Entity information:
INCOME TAXES

The Company is subject to the income tax laws of the U.S., its states and municipalities and certain foreign countries. These tax laws are complex and are potentially subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws.

Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. The Company reviews its tax balances quarterly and, as new information becomes available, the balances are adjusted as appropriate. The Company is subject to ongoing tax examinations and assessments in various jurisdictions.

On December 22, 2017, the TCJA, was enacted. Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. At December 31, 2017, the Company recorded a one-time tax benefit of $427.3 million, primarily due to the re-valuation of its net deferred tax liability at the lower 21% rate.

NOTE 15. INCOME TAXES (continued)

Due to the complexities involved in accounting for the enactment of the TCJA, SEC Staff Accounting Bulletin (“SAB”) 118 specifies, among other things, that reasonable estimates of the income tax effects of the TCJA should be used, if determinable. Further, SAB 118 clarifies accounting for income taxes under ASC Topic 740, Income Taxes (ASC 740), if information is not yet available or complete and provides for up to a one-year period in which to complete the required analyses and accounting (the measurement period). The Company has obtained and analyzed all currently available information to record the effect of the change in tax law. While we were able to make a reasonable estimate of the impact of the reduction in the corporate tax rate, this accounting may be impacted by other analyses related to the TCJA, technical corrections or other amendments to the TCJA, further accounting or administrative tax guidance.

Income Taxes from Continuing Operations

The provision for income taxes in the Consolidated Statement of Operations is comprised of the following components:
 
 
Year Ended December 31,
(in thousands)
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
 
Foreign
 
$
7,288

 
$
30,983

 
$
26,042

Federal
 
24,335

 
71,429

 
160,107

State
 
7,951

 
(2,646
)
 
44,712

Total current
 
39,574

 
99,766

 
230,861

 
 
 
 
 
 
 
Deferred:
 

 
 
 
 
Foreign
 
(15,065
)
 
(36,039
)
 
(5,878
)
Federal
 
(189,903
)
 
143,494

 
(755,630
)
State
 
13,060

 
106,494

 
(69,111
)
Total deferred
 
(191,908
)
 
213,949

 
(830,619
)
Total income tax provision/(benefit)
 
$
(152,334
)
 
$
313,715

 
$
(599,758
)


Reconciliation of Statutory and Effective Tax Rate

The following is a reconciliation of the U.S. federal statutory rate of 35.0% to the Company's effective tax rate for each of the years indicated:
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Federal income tax at statutory rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
Increase/(decrease) in taxes resulting from:
 
 
 
 
 
 
Valuation allowance
 
0.9
 %
 
(5.0
)%
 
(0.1
)%
Tax-exempt income
 
(1.8
)%
 
(1.6
)%
 
0.5
 %
BOLI
 
(2.8
)%
 
(2.1
)%
 
0.6
 %
State income taxes, net of federal tax benefit
 
2.5
 %
 
5.7
 %
 
(1.8
)%
General business tax credits
 
(2.0
)%
 
(2.1
)%
 
0.3
 %
Electric vehicle credits
 
(2.9
)%
 
(2.7
)%
 
0.8
 %
Basis in SC
 
3.4
 %
 
3.1
 %
 
26.6
 %
Nondeductible goodwill impairment
 
—
 %
 
—
 %
 
(45.7
)%
Uncertain tax position reserve
 
(0.4
)%
 
3.3
 %
 
(2.9
)%
Tax reform
 
(52.1
)%
 
—
 %
 
—
 %
Other
 
1.6
 %
 
(0.7
)%
 
3.1
 %
Effective tax rate
 
(18.6
)%
 
32.9
 %
 
16.4
 %

NOTE 15. INCOME TAXES (continued)

Deferred Tax Assets and Liabilities

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are presented below:
 
 
At December 31,
(in thousands)
 
2017
 
2016
Deferred tax assets:
 
 
 
 
ALLL
 
$
214,873

 
$
255,221

Internal Revenue Code ("IRC") Section 475 mark to market adjustment
 
512,177

 
474,366

Unrealized loss on available-for-sale securities
 
57,324

 
80,958

Unrealized loss on derivatives
 
13,217

 
6,512

Capital loss carryforwards
 
28,873

 
35,770

Net operating loss carry forwards
 
924,871

 
1,441,368

Non-solicitation payments
 
237

 
643

Employee benefits
 
112,206

 
152,324

General business credit & other tax credit carry forwards
 
627,969

 
564,011

Broker commissions paid on originated mortgage loans
 
11,179

 
15,665

Minimum tax credit carry forwards
 
164,661

 
162,956

Recourse reserves
 
5,143

 
10,812

Deferred interest expense
 
55,552

 
80,421

Other
 
120,450

 
146,911

Total gross deferred tax assets
 
2,848,732

 
3,427,938

Valuation allowance
 
(235,920
)
 
(124,953
)
Total deferred tax assets
 
2,612,812

 
3,302,985

 
 
