8.           Income Taxes

The provision for income taxes from continuing operations for the years ended December 31, 2017, 2016 and 2015 consists of the following:

 

The following table reconciles the statutory federal income tax rate with our effective income tax rate from continuing operations for the years ended December 31, 2017, 2016 and 2015:

 

The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at December 31, 2017 and 2016 are as follows:

 

The Company has a deferred tax asset for a capital loss carryforward that is available to offset current and future capital gains.  As of December 31, 2017 and 2016, the deferred tax asset, net of federal tax effect, related to this capital loss carryforward is $0.1 million and $3.9 million, respectively. During 2017, realized capital gains on investment securities and capital gain dividend distributions exceeded the federal capital loss carryforward and therefore, the related deferred tax asset was eliminated. As of December 31, 2017, $0.1 million deferred tax assets remains related to a state capital loss carryforward.  Due to the character of the losses and the limited carryforward period permitted by law upon realization, the Company had a valuation allowance recorded against this deferred tax asset as of December 31, 2016 in the amount of $5.8 million.  Management believes it is more likely than not that the Company will realize the full benefit of the state capital loss carryforward prior to its expiration in 2018.  As a result, no valuation allowance remains on the balance sheet as of December 31, 2017.

Certain subsidiaries of the Company have net operating loss carryforwards in certain states in which these companies file on a separate company basis.  The deferred tax asset, net of federal tax effect, relating to these carryforwards as of December 31, 2017 and 2016 is approximately $7.2 million and $5.7 million, respectively.  The carryforwards, if not utilized, will expire between 2018 and 2037.  Management believes it is not more likely than not that these subsidiaries will generate sufficient future taxable income in these states to realize the benefit of the net operating loss carryforwards and, accordingly, a valuation allowance in the amount of $7.2 million and $5.6 million has been recorded at December 31, 2017 and 2016, respectively.

The Company has state tax credit carryforwards of $2.8 million and $2.1 million as of December 31, 2017 and 2016, respectively.  Of these state tax credit carryforwards, $2.6 million will expire between 2024 and 2033 if not utilized and $0.2 million will expire in 2026 if not utilized.  The Company anticipates these credits will be fully utilized prior to their expiration date.

As of January 1, 2017, the Company had unrecognized tax benefits, including penalties and interest, of $11.5 million ($8.4 million net of federal benefit) that, if recognized, would impact the Company’s effective tax rate.  As of December 31, 2017, the Company had unrecognized tax benefits, including penalties and interest, of $10.9 million ($8.9 million net of federal benefit) that, if recognized, would impact the Company’s effective tax rate.  The unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities in the accompanying consolidated balance sheets; unrecognized tax benefits that are expected to be settled within the next 12 months are included in income taxes payable; and unrecognized tax benefits that reduce a net operating loss, similar tax loss, or tax credit carryforward are presented as a reduction