Income Taxes

Income Tax Provision

The components of our consolidated income tax provision from continuing operations are as follows:



	Year Ended December 31,
(In thousands)	2017		2016		2015
Current provision	$	59,122	$	4,546	$	120
Deferred provision	166,527		170,887		156,170
Total income tax provision	$	225,649	$	175,433	$	156,290

The reconciliation of taxes computed at the statutory tax rate of 35% to the provision for income taxes on continuing operations is as follows:



	Year Ended December 31,
(In thousands)	2017			2016			2015
Provision for income taxes computed at the statutory tax rate	$	121,358		$	169,290		$	153,240
Change in tax resulting from:
Repurchase premium on convertible notes	(96		)	9,988			(6,674		)
State tax (benefit)	(15,641		)	(8,974		)	(7,619		)
Valuation allowance	18,197			10,663			11,931
Remeasurement of net deferred tax assets due to the TCJA	102,617			—			—
Other, net	(786		)	(5,534		)	5,412
Provision for income taxes	$	225,649		$	175,433		$	156,290

Deferred Tax Assets and Liabilities

The significant components of our net deferred tax assets and liabilities from continuing operations are summarized as follows:



	December 31,
(In thousands)	2017		2016
Deferred tax assets:
Accrued expenses	$	30,267	$	41,219
Unearned premiums	35,035		67,538
NOL	—		179,128
Net unrealized loss on investments	—		6,285
State income taxes	68,577		51,875
Partnership investments	47,991		73,918
Loss reserves	1,397		3,801
Alternative minimum tax credit carryforward	57,086		7,367
Goodwill and Intangibles	36,947		—
Other	41,499		49,511
Total deferred tax assets	318,799		480,642
Deferred tax liabilities:
Convertible and other long-term debt	—		2,212
Differences in fair value of financial instruments	3,833		1,758
Net unrealized gain on investments	6,792		—
Depreciation	11,138		10,626
Goodwill and Intangibles	—		4,758
Other	2,446		2,598
Total deferred tax liabilities	24,209		21,952
Less: Valuation allowance	65,023		46,892
Net deferred tax asset	$	229,567	$	411,798

Tax Reform

On December 22, 2017, H.R.1, the TCJA, was signed into law. In accordance with the provisions of the accounting standard regarding accounting for income taxes, changes in tax rates and tax law are accounted for in the period of enactment, which, for federal legislation, is the date the President signed the bill into law. Effective January 1, 2018, the TCJA, among other things, reduces the federal corporate income tax rate from 35% to 21%, repeals the corporate alternative minimum tax and modifies certain limitations on executive compensation. Under GAAP, the effect of tax rate changes on deferred tax balances is recorded as a component of the income tax provision related to continuing operations for the period in which the new tax law is enacted.

Because the TCJA was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation is expected over the next 12 months, as of December 31, 2017, we have not completed our accounting for the effects of the TCJA on certain deferred tax balances; however, we have made provisional estimates of those amounts in accordance with SAB 118. These provisional estimates primarily relate to NOLs, loss reserves, tax depreciation, share-based compensation and state taxes. We expect to complete our analysis of all deferred tax balances within the 12-month measurement period defined by SAB 118. Accordingly, we have recognized a non-cash, provisional income tax expense of $102.6 million, which is included as a component of the income tax provision for the year ended December 31, 2017. The ultimate impact of the TCJA may differ from our provisional estimates due to, among other things, future guidance that may be issued, changes in our interpretation or assumptions with respect to reversal periods, the outcome of our potential settlement of the IRS Matter and future actions that we may take as a result of the new tax law.

For periods beginning after December 31, 2017, we will realize a significant reduction in our annualized effective tax rate, before considering Discrete Items, primarily due to the reduction in the federal corporate tax rate from 35% to 21%. Typically, when the statutory tax rate is constant between periods, our return-to-provision adjustments for temporary differences do not impact our overall effective tax rate. However, with the change in the corporate tax rate, our return-to-provision adjustments recorded during 2018 may affect our current provision at a 35% tax rate while affecting our deferred provision at a 21% tax rate. Our return-to-provision adjustments are accounted for as Discrete Items and are generally recorded in the three-month period ending December 31.

