Income Tax Provision
The following table summarizes Income tax benefit:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In millions) |
Current: | |
| | |
| | |
|
Federal | $ | 42 |
| | $ | — |
| | $ | — |
|
State | 1 |
| | — |
| | (1 | ) |
Change in income tax contingencies | (1 | ) | | (2 | ) | | — |
|
Total current income tax expense (benefit) | 42 |
| | (2 | ) | | (1 | ) |
| | | | | |
Deferred: | |
| | |
| | |
|
Federal | (102 | ) | | (100 | ) | | (79 | ) |
State | (19 | ) | | (9 | ) | | (2 | ) |
Total deferred income tax benefit | (121 | ) | | (109 | ) | | (81 | ) |
Income tax benefit | $ | (79 | ) | | $ | (111 | ) | | $ | (82 | ) |
Deferred Taxes
Deferred tax assets and liabilities represent the basis differences between assets and liabilities measured for financial reporting versus for income tax returns' purposes. The following table summarizes the significant components of deferred tax assets and liabilities:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In millions) |
Deferred tax assets: | |
| | |
|
Federal loss carryforwards | $ | — |
| | $ | 23 |
|
State loss carryforwards and credits | 48 |
| | 39 |
|
Reserves and allowances | 17 |
| | 36 |
|
Exit cost liability | 10 |
| | 10 |
|
Accrued legal and regulatory matters | 6 |
| | 46 |
|
Other accrued liabilities | 17 |
| | 24 |
|
Other | 4 |
| | — |
|
Gross deferred tax assets | 102 |
| | 178 |
|
Valuation allowance | (78 | ) | | (44 | ) |
Deferred tax assets, net of valuation allowance | 24 |
| | 134 |
|
| | | |
Deferred tax liabilities: | |
| | |
|
Mortgage servicing rights(1) | 20 |
| | 234 |
|
Other | 4 |
| | 1 |
|
Deferred tax liabilities | 24 |
| | 235 |
|
Net deferred tax liability | $ | — |
| | $ | 101 |
|
| |
(1) | For the year ended December 31, 2017, the decrease in the MSR deferred tax liability is primarily a result of the Company's execution of the MSRs secured borrowing arrangement with New Residential that resulted in the sale of a substantial portion of the Company's MSR portfolio for tax purposes. |
The deferred tax balance represent the future tax asset or liability generated upon reversal of the differences between the tax basis and book basis of certain of the Company's assets and liabilities. The Company's net deferred tax assets are reduced by valuation allowances if it is more likely than not that some portion of the deferred tax asset will not be realized. This assessment includes the consideration of all available evidence, both positive and negative, using a "more likely than not" standard with respect to whether deferred tax assets will be realized. The Company's evaluation of the realizability of its net deferred tax asset as of December 31, 2017 resulted in a valuation allowance of $78 million to reduce the net deferred basis to zero, driven primarily by provisions in the Tax Cuts and Jobs Act (the “Tax Act”) that reduce the current federal income tax rate from 35% to 21%, and provisions that eliminate the Company's ability to carry back Federal net operating losses generated in taxable years beginning after December 31, 2017.
The deferred tax assets' valuation allowance also relates to state loss carryforwards and net non-loss deferred tax assets. The valuation allowance will be reduced when and if it is determined that it is more likely than not that all or a portion of the deferred tax assets will be realized. The Company's net deferred tax asset includes state loss carryforwards will expire from 2017 to 2038, if not utilized.
Effective Tax Rate
Total income taxes differ from the amount that would be computed by applying the U.S. federal statutory rate as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In millions) |
Loss before income taxes | $ | (273 | ) | | $ | (304 | ) | | $ | (213 | ) |
Statutory federal income tax rate | 35 | % | | 35 | % | | 35 | % |
Income taxes computed at statutory federal rate | $ | (96 | ) | | $ | (106 | ) | | $ | (75 | ) |
Impact of federal tax reform | 30 |
| | — |
| | — |
|
Changes in rate and apportionment factors | 13 |
| | 1 |
| | 3 |
|
Noncontrolling interest | (8 | ) | | (3 | ) | | (5 | ) |
Changes in valuation allowance | (13 | ) | | 5 |
| | 10 |
|
State and local income taxes, net of federal tax benefits | (18 | ) | | (15 | ) | | (14 | ) |
Liabilities for income tax contingencies | 3 |
| | (2 | ) | | — |
|
Nondeductible expenses | 7 |
| | 6 |
| | 6 |
|
Other | 3 |
| | 3 |
| | (7 | ) |
Income tax benefit | $ | (79 | ) | | $ | (111 | ) | | $ | (82 | ) |
Effective tax rate | (28.9 | )% | | (36.7 | )% | | (38.4 | )% |
Impact of federal tax reform. Represents the impact of the Tax Act that was enacted on December 22, 2017. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. For the year ended December 31, 2017, the impact of the tax reform is $30 million consisting of revaluation of its net deferred tax asset and an increase to the valuation allowance, as discussed further above, driven by provisions in the act that reduce the current federal income tax rate and eliminate the net operating loss carryback.
