NOTE 11—INCOME TAXES

The provision for income taxes is based upon the Corporation's annual income or loss before income taxes for each respective accounting period. The following table summarizes the Corporation's provision for income taxes for the periods presented (dollars in millions):

 

A reconciliation of the U.S. statutory rate to the Corporation's effective tax rate is as follows for the years ended December 31:

 

 

    The effective tax rate in 2014 is higher than the federal statutory rate largely as a result of the combined impact of state and local taxes and non-deductible legal expenses.  Conversely, the effective tax rate in 2015 is lower than the federal statutory rate largely as a result of the impact of deductible legal expenses.  The effective tax rate in 2016 is lower than the federal statutory rate largely as a result of the impact of a partial release of the valuation allowance, federal and state tax provision-to-tax return adjustments driven by the deductibility of certain legal expenses, and the early adoption of ASU 2016-09 with regard to excess tax benefits for stock compensation.

The overall effective tax rate stayed relatively consistent from 2015 to 2016.  During 2015, the deductibility of legal expenses is the primary driver of this decrease from the federal statutory rate.  The deductible legal expenses relate to settlements entered into with the Department of Justice.  In 2015, the settlement process was completed and the Corporation concluded the expenses were deductible.  Excluding the impact of the legal expenses, non-recurring items, and other discrete items, the provision for income taxes as a percentage of pre-tax income for 2015 would have been 37.0%.  The Corporation is expecting a taxable loss for the 2016 year driven by lower amounts of pre-tax book income and favorable timing items which negatively impact the domestic production activities deduction.  In addition, there is a partial valuation allowance release on certain state net operating losses which favorably impact the 2016 effective tax rate.  The 2016 effective rate was also favorably impacted by the federal and state tax provision-to-return adjustments which reflected additional amounts of deductible legal settlement payments.

 

The Corporation derives a current federal and state income tax benefit from the impact of deductions associated with the amortization of tax deductible goodwill acquired through business combinations. The tax basis of the Corporation's tax deductible goodwill was approximately $171.1 million and $162.7 million at December 31, 2015 and 2016, respectively.

The Corporation recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled. The Corporation also recognizes as deferred tax assets, the future tax benefits from net operating and capital loss carryforwards. As of December 31, 2016, the Corporation had federal net operating loss carryforwards of $32.9 million ($11.5 million deferred tax asset).  These net operating loss carryforwards resulted from the stock acquisitions the Corporation completed in 2013 and 2014.  These net operating losses are subject to limitations under Internal Revenue Code Section 382.  However, the Corporation expects that it will be able to use the recorded amount which takes into account the limitations of the carryforwards.  The deferred tax asset for state net operating loss carryforwards was $6.4 million, net of federal tax impact and valuation allowances. The deferred tax asset for state net operating losses have carryforward periods ranging from 1 to 20 years depending on the taxing jurisdiction.

As a result of a corporate restructuring that was implemented on January 1, 2014, separate company state taxable income was significantly reduced.  This reduction in separate company state taxable income impacted the Corporation's analysis of the realizability of separate company net operating loss carryforwards.  A valuation allowance is provided for the Corporation's deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Based on the Corporation's analysis of the impact of the corporate restructuring, a valuation allowance on the separate company state net operating loss carryforwards was recorded.  The deferred tax asset for state net operating loss carryforwards totaled $4.1 million and $6.4 million at December 31, 2015 and 2016, respectively, net of valuation allowances of $3.8 million and $2.6 million, respectively.

The Corporation recognized net deferred tax assets totaling $21.1 million and $9.2 million at December 31, 2015 and 2016, respectively, net of valuation allowances of $3.8 million and $2.6 million, respectively.

Current deferred income taxes consisted of (dollars in millions):

 

 

Noncurrent deferred income taxes consisted of (dollars in millions):

 

As of December 31, 2015 and December 31, 2016, the Corporation had no reserves recorded as a liability for unrecognized tax benefits for U.S. federal and state tax jurisdictions. There were no unrecognized tax benefits at December 31, 2016 that, if recognized, would affect the tax rate.

It is the Corporation's policy to accrue interest and penalties related to liabilities for income tax contingencies in the provision for income taxes. As of December 31, 2016, the Corporation had no accrued interest or penalties related to uncertain tax positions.

The federal statute of limitations remains open for tax years 2013 through 2015. The Corporation has not been notified of any IRS tax audits.

State tax jurisdictions generally have statutes of limitations ranging from three to five years. The Corporation is no longer subject to state and local income tax examinations by tax authorities for years before 2011. The state income tax impact of federal income tax changes remains subject to examination by various states for a period of up to one year after formal notification of IRS settlement to the states. The Corporation is currently under exam by New York and Oregon.  Additionally, one of the Corporation's subsidiaries is currently under exam by the state of Tennessee.  The Corporation has not been notified of any other upcoming federal or state or local income tax examinations.