 
 
 
Deferred tax liabilities:
 
 
 
 
Purchase accounting adjustments
 
82,217

 
123,518

Deferred income
 
20,562

 
31,231

Originated MSR
 
38,775

 
58,754

Change in Control deferred gain
 
345,014

 
396,600

Leasing transactions
 
2,076,602

 
2,622,331

Depreciation and amortization
 
122,417

 
297,314

Unremitted foreign earnings
 
—

 
67,720

Other
 
125,569

 
136,065

Total gross deferred tax liabilities
 
2,811,156

 
3,733,533

 
 
 
 
 
Net deferred tax (liability)
 
$
(198,344
)
 
$
(430,548
)


The IRC Section 475 mark to market adjustment deferred tax asset is related to SC's business as a dealer, which is required to be recognized under IRC Section 475 for net gains that have been recognized for tax purposes on loans that are required to be marked to market for tax purposes but not book purposes. The leasing transactions deferred tax liability is primarily related to accelerated tax depreciation on leasing transactions. The Change in Control deferred gain is the book over tax basis difference in the Company's investment in SC. The deferred tax liability would be realized upon the Company's disposition of its interest in SC or through dividends received from SC.

Periodic reviews of the carrying amount of deferred tax assets are made to determine if the establishment of a valuation allowance is necessary. If, based on the available evidence in future periods, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized, a deferred tax valuation allowance would be established. Consideration is given to all positive and negative evidence related to the realization of the deferred tax assets.
NOTE 15. INCOME TAXES (continued)

Items considered in this evaluation include historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carry-forward periods, experience with operating loss and tax credit carryforwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. The Company's evaluation is based on current tax laws, as well as its expectations of future performance. As of December 31, 2017, the Company maintains a valuation allowance of $235.9 million related to deferred tax assets subject to carryforward periods for which the Company has determined it is more likely than not that these deferred tax assets will remain unused after the carry-forward periods have expired.

The deferred tax asset realization analysis is updated at each year-end using the most recent forecasts. An assessment is made quarterly as to whether the forecasts and assumptions used in the deferred tax asset realization analysis should be revised in light of any changes that have occurred or are expected to occur that would significantly impact the forecasts or modeling assumptions. At December 31, 2017, the Company has recorded a deferred tax asset of $800.2 million related to federal and Puerto Rico net operating loss carryforwards, which may be offset against future taxable income. If not utilized in future years, these will expire in varying amounts through 2037. The Company has recorded a deferred tax asset of $124.7 million related to state net operating loss carryforwards, which may be used against future taxable income. If not utilized in future years, these will expire in varying amounts through 2037. The Company has recorded a deferred tax asset of $28.9 million related to capital loss carryforwards, which may be used against future capital gain income. If not utilized in future years, these will expire in varying amounts through 2020. The Company also has recorded a deferred tax asset of $628.0 million related to tax credit carryforwards, which may be offset against future taxable income. If not utilized in future years, these will expire in varying amounts through 2037. The Company has concluded that it is more likely than not that $101.2 million of the deferred tax asset related to the federal and Puerto Rico net operating loss carryforwards, $5.5 million of the deferred tax asset related to state net operating loss carryforwards, $23.9 million of the deferred tax asset related to capital loss carryforwards, $74.5 million of the deferred tax asset related to tax credit carryforwards and $30.8 million of the deferred tax timing differences will not be realized and correspondingly has established a valuation allowance.

With the exception of one subsidiary, as of December 31, 2017, the Company’s intention to permanently reinvest unremitted earnings of certain foreign subsidiaries in accordance with ASC 740-30 (formerly Accounting Principles Board Opinion No. 23) remains unchanged. This will continue to be evaluated as the Company’s business needs and requirements evolve. While the TCJA includes a transition tax which amounts to a deemed repatriation of foreign earnings and a one-time inclusion of these earnings in U.S. taxable income, there could be additional costs of actual repatriation of the foreign earnings, such as state taxes and foreign withholding taxes, which are inherently difficult to quantify. With respect to the subsidiary for which the Company did make a decision to no longer permanently reinvest its unremitted earnings, a $55.7 million tax liability was initially recorded in the three months ended December 31, 2017 to reflect the applicable deferred taxes. With the enactment of the TCJA transition tax, this liability was reduced to $25.1 million by year-end.

The TCJA also requires a U.S. shareholder of a controlled foreign corporation ("CFC") to include in income, as a deemed dividend, the global intangible low-taxed income ("GILTI") of the CFC. This provision is effective for taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. The Company has elected to treat taxes due on future U.S. inclusions in taxable income under the GILTI provision as a current period expense when incurred.

The Company has not provided deferred income taxes of $28.8 million on approximately $112.1 million of the Bank's existing pre-1988 tax bad debt reserve at December 31, 2017, due to the indefinite nature of the recapture provisions. Certain rules under section 593 of the Internal Revenue Code govern when the Company may be subject to tax on the recapture of the existing base year tax bad debt reserve, such as distributions by the Bank in excess of certain earnings and profits, the redemption of the Bank’s stock, or a liquidation. The Company does not expect any of those events to occur. 