Current and Deferred Taxes

As of December 31, 2017, we recorded a net current income tax payable of $95.6 million, which primarily consists of liabilities related to applying the standards of accounting for uncertainty in income taxes, and a current federal income tax recoverable of $48.4 million. Before consideration of uncertain tax positions, we have approximately $124.4 million of U.S. NOL carryforwards, $57.1 million of alternative minimum tax credit carryforwards and $6.5 million of research and development tax credit carryforwards as of December 31, 2017. Our deferred tax asset relating to our U.S. NOL carryforward is reduced by the impact of uncertain tax positions in the above table of deferred tax assets and liabilities. To the extent not utilized, the U.S. NOL carryforwards will expire during tax years 2031 and 2032, and the research and development tax credit carryforwards will expire during tax years 2031 through 2037. We expect our alternative minimum tax credit carryforwards to be fully utilized or refunded in the near term. Certain entities within our consolidated group have also generated deferred tax assets of approximately $69.5 million, relating primarily to state and local NOL carryforwards which, if unutilized, will expire during various future tax periods.

Valuation Allowances

We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our deferred tax assets will be realized in future periods. We have determined that certain non-insurance entities within Radian may continue to generate taxable losses on a separate company basis in the near term and may not be able to fully utilize certain state and local NOLs on their state and local tax returns. Therefore, with respect to deferred tax assets relating to these state and local NOLs and other state timing adjustments, we retained a valuation allowance of $65.0 million at December 31, 2017 and $46.9 million at December 31, 2016.

Tax Benefit Preservation Plan

Our ability to fully use our tax assets such as NOLs and tax credit carryforwards could be limited if we experience an “ownership change” within the meaning of IRC Section 382. IRC Section 382 rules governing when a change in ownership occurs are complex and subject to interpretation; however, in general, an ownership change would occur if any “five-percent shareholders,” as defined under IRC Section 382, collectively increase their ownership by more than 50 percentage points over a rolling three-year period. As of December 31, 2017, we have not experienced an ownership change under IRC Section 382. However, if we were to experience a change in ownership under IRC Section 382 in a future period, then we may be delayed in our ability to utilize our NOL and tax credit carryforwards in future periods.

In 2009, we adopted a Tax Benefit Preservation Plan (the “Plan”), which, as amended, was approved by our stockholders at our 2010, 2013 and 2016 annual meetings. We also adopted certain amendments to our amended and restated bylaws (the “Bylaw Amendment”) and at our 2010, 2013 and 2016 annual meetings, our stockholders approved certain amendments to our amended and restated certificate of incorporation (the “Charter Amendment”). These steps were taken to protect our ability to utilize our NOLs and other tax assets and to attempt to prevent an “ownership change” under U.S. federal income tax rules by discouraging and in most cases restricting certain transfers of our common stock that would: (i) create or result in a person becoming a five-percent shareholder under IRC Section 382 or (ii) increase the stock ownership of any existing five-percent shareholder under IRC Section 382. The continued effectiveness of the Plan, the Bylaw Amendment and the Charter Amendment are subject to periodic examination by Radian Group’s board of directors and the reapproval of the Plan and the Charter Amendment by our stockholders every three years. We currently expect that our tax benefit preservation measures will be terminated no later than 2019.

IRS Matter

As previously disclosed, we are contesting adjustments resulting from the examination by the IRS of our 2000 through 2007 consolidated federal income tax returns. The IRS opposes the recognition of certain tax losses and deductions that were generated through our investment in a portfolio of non-economic REMIC residual interests and has proposed denying the associated tax benefits of these items. We appealed these proposed adjustments to the Internal Revenue Service Office of Appeals and made “qualified deposits” with the U.S. Treasury of $85 million in June 2008 relating to the 2000 through 2004 tax years and $4 million in May 2010 relating to the 2005 through 2007 tax years in order to avoid the accrual of incremental above-market-rate interest with respect to the proposed adjustments.

We attempted to reach a compromised settlement with the Internal Revenue Service Office of Appeals, but in September 2014 we received Notices of Deficiency covering the 2000 through 2007 tax years that assert unpaid taxes and penalties of $157 million. The Deficiency Amount has not been reduced to reflect our NOL carryback ability. As of December 31, 2017, there also would be interest of approximately $149 million related to these matters. Depending on the outcome, additional state income taxes, penalties and interest (estimated in the aggregate to be approximately $37 million as of December 31, 2017) also may become due when a final resolution is reached. The Notices of Deficiency also reflected additional amounts due of $105 million, which are primarily associated with the disallowance of the previously filed carryback of our 2008 NOL to the 2006 and 2007 tax years. We currently believe that the disallowance of our 2008 NOL carryback is a precautionary position by the IRS and that we will ultimately maintain the benefit of this NOL carryback claim.

