Core-Mark Holding Company, Inc.

Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was signed into law, which enacts significant changes to the U.S. tax laws. Under ASC 740, the effects of the changes in tax law are recognized in the period in which the law is enacted. The key provisions of the TCJA impacting the Company are a permanent reduction of the federal corporate income tax rate from 35% to 21% effective January 1, 2018, the immediate expensing of the cost of acquired qualified property and limitations on certain corporate deductions and credits.

As a result of the rate change, the Company’s net deferred tax liabilities, which represent an increase in corporate taxes expected to be paid in the future, were revalued. The revaluation resulted in a one-time reduction of our net deferred tax liabilities of $14.6 million and a corresponding deferred income tax benefit in 2017. Our federal income tax expense for periods beginning in 2018 will be based on the new rate.

The income tax liability for 2017 included a federal alternative minimum tax ("AMT") of $7.2 million. The Tax Cuts and Jobs Act repealed the federal AMT for fiscal years beginning after December 31, 2017. Taxpayers with federal AMT carry-forwards from 2017 and prior years may claim a refund in future years equal to their AMT carry-forward even if no future tax liabilities exist. The Company has treated the federal AMT amount as a receivable of current taxes.

The Company’s income tax provision consists of the following (in millions):



	Year Ended December 31,
	2017			2016			2015
Current:
Federal	$	(2.2	)	$	21.4		$	19.4
State	0.9			3.1			3.2
Total current tax (benefit) provision	(1.3		)	24.5			22.6

Deferred:
Federal	$	(5.3	)	$	6.7		$	7.8
State	1.4			0.8			1.1
Foreign	0.1			(0.7		)	(0.1		)
Total deferred tax (benefit) provision	(3.8		)	6.8			8.8

Total income tax (benefit) provision	$	(5.1	)	$	31.3		$	31.4

A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate and income tax provision is as follows (in millions):



	Year Ended December 31,
	2017					2016					2015
Federal income tax provision at the statutory rate	$	9.9		35.0	%	$	29.9		35.0	%	$	29.0		35.0	%
Increase (decrease) resulting from:
State income taxes, net of federal benefit	1.6			5.7		2.9			3.4		2.9			3.5
Reduction in federal statutory rate ⁽¹⁾	(14.6		)	(51.6	)	—			—		—			—
Decrease in unrecognized tax benefits (inclusive of
related interest and penalty)	(0.3		)	(1.0	)	(0.3		)	(0.4	)	—			—
Effect of foreign operations	0.1			0.4		(0.7		)	(0.8	)	(0.1		)	(0.1	)
Excess tax benefits from stock-based award payments ⁽²⁾	(1.5		)	(5.3	)	—			—		—			—
Change in valuation allowance	—			—		—			—		(0.1		)	(0.1	)
Tax credits and other, net	(0.3		)	(1.2	)	(0.5		)	(0.6	)	(0.3		)	(0.4	)
Income tax (benefit) provision	$	(5.1	)	(18.0	)%	$	31.3		36.6	%	$	31.4		37.9	%

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(1)	As a result of the enactment of the TCJA, a $14.6 million net income tax benefit was recorded in the fourth quarter of 2017 due to a one-time revaluation of our net deferred tax liability.

(2) As the result of the adoption of ASU 2016-09, the Company recognized excess tax benefits of approximately $1.5 million, for 2017.

The Company’s effective tax rate was a benefit of 18.0% for 2017 compared to a provision of 36.6% for 2016. The effective tax rate for 2017 decreased 5.3% due to the excess tax benefits related to stock-based compensation and 51.6% due to the revaluation of the net deferred tax liabilities, related to the reduction in the federal statutory rate from 35.0% to 21.0% effective January 1, 2018.

The provision for income taxes included a net benefit of $0.5 million and $1.5 million for 2017 and 2016, respectively, related primarily to the expiration of the statute of limitations for uncertain tax positions and adjustments of prior years’ estimates.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The tax effects of significant temporary differences which comprise deferred tax assets and liabilities are as follows (in millions):



	December 31, 2017			December 31, 2016
Deferred tax assets:
Employee benefits, including post-retirement benefits	$	9.1		$	15.4
Trade and other receivables	1.8			2.9
Goodwill and intangibles	—			—
Self-insurance reserves	1.5			1.7
Other	3.8			6.1
Subtotal	16.2			26.1
Less: valuation allowance	—			—
Net deferred tax assets	$	16.2		$	26.1
Deferred tax liabilities:
Inventories	$	12.1		$	7.0
Property and equipment	28.7			36.2
Goodwill and intangibles	1.3			5.4
Other	1.5			1.8
Total deferred tax liabilities	$	43.6		$	50.4

Net deferred tax liabilities	$	(27.4	)	$	(24.3	)

Tax jurisdiction:
Net deferred asset (Canada)	$	0.1		$	1.0
Net deferred liability (U.S.)	$	(27.5	)	$	(25.3	)

At each balance sheet date, management assesses whether it is more likely than not that these deferred tax assets would not be realized. The Company had no valuation allowance at December 31, 2017 and 2016.

The Company had no unrecognized tax benefits related to federal, state and foreign taxes at December 31, 2017 and approximately $0.2 million unrecognized tax benefits related to federal, state and foreign taxes at December 31, 2016.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2017, 2016 and 2015 is as follows (in millions):



	Year Ended December 31,
	2017			2016			2015
Balance at beginning of year	$	0.2		$	0.4		$	0.4
Lapse of statute of limitations	(0.2		)	(0.2		)	—
Balance at end of year	$	—		$	0.2		$	0.4

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The Company files U.S. federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2014 to 2017 tax years remain subject to examination by federal and state tax authorities. The 2013 tax year is still open for certain state tax authorities. The 2010 to 2017 tax years remain subject to examination by the tax authorities in Canada.