. Amendments related to accounting for excess tax benefits have been adopted prospectively, resulting in recognition of excess tax benefits against income tax expenses rather than additional paid-in capital of $2.9 million for the year ended December 31, 2017. This adoption had no impact on income because the company is in a net operating loss position with a full valuation allowance.

The following table provides a summary of NOLs including the year they were incurred and the year they would currently be scheduled to expire if unused:

(in thousands)

Originated During Year Ended	Operating Loss (Taxable)			Limitations			Net Operating Loss (Taxable)			Expiration (if unused) Year Ended
December 31, 2011	$	(14,201	)	$	—		$	(14,201	)	December 31, 2031
December 31, 2012		(7,535,083	)		(1,589,798	)		(5,945,285	)	December 31, 2032
December 31, 2013		(5,019	)		—			(5,019	)	December 31, 2033
December 31, 2014		(32,389	)		—			(32,389	)	December 31, 2034
December 31, 2015		(12,347	)		—			(12,347	)	December 31, 2035
December 31, 2016		(4,617	)		—			(4,617	)	December 31, 2036
December 31, 2017		(7,152	)		—			(7,152	)	December 31, 2037
Total	$	(7,610,808	)	$	(1,589,798	)	$	(6,021,010	)

The Company accounts for uncertain tax positions in accordance with the income tax accounting guidance. The Company has analyzed filing positions in the federal and state jurisdiction where it is required to file tax returns, as well as the open tax years in these jurisdictions. Tax years 2011 to present are subject to examination by the Internal Revenue Service. The Company believes that its federal income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain federal income tax positions have been recorded. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes. The Company did not incur any federal income tax related interest income, interest expense or penalties for the years ended December 31, 2017, 2016, and 2015.