Changes in rate and apportionment factors. Represents the impact to the effective tax rate from deferred tax items for changes in apportionment factors and state tax rate and reflect the impact of applying statutory changes to apportionment weight, apportionment sourcing and corporate income tax rates that were enacted by various states. For the year ended December 31, 2017, the impact includes the shift in state apportionment of deferred tax items driven in part by the Company's executed MSR sales and other business changes.
Noncontrolling interest. Represents the impact to the effective tax rate from Realogy Corporation’s portion of income taxes related to the income or loss attributable to PHH Home Loans. The impact is driven by PHH Home Loans’ election to report as a partnership for federal and state income tax purposes, whereby, the tax expense is reported by the individual LLC members. Accordingly, the Company’s Income tax expense or benefit includes only its proportionate share of the income tax related to the income or loss generated by PHH Home Loans.
Changes in valuation allowance. Excludes changes in valuation allowance as a result of the Impact of federal tax reform, discussed above. Represents other impacts to the effective tax rate from state net operating loss ("NOL") carryforwards utilized or generated during the year and certain cumulative non NOL deferred tax assets for which the Company believes it is more likely than not that the amounts will not be realized. For the year ended December 31, 2017, state tax losses utilized were $6 million and the remaining changes were from non NOL deferred tax assets for which a valuation allowance is not warranted. For the year ended December 31, 2016, state tax losses generated were $4 million and the remaining changes were from non NOL deferred tax assets for which a valuation allowance is warranted.
State and local income taxes, net of federal tax benefits. Represents the impact to the effective tax rate from the pre-tax income or loss as well as the mix of income or loss from the operations by entity and state income tax jurisdiction. For the year ended December 31, 2017 as compared to 2016, the effective state tax rate is higher due to the Company’s losses from its operations in multiple jurisdictions that are taxed at a higher apportionments.
Liabilities for income tax contingencies. Represents the impact to the effective tax rate from changes in the liabilities for income tax contingencies associated with new uncertain tax positions taken during the period or the resolution and settlement of prior uncertain tax positions with various taxing authorities. For the year ended December 31, 2017, the change was due to provisions in the Tax Act that resulted in changes to the federal tax rate applied to positions taken in prior periods. For the year ended December 31, 2016, the change was driven by the expiration of statute of limitations related to tax positions taken in prior years.
Nondeductible expenses. For the years ended December 31, 2017 and 2016, the amount represents the impact to the effective tax rate from nondeductible expenses primarily related to legal and regulatory matters of $3 million and $6 million, respectively. Additionally for 2017, $4 million tax deficiencies relates to stock buyback expenses, and non-deductible meals and entertainment expenses.
Other. For the years ended December 31, 2017 and 2016, the amount was driven from adjustments resulting from the comparison of items included in the prior year provision to the final income tax returns.
Unrecognized Income Tax Benefits
Unrecognized income tax benefits are recognized related to tax positions included in: (i) previously filed income tax returns and (ii) financial results expected to be included in income tax returns to be filed for periods through the date of the Consolidated Financial Statements. The Company recognizes tax benefits from uncertain income tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authority based on the technical merits of the position. An uncertain income tax position that meets the “more likely than not” recognition threshold is then measured to determine the amount of the benefit to recognize.
An unrecognized tax benefit, or a portion of an unrecognized tax benefit, is presented in the Consolidated Balance Sheets within Other liabilities to the extent a NOL carryforward is not available at the reporting date to settle any additional income taxes resulting from the tax position. In other instances where a NOL carryforward is available, the amounts are recorded as a reduction to the Company’s deferred tax liabilities in the Consolidated Balance Sheets.
Activity related to the Company's unrecognized income tax benefits (including the liability for potential payment of interest and penalties) consisted of:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In millions) |
Balance, beginning of period | $ | 8 |
| | $ | 11 |
| | $ | 11 |
|
Activity related to tax positions taken during the current year | — |
| | — |
| | — |
|
Activity related to tax positions taken during prior years | 3 |
| | (3 | ) | | — |
|
Balance, end of period | $ | 11 |
| | $ | 8 |
| | $ | 11 |
|
The estimated liability for the potential payment of interest and penalties included in the liability for unrecognized income tax benefits was $2 million and $2 million as of both December 31, 2017 and 2016, respectively.
The amount of unrecognized income tax benefits may change by $11 million in the next twelve months primarily due to the expiration of the audit period for income tax positions taken during prior years. The effective income tax rate would be positively impacted by $11 million as of both December 31, 2017 and 2015 in the event of a favorable resolution of income tax contingencies or reductions in valuation allowances and $8 million as of December 31, 2016.
The Company and its subsidiaries are currently under examination by the IRS for the tax years ended December 31, 2016, 2015 and 2014 and remain subject to examination for the year ended December 2017. As of December 31, 2017, foreign and state income tax filings were subject to examination for periods including and subsequent to 2009, dependent upon jurisdiction.