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Income Taxes | 12 Months Ended
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Dec. 31, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | 16. Income Taxes The components of income tax expense (benefit) on continuing operations were as follows:
| Successor |  |  | Predecessor
For the Period August 1 - December 31, 2018 |  |  | For the Period January 1 - July 31, 2018 |  | Year ended December 31, 2017 |  | Year ended December 31, 2016
Current Income Taxes |  |  |  |  |  |  |  |
Federal | $ | — |  |  |  | $ | (14 | ) |  | $ | 52 |  |  | $ | 14 |
State | — |  |  |  | (1 | ) |  | 7 |  |  | 4 |
Total current income taxes | — |  |  |  | (15 | ) |  | 59 |  |  | 18 |
Deferred Income Taxes |  |  |  |  |  |  |  |
Federal | (1,015 | ) |  |  | 54 |  |  | (43 | ) |  | (4 | )
State | (6 | ) |  |  | 9 |  |  | (3 | ) |  | (1 | )
Total deferred income taxes | (1,021 | ) |  |  | 63 |  |  | (46 | ) |  | (5 | )
Total provision for income taxes | $ | (1,021 | ) |  |  | $ | 48 |  |  | $ | 13 |  |  | $ | 13 |
Income tax expense differs from the amounts computed by applying the U.S. federal corporate tax rate of 21.0% as follows for the years indicated.
| Successor |  |  | Predecessor
| For the Period August 1 - December 31, 2018 |  |  | For the Period January 1 - July 31, 2018 |  | Year ended December 31, 2017 |  | Year ended December 31, 2016
Tax (Benefit) Expense at Federal Statutory Rate | $ | (29 | ) |  | 21.0 | % |  |  | $ | 42 |  |  | 21.0 | % |  | $ | 15 |  |  | 35.0 | % |  | $ | 10 |  |  | 35.0 | %
Effect of: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State taxes, net of federal benefit | (6 | ) |  | 4.2 | % |  |  | 8 |  |  | 3.8 | % |  | 1 |  |  | 1.9 | % |  | 1 |  |  | 5.0 | %
Non-controlling interests | — |  |  | — | % |  |  | — |  |  | — | % |  | — |  |  | (0.3 | )% |  | 1 |  |  | 3.4 | %
Decrease of federal valuation allowance | (990 | ) |  | 720.0 | % |  |  | — |  |  | — | % |  | (1 | ) |  | (1.2 | )% |  | — |  |  | — | %
Deferred adjustments | 3 |  |  | (1.8 | )% |  |  | (1 | ) |  | (0.5 | )% |  | — |  |  | — | % |  | 1 |  |  | 2.3 | %
Federal tax reform impact | — |  |  | — | % |  |  | — |  |  | — | % |  | (5 | ) |  | (12.6 | )% |  | — |  |  | — | %
Current payable adjustments | — |  |  | — | % |  |  | (1 | ) |  | (0.5 | )% |  | — |  |  | — | % |  | 1 |  |  | 1.9 | %
Adjustments related to uncertain tax positions | — |  |  | — | % |  |  | — |  |  | — | % |  | 1 |  |  | 2.4 | % |  | — |  |  | — | %
Other, net | 1 |  |  | (1.0 | )% |  |  | — |  |  | — | % |  | 2 |  |  | 3.7 | % |  | (1 | ) |  | (2.4 | )%
Total income tax (benefit) expense | $ | (1,021 | ) |  | 742.4 | % |  |  | $ | 48 |  |  | 23.8 | % |  | $ | 13 |  |  | 28.9 | % |  | $ | 13 |  |  | 45.2 | %
In 2018, the effective tax rate differed from the statutory tax rate primarily due to the reversal of the valuation allowance associated with the net operating loss (“NOL”) carryforwards of WMIH, permanent differences including executive compensation disallowed under Internal Revenue Code Section 162(m), penalties and nondeductible meals and entertainment expenses. In 2017, the effective tax rate differed from the statutory tax rate primarily as a result of changes made by the Tax Reform Act, including deferred adjustments related to the remeasurement of deferred tax assets and liabilities as a result of the reduction of the U.S. corporate tax rate to 21%. Deferred income tax amounts at December 31, 2018 and 2017, reflect the effect of basis differences in assets and liabilities for financial reporting and income tax purposes and tax attribute carryforwards. Prior to the Merger, WMIH had a full valuation allowance of $1.3 billion established against the deferred tax asset related to its federal net operating loss carryforwards (“NOLs”) due to cumulative losses in previous years. On the contrary, the Predecessor determined that it would be able to fully realize its federal and state net operating losses, with the exception of a portion of its NOLs that would more-likely-than-not expire unused due to limitations of Internal Revenue Code Section 382. As a result of the Merger, the Successor re-evaluated its valuation allowance. In the assessment of whether a valuation allowance was required against WMIH’s NOLs subsequent to the Merger, the Successor considered the four sources of taxable income, as follows, under ASC 740-10-30-18:
1. | Taxable income in prior carryback year(s) if carryback is permitted under the tax law;
2. | Future reversals of existing taxable temporary differences;
3. | Tax-planning strategies; and
4. | Future taxable income exclusive of reversing temporary differences and carryforwards.
