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Income Taxes
 9 Months Ended
Sep. 30, 2014
Text Block [Abstract]  
Income Taxes

Note 9: Income Taxes

The Company’s income taxes and the related effective tax rates for the three and nine months ended September 30, 2014 and 2013 are as follows:

Three Months Ended September 30,Nine Months Ended September 30,
In millions2014201320142013
Income (loss) before income taxes$148$171$607$122
Provision (benefit) for income taxes$(25)$39$58$4
Effective tax rate-16.9%22.8%9.6%3.3%

For the nine months ended September 30, 2014, the Company’s effective tax rate applied to its pre-tax income was lower than the U.S. statutory tax rate primarily as a result of the decrease in the valuation allowance against its deferred tax asset and the reduction of the reserve for uncertain tax positions in the third quarter of 2014.

For the nine months ended September 30, 2013, the Company’s effective tax rate applied to its pre-tax income was lower than the U.S. statutory tax rate primarily as a result of the decrease in the valuation allowance against its deferred tax asset.

The Company's provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to the variability in fair value of its credit derivatives, which prevents the Company from projecting a reliable estimated annual effective tax rate and pretax income for the full year of 2014. A discrete calculation of the provision is calculated for each interim period.

Deferred Tax Asset, Net of Valuation Allowance

The Company establishes a valuation allowance against its deferred tax asset when it is more likely than not that all or a portion of the deferred tax asset will not be realized. All evidence, both positive and negative, needs to be identified and considered in making the determination. Future realization of the existing deferred tax asset ultimately depends, in part, on the generation of sufficient taxable income of appropriate character (for example, ordinary income versus capital gains) within the carryforward period available under the tax law.

As of September 30, 2014, the Company reported a net deferred tax asset of $1.0 billion, net of a $12 million valuation allowance. This valuation allowance related to losses from asset impairments. As of December 31, 2013, the valuation allowance against a portion of the deferred tax asset was $93 million. This decrease in the valuation allowance was primarily due to sales of previously impaired assets.

In accordance with ASU 2013-11, the netting of deferred taxes between different taxpaying jurisdictions is not permitted. As of September 30, 2014, there was a gross deferred tax asset of $1.0 billion and a gross deferred tax liability of $28 million, which was included in “Other liabilities” 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” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, for further discussion on the Company’s tax sharing agreement.

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. The amounts in the table below do not include accrued interest of $2 million. All amounts below are reflected before any applicable tax benefit.

In millions
Unrecognized tax benefit as of December 31, 2013$65
The gross amount of the increase/(decrease) in the UTB as a result of tax positions taken:
During a prior year(61)
During the current year-
The amount of decreases in the UTB related to settlements with taxing authorities-
The reduction in the UTB as a result of the applicable statute of limitations-
Unrecognized tax benefit as of September 30, 2014$4

The Company does not anticipate any additional amount to reverse in the next twelve months based on settling certain issues.

The reserve for UTB has decreased during the third quarter of 2014 based on certain positive developments, including the conclusion from an Internal Revenue Service initiated survey of the 2011 consolidated return of MBIA Inc. and its subsidiaries, which has resulted in no changes to taxable income.

The United Kingdom tax authorities are currently auditing tax years 2005 through 2011. On January 24, 2014, the Company provided an independent report to HM Revenue & Customs (“HMRC”). On April 8, 2014, HMRC responded with comments. On June 2, 2014, the Company responded to HMRC’s letter dated April 8, 2014. As of September 30, 2014, no response has been received from HMRC and there has been no resolution.

During 2013, the Company met with New York State Department of Taxation and Finance to discuss the Company’s respective tax positions regarding certain issues related to the 2008 tax year. As of September 30, 2014, there has been no resolution.

As of December 31, 2013, the Company’s NOL is approximately $2.8 billion which will expire between tax years 2029 through 2033. As of December 31, 2013, the Company has an alternative minimum tax credit carryforward of $22 million, which does not expire. As a result of the commutation of CMBS exposure that occurred during the nine months ended September 30, 2014, the Company’s NOL is approximately $3.2 billion as of September 30, 2014.

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

U.S. deferred income taxes are provided on the differences in the book and tax basis in the Company’s investment in MBIA UK and certain other entities since the Company no longer intends to have these earnings permanently reinvested. The impact is reflected in the Company’s current period’s provision.