On December 3, 2014, we petitioned the U.S. Tax Court (“Tax Court”) to litigate the Deficiency Amount. On September 1, 2015, we received a notice that the case had been scheduled for trial. However, the parties jointly filed, and the Tax Court approved, motions for continuance in this matter to postpone the trial date. Also, in February 2016, the Tax Court approved a joint motion to consolidate for trial, briefing and opinion our case with a similar case involving MGIC Investment Corporation. During 2016, we held several meetings with the IRS in an attempt to reach a compromised settlement on the issues presented in our dispute. In October 2017, the parties informed the Tax Court that they believe they have reached agreement in principle on all issues in the dispute. In November 2017, as required by law, the agreement was reported to the JCT for review. The agreement cannot be finalized until the IRS considers the views, if any, expressed by the JCT about the matter. If we are unable to complete a compromised settlement, then the ongoing litigation could take several years to resolve and may result in substantial legal expenses. We can provide no assurance regarding the outcome of any such litigation or whether a compromised settlement with the IRS will ultimately be reached. We currently believe that an adequate provision for income taxes has been made for the potential liabilities that may result from this matter. However, if the ultimate resolution of this matter produces a result that differs materially from our current expectations, there could be a material impact on our effective tax rate, results of operations and cash flows.

Unrecognized Tax Benefits

As of December 31, 2017, we have $112.3 million of unrecognized tax benefits, including $65.7 million of interest and penalties, that would affect the effective tax rate, if recognized. Our policy for the recognition of interest and penalties associated with uncertain tax positions is to record such items as a component of our income tax provision, of which $2.2 million, $1.8 million and $0.8 million were recorded for the years ended December 31, 2017, 2016 and 2015, respectively.

A reconciliation of the beginning and ending unrecognized tax benefits is as follows:



	Year Ended December 31,
(In thousands)	2017			2016
Balance at beginning of period	$	123,028		$	124,246
Tax positions related to the current year:
Increases	2,343			1,203
Decreases	—			(1,835		)
Tax positions related to prior years:
Increases	24,122			22,389
Decreases	(1,437		)	(1,406		)
Lapses of applicable statute of limitation	(24,105		)	(21,569		)
Balance at end of period	$	123,951		$	123,028

In previous years, we took a return position in various jurisdictions that we are not required to remit taxes with regard to the income generated from our investment in certain partnership interests. Although we believe that these tax positions are more likely than not to succeed if adjudicated, measurement of the potential amount of liability for state and local taxes and the potential for penalty and interest thereon is performed on a quarterly basis. Our net unrecognized tax benefits related to prior years increased by $22.7 million during 2017. This net increase primarily reflects the impact of unrecognized tax benefits associated with our recognition of certain premium income. Although unrecognized tax benefits for this item decreased by $24.1 million due to the expiration of the applicable statute of limitations for the taxable period ended December 31, 2013, the related amounts continued to impact subsequent years, resulting in a corresponding increase to the unrecognized tax benefits related primarily to the 2014 taxable year.

As discussed above, we believe we have reached a basis for a compromised settlement with the IRS on the issues present in our case. The resolution and computations of our adjusted tax liabilities for the 2000 through 2007 tax years have been presented to the JCT for review and cannot be finalized until the IRS considers the views, if any, expressed by the JCT about the matter. However, if we are able to achieve a compromised settlement with the IRS, then it is estimated that over the next 12 months approximately $70.0 million of unrecognized tax benefits in the above tabular reconciliation may be reversed pursuant to the accounting standard for uncertain tax positions.

In the event we are not successful in defense of our tax positions taken for U.S. federal income tax purposes, and for which we have recorded unrecognized tax benefits, then such adjustments originating in NOL or NOL carryback years may reduce our existing NOL.

The following calendar tax years, listed by major jurisdiction, remain subject to examination:



U.S. Federal Corporation Income Tax (1)	2000 - 2007, 2014 - 2016
Significant State and Local Jurisdictions (2)	2000 - 2016

______________________


(1)	For the 2000 through 2007 calendar tax years, we petitioned the U.S. Tax Court to litigate the IRS Notices of Deficiency resulting from the examination of our 2000 through 2007 consolidated federal income tax returns. This litigation relates to the recognition of certain tax benefits associated with our investment in a portfolio of non-economic REMIC residual interests.


(2)	California, Florida, Georgia, New York, Ohio, Pennsylvania and New York City.