The Successor noted that the NOL carryback period of taxable income is no longer available to offset taxable income in prior years as modified as part of the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”). Also, the Successor did not identify any tax planning strategies available that would support realization of the WMIH NOL deferred tax asset under ASC 740. Thus, in determining the appropriate deferred tax asset valuation allowance subsequent to the Merger, the Successor relied upon reversals of existing deferred tax liabilities and future taxable income excluding reversing differences, with the latter item accounting for most of the change. In estimating future taxable income from the fourth source listed above, the Successor considered all available evidence and applied judgment in determining the effect of positive and negative evidence based on its ability to objectively verify it. In that regard, the Successor further noted that under ASC 740-10-30-21, “Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Other examples of negative evidence include, but are not limited to, the following:
1. | A history of operating loss or tax credit carryforwards expiring unused
2. | Losses expected in early future years (by a presently profitable entity)
3. | Unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years
4. | A carryback, carryforward period that is so brief it would limit realization of tax benefits if a significant deductible temporary difference is expected to reverse in a single year or the entity operates in a traditionally cyclical business.”
The Successor noted none of the negative items listed above from the perspective of the post-merger operations. Accordingly, it was deemed appropriate and reasonable to conclude under ASC 740 that a significant portion of the WMIH NOL deferred tax asset, previously subject to a full valuation allowance, would be realizable at a more-likely-than-not (“MLTN”) level subsequent to the Merger. While WMIH experienced a history of cumulative losses in previous years, the Predecessor, which accounts for almost all of the post-merger operations, has demonstrated a history of strong sustainable pre-tax income and taxable income in previous years. In determining the amount of the valuation allowance to release, the Successor considered (1) internal forecasts of the Successor’s future pre-tax income exclusive of reversing temporary differences and carryforwards, (2) the nature and timing of future reversals of existing deferred tax assets and liabilities, (3) future originating temporary and permanent differences, and (4) NOL carryforward expiration dates. For purposes of the analysis, the Successor concluded that it should start with an average of the Predecessor’s historical pre-tax income to project future taxable income adjusted for non-recurring expenses. The Successor also removed any existing intangible amortization expense and interest expense from the 3-year historical average and incorporated post-Merger costs expected to be incurred, including additional interest expense from new debt assumed and additional amortization expense resulting from the intangibles recorded as part of purchase price accounting. For purposes of analyzing the realization of the deferred tax assets in accordance with ASC 740, the Company assumed a steady state of operations that would generate cash flows and liquidity sufficient to maintain current operations and pay down corporate debt resulting in a reduction in interest expense in future periods. The Successor considered other factors in its determination of future taxable income that was demonstrated by historical performance. As a result of the above considerations and analysis, the Successor released $990 of the valuation allowance related to WMIH’s net operating loss carryforwards and other deferred tax assets. The Successor does not expect any tax loss limitations under Sections §382 and §384 that would impact its utilization of WMIH’s pre-Merger federal NOL carryforwards in the future. Impact of Tax Reform On December 22, 2017, the Tax Reform Act was enacted, and it significantly revised the U.S. corporate income tax regime by lowering the U.S. corporate tax rate from 35% to 21%, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, creating new taxes on certain foreign sourced earnings, as well as other changes. The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP