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Income Taxes | 9 Months Ended
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Sep. 30, 2017
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Income Taxes | Note 10: Income Taxes The Company’s i n c o m e t a x e s a nd t he r e l a t e d e f f e c ti v e t a x r a t e s f o r t he three and nine months ended September 30, 2017 a nd 2016 a re a s fo l l o ws:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30, |
In millions |  | 2017 |  | 2016 |  | 2017 |  | 2016 |
Income (loss) before income taxes |  | $ | (273) |  | $ | 55 |  | $ | (603) |  | $ | (101) |
Provision (benefit) for income taxes |  | $ | (6) |  | $ | 24 |  | $ | 965 |  | $ | (28) |
Effective tax rate |  |  | 2.2% |  |  | 43.6% |  |  | -160.0% |  |  | 27.7% |
F or the nine months ended September 30, 2017, the Company’s effective tax rate applied to its loss before income taxes is less than the U.S. statutory tax rate primarily due to a full valuation allowance against its net deferred tax asset. F or the nine months ended September 30, 2016, the Company’s effective tax rate applied to its loss before income taxes is less than the U.S. statutory effective tax rate primarily due to a foreign tax credit adjustment, partia lly offset by the fluctuation of the value of nontaxable warrants issued by the Company and tax exempt interest income. 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 bases 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 asse ts and liabilities is recognized in inco me 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 a nd liabilities as of September 30, 2017 and December 31, 2016 are presented in the following table:
|  |  |  | As of |
| In millions |  | September 30, 2017 |  | December 31, 2016 |
| Deferred tax liabilities: |  |  |  |  |  |  |
|  | Unearned premium revenue |  | $ | 139 |  | $ | 143 |
|  | Deferral of cancellation of indebtedness income |  |  | 28 |  |  | 46 |
|  | Deferred acquisition costs |  |  | 34 |  |  | 42 |
|  | Net gains on financial instruments at fair value and foreign exchange |  |  | - |  |  | 4 |
|  | Net unrealized gains in accumulated other comprehensive income |  |  | 10 |  |  | - |
|  | Partnership basis difference |  |  | 29 |  |  | 36 |
|  | Basis difference in foreign subsidiaries |  |  | 1 |  |  | 64 |
|  | Net deferred taxes on VIEs |  |  | 13 |  |  | - |
|  | Other |  |  | 28 |  |  | 27 |
| Total gross deferred tax liabilities |  |  | 282 |  |  | 362 |
| Deferred tax assets: |  |  |  |  |  |  |
|  | Compensation and employee benefits |  |  | 15 |  |  | 19 |
|  | Accrued interest |  |  | 208 |  |  | 177 |
|  | Loss and loss adjustment expense reserves |  |  | 121 |  |  | 142 |
|  | Net operating loss |  |  | 996 |  |  | 929 |
|  | Foreign tax credits |  |  | 62 |  |  | 7 |
|  | Other-than-temporary impairments |  |  | 28 |  |  | 4 |
|  | Net unrealized losses on insured derivatives |  |  | 28 |  |  | 29 |
|  | Net losses on financial instruments at fair value and foreign exchange |  |  | 30 |  |  | - |
|  | Net unrealized losses in accumulated other comprehensive income |  |  | - |  |  | 6 |
|  | Alternative minimum tax credit carryforward |  |  | 30 |  |  | 26 |
| Total gross deferred tax assets |  |  | 1,518 |  |  | 1,339 |
|  | Valuation allowance |  |  | 1,236 |  |  | 7 |
| Net deferred tax asset |  | $ | - |  | $ | 970 |
On June 26, 2017, S&P downgraded the financial strength rating of National, which led the Company to cease its efforts to actively pursue writing new financial guarantee business. In addition to National’s cessation of new business activity, there was an increase in loss and LAE due to changes in assumptions on certain Puerto Rico credits. As a result of the increase in loss and LAE, the Company has a three-year cumulative loss, which is considered significant negative evidence in the assessment of its abi lity to use its deferred tax assets. In addition, the Company considered all available positive and negative evidence as required by GAAP, to estimate if sufficient taxable income will be generated to use its deferred tax assets. After considering all posi tive and negative evidence, including the Company’s inability to objectively identify and forecast future sources of taxable income, the Company c oncluded in the second quarter of 2017 it d id not have sufficient positive evidence to support its abil ity to use its d eferred tax assets before they would expire. Accordingly, the Company has a full valuation allowance against its net deferred tax asset of $1.2 billion in the nine months ended September 30, 2017. The Company will continue to analyze the valuation allowance on a quarterly basis. A cc o u n t i n g f o r U n c e r t a i n t y i n I n c o m e T ax e s The C o m p a ny’s po l i c y is t o r eco r d a n d d i s c l o s e an y c h an g e i n unrecognized tax benefits (“U T B”) an d r e l a t e d i n t e r es t a n d/or p e n a l t i e s t o i n c o m e t a x i n t h e co n s o l i d a t e d s t a t e m en t s o f o pe r a t i ons. The Company includes interest as a component of income tax expense. As of September 30, 2017 and December 31, 2016, the Company had no UTB. Federal income tax returns through 2011 have been examined or surveyed. As of September 30, 2017, the Company’s net operating loss (“NOL”) is approximately $2.8 billion. The NOL will expire between tax years 20 3 1 through 203 7. As of September 30, 2017, the Company has a foreign tax credit carryforward of $62 million, which will expire between tax years 2019 through 2027. As of September 30, 2017, the Company has an alternative minimum tax credit carryforward of $30 million, which does not expire.

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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://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32559-109319 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32718-109319 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32537-109319 + Details
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