NOTE 15. INCOME TAXES (continued)

Changes in Liability Related to Uncertain Tax Positions

At December 31, 2017, the Company had reserves related to tax benefits from uncertain tax positions of $84.6 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in thousands)
 
Unrecognized Tax Benefits
 
Accrued Interest and Penalties
 
Total
Gross unrecognized tax benefits at January 1, 2015
 
$
155,716

 
$
24,621

 
$
180,337

Additions based on tax positions related to 2015
 
2,752

 
31

 
2,783

Additions for tax positions of prior years
 
105,526

 
3,677

 
109,203

Reductions for tax positions of prior years
 
(15
)
 
(9
)
 
(24
)
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations
 
(4,116
)
 
(2,061
)
 
(6,177
)
Gross unrecognized tax benefits at December 31, 2015
 
259,863

 
26,259

 
286,122

Additions based on tax positions related to 2016
 
17,323

 
1,505

 
18,828

Additions for tax positions of prior years
 
4,644

 
37,508

 
42,152

Reductions for tax positions of prior years
 
(218,994
)
 
(18,828
)
 
(237,822
)
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations
 
(4,194
)
 
(43
)
 
(4,237
)
Settlements
 
(2,886
)
 
(3,028
)
 
(5,914
)
Gross unrecognized tax benefits at December 31, 2016
 
55,756

 
43,373

 
99,129

Additions based on tax positions related to the current year
 
987

 
—

 
987

Additions for tax positions of prior years
 
2,728

 
1,877

 
4,605

Reductions for tax positions of prior years
 
(784
)
 
(1,926
)
 
(2,710
)
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations
 
(9,999
)
 
(1,526
)
 
(11,525
)
Gross unrecognized tax benefits at December 31, 2017
 
$
48,688

 
$
41,798

 
$
90,486

Gross net unrecognized tax benefits that if recognized would impact the effective tax rate at December 31, 2017
 
$
48,688

 
$
41,798

 
 
 
 
 
 
 
 
 
Less: Federal, state and local income tax benefits
 
 
 
 
 
(5,927
)
Net unrecognized tax benefit reserves
 
 
 
 
 
$
84,559



Tax positions will initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. The Company is subject to the income tax laws of the U.S., its states and municipalities and certain foreign countries. These tax laws are complex and are potentially subject to different interpretations by the taxpayer and relevant governmental taxing authorities. In establishing an income tax provision, the Company must make judgments and interpretations about the application of these inherently complex tax laws. The Company recognizes penalties and interest accrued related to unrecognized tax benefits within Income tax provision on the Consolidated Statements of Operations.

The Company filed a lawsuit against the United States in 2009 in Federal District Court in Massachusetts relating to the proper tax consequences of two financing transactions with an international bank through which the Company borrowed $1.2 billion. As a result of these financing transactions, the Company paid foreign taxes of $264.0 million during the years 2003 through 2007 and claimed a corresponding foreign tax credit for foreign taxes paid during those years, which the Internal Revenue Service ("IRS") disallowed. The IRS also disallowed the Company's deductions for interest expense and transaction costs, totaling $74.6 million in tax liability, and assessed penalties and interest totaling approximately $92.5 million. The Company has paid the taxes, penalties and interest associated with the IRS adjustments for all tax years, and the lawsuit will determine whether the Company is entitled to a refund of the amounts paid.

NOTE 15. INCOME TAXES (continued)

In November 2015, the Federal District Court granted the Company’s motions for summary judgment and later ordered amounts assessed by the IRS for the years 2003 through 2005 to be refunded to the Company. The IRS appealed that judgment and the U.S. Court of Appeals for the First Circuit partially reversed the judgment of the Federal District Court, finding that the Company is not entitled to claim the foreign tax credits it claimed but will be allowed to exclude from income $132.0 million (representing half of the U.K. taxes the Company paid) and will be allowed to claim the interest expense deductions. The case has been remanded to the Federal District Court for further proceedings to determine, among other issues, whether penalties should be sustained. On remand, the parties are awaiting the Court’s decision on motions for summary judgment filed by the Company regarding the remaining issues.

In response to the First Circuit's decision, the Company, at December 31, 2016, used its previously established $230.1 million tax reserve to write off deferred tax assets and a portion of the receivable that would not be realized under the Court's decision. Additionally, the Company established a $36.8 million tax reserve in relation to items that have not yet been determined by the courts, including potential penalties. Over the next 12 months, it is reasonably possible that changes in the reserve for uncertain tax positions could range from a decrease of $36.8 million to no change.

With few exceptions, the Company is no longer subject to federal, state and non-U.S. income tax examinations by tax authorities for years prior to 2006.