related to the enactment of the Tax Reform Act. SAB 118 provides guidance in those situations where the accounting for certain income tax effects of the Tax Reform Act will be incomplete by the time financial statements are issued for the reporting period that includes the enactment date. In 2017 and the first nine months of 2018, the Predecessor had not completed the accounting for the tax effects of enactment of the Tax Reform Act. As of December 31, 2017, the Company recorded provisional amounts for the remeasurement of deferred taxes, the transition tax, and valuation allowance, among others, under the guidance within SAB 118. At December 31, 2018, the Company has completed the accounting for all income tax effects of the enactment of the Tax Reform Act. The Company recorded adjustments of $3, including the rate differential from the remeasurement of deferred taxes resulting from return to provision true up adjustments. Such adjustments were recorded in purchase accounting and had no impact on the tax provision. In addition, the Company has elected to account for the Global Intangible Low-Taxed Income (“GILTI”) tax expense in the period in which it is incurred. As a result, no deferred tax impacts of GILTI has been provided in the consolidated financial statements. Temporary differences and carryforwards that give rise to deferred tax assets and liabilities are comprised of the following:
| Successor |  |  | Predecessor
| December 31, 2018 |  |  | December 31, 2017
Deferred Tax Assets |  |  |  |
Effect of: |  |  |  |
Loss carryforwards (federal, state and capital) | $ | 1,334 |  |  |  | $ | 37 |
Excess interest expense | 10 |  |  |  | — |
Reverse mortgage interests | 68 |  |  |  | — |
Loss reserves | 69 |  |  |  | 81 |
Reverse mortgage premiums | 1 |  |  |  | 15 |
Rent expense | 1 |  |  |  | 4 |
Restricted share based compensation | 1 |  |  |  | 6 |
Accruals | 14 |  |  |  | 10 |
Partnership interests | 7 |  |  |  | 5 |
Reverse mortgage purchase discount | 1 |  |  |  | 24 |
Goodwill and intangible assets | 4 |  |  |  | — |
Other, net | 5 |  |  |  | 3 |
Total deferred tax assets | 1,515 |  |  |  | 185 |
Deferred Tax Liabilities |  |  |  |
MSR amortization and mark-to-market, net | (243 | ) |  |  | (174 | )
Depreciation and amortization, net | (12 | ) |  |  | (20 | )
Prepaid assets | (1 | ) |  |  | (2 | )
Goodwill and intangible assets | — |  |  |  | (1 | )
Total deferred tax liabilities | (256 | ) |  |  | (197 | )
Valuation allowance | (295 | ) |  |  | (4 | )
Net deferred tax assets (liabilities) | $ | 964 |  |  |  | $ | (16 | )
The Company files income tax returns in the U.S. federal jurisdiction and numerous U.S. state jurisdictions. With few exceptions, as of December 31, 2018, the Company is no longer subject to U.S. federal and state income tax examinations for tax years prior to 2014. As of December 31, 2018, the Company has no unrecognized tax benefits recorded related to uncertain tax positions. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties.
| Successor |  |  | Predecessor
Unrecognized Tax Benefits | For the Period August 1 - December 31, 2018 |  |  | For the Period January 1 - July 31, 2018 |  | Year ended December 31, 2017 |  | Year ended December 31, 2016
Balance - beginning of period | $ | — |  |  |  | $ | 17 |  |  | $ | — |  |  | $ | — |
Increases in tax positions of current year | — |  |  |  | — |  |  | 1 |  |  | — |
Increases in tax positions of prior years | — |  |  |  | — |  |  | 20 |  |  | — |
Decreases in tax positions of prior years | — |  |  |  | (17 | ) |  | — |  |  | — |
Settlements | — |  |  |  | — |  |  | (4 | ) |  | — |
Balance - end of period | $ | — |  |  |  | $ | — |  |  | $ | 17 |  |  | $ | — |
As of December 31, 2017, the Company recorded $19 of unrecognized tax benefits related to uncertain tax positions, including $2 in interest and penalties. In the period ended March 31, 2018 the Company took certain actions to remediate the uncertain tax position that existed as of the prior period. As a result, the Company recognized all of the unrecognized tax benefits and recorded an income tax benefit of approximately $6, exclusive of any benefits related to interest and penalties in the period ended March 31, 2018.

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- 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. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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