Entity information:
3.
INCOME TAXES
 
The (benefit from) provision for income taxes consists of the following:
 
   
2017
   
2016
   
2015
 
Current:
                        
Federal
   $
(2,570,000
 )   $
(268,000
 )   $
458,000
  
State
    
(6,000
 )    
(30,000
 )    
(271,000
 )
     
(2,576,000
 )    
(298,000
 )    
187,000
  
Deferred:
                        
Federal
    
(3,854,000
 )    
(1,369,000
 )    
(1,053,000
 )
State
    
(720,000
 )    
(268,000
 )    
(254,000
 )
     
(4,574,000
 )    
(1,637,000
 )    
(1,307,000
 )
    $
(7,150,000
 )   $
(1,935,000
 )   $
(1,120,000
 )
 
The difference between the statutory federal income tax rate and the Company
’s effective rate is summarized below:
 
   
2017
   
2016
   
2015
 
                         
Statutory federal income tax rate
    
34.0
 %    
34.0
 %    
34.0
 %
State franchise taxes (net of federal tax benefit)
    
6.2
      
5.2
      
(23.3
 )
State enterprise zone benefits
    
---
      
---
      
134.9
  
Business meals/gifts
    
(0.8
 )    
(2.3
 )    
(18.8
 )
Domestic production activity deduction
    
---
      
---
      
(2.2
 )
Dividends received deduction
    
10.0
      
24.5
      
225.7
  
Reversal of uncertain and unrecognized tax position
    
37.6
      
---
      
---
  
Penalties for uncertain and unrecognized tax benefits
    
2.0
      
---
      
---
  
Prior year true-up
    
1.0
      
(2.0
 )    
(7.3
 )
Foreign tax credits
    
2.0
      
4.0
      
28.4
  
Effect of state rate change on beginning balance of deferred tax liabilities
    
(0.3
 )    
1.4
      
(5.0
 )
Others
    
(3.0
 )    
0.2
      
(5.5
 )
Effective tax rate
    
88.7
 %    
65.0
 %    
360.9
 %
 
The Company’s deferred income tax assets and liabilities were comprised of the following:
 
   
2017
   
2016
   
2015
 
Deferred tax assets attributable to:
                        
Accrued liabilities, including supplemental compensation and vacation pay accrual
   $
(69,000
 )   $
455,000
     $
605,000
  
Impairment losses on investments
    
1,376,000
      
1,382,000
      
1,369,000
  
Bad debt reserves not yet deductible
    
62,000
      
62,000
      
82,000
  
Depreciation and amortization
    
5,977,000
      
4,549,000
      
3,251,000
  
Deferred revenues
    
1,431,000
      
1,555,000
      
1,378,000
  
Credits and other
    
4,403,000
      
1,519,000
      
869,000
  
Total deferred tax assets
    
13,180,000
      
9,522,000
      
7,554,000
  
                         
Deferred tax liabilities attributable to:
                        
Unrealized gains on investments
    
(64,550,000
 )    
(42,250,000
 )    
(43,278,000
 )
Goodwill
    
(311,000
 )    
(1,227,000
 )    
(896,000
 )
Total deferred tax liabilities
    
(64,861,000
 )    
(43,477,000
 )    
(44,174,000
 )
Net deferred income taxes
   $
(51,681,000
 )   $
(33,955,000
 )   $
(36,620,000
 )
 
    
During fiscal
2017,
the Company recorded an income tax benefit of
$7,150,000
on pretax loss of
$8,068,000.
  The effective tax rate (before the discrete item discussed below) was greater than the statutory rate primarily due to the dividends received deduction which increases the loss for tax purposes.  On pretax loss of
$2,978,000
for fiscal
2016,
the Company recorded an income tax benefit of
$1,935,000.
  The effective tax rate was greater than the statutory rate mainly resulting from the dividends received deduction.  On pretax loss of
$310,000
for fiscal
2015,
the Company recorded a tax benefit of
$1,120,000.
  The effective tax rate was greater than the statutory rate mainly resulting from the dividends received deduction, the domestic production activity deduction and a discrete benefit of approximately
$400,000
related to the California Enterprise Zone hiring credits which resulted from the Company’s filing amended California tax returns for fiscal
2010
through fiscal
2013.
   The Company’s effective tax rate was
89%,
65%
and
361%
for fiscal
2017,
2016
and
2015,
respectively.
 
At the beginning of fiscal
2017,
the Company had a liability for uncertain and unrecognized tax benefits in the amount of
$2,723,000
relating to an acquisition in fiscal
2013.
  During the
second
quarter of fiscal
2017,
the Internal Revenue Service concluded its examination of the Company’s fiscal
2014
income tax return and proposed
no
changes to the tax position that gave rise to this liability.  Consequently, this liability was reversed in
March 2017
along with the related accrued interest and penalty expenses of
$743,000.
  In addition, a deferred tax liability, in the amount of
$352,000,
relating to temporary differences that would only exist if the uncertain tax position was never recognized, was reversed.  At
September 30, 2016,
the liability was approximately
$2,723,000,
after a reduction of
$521,000
resulting from the recognition of deferred revenues and from the amortization of goodwill for tax purposes.  At
September 30, 2015,
the Company had an
accrued liability of approximately
$2,991,000
for uncertain and unrecognized tax benefits after a reduction of
$253,000.
  During
2016
and
2015,
interest expense of approximately
$112,000
and
$96,000,
respectively, was recorded as “interest and penalty expense accrued for uncertain and unrecognized tax benefits” in the consolidated statements of comprehensive income (loss).
 
A reconciliation of the beginning and ending balance for liabilities associated with these uncertain and unrecognized tax benefits is as follows:
 
Uncertain Tax Liability
 
   
2017
    
2016
    
2015
  
                         
Beginning balance
   $
2,723,000
     $
2,991,000
     $
3,244,000
  
Added liability for the prior year
    
---
      
---
      
---
  
Added liability for the current year
    
---
      
---
      
---
  
Tax payment upon settlement
    
---
      
---
      
---
  
Reversal/r
educed liability for the current year
    
(2,723,000
 )    
(268,000
 )    
(253,000
 )
Ending balance
   $
---
     $
2,723,000
     $
2,991,000
  
 
The Company files consolidated federal income tax returns in the United States and with various state jurisdictions and is
no
longer subject to examinations for fiscal years before fiscal
2015
with regard to federal income taxes and fiscal
2013
for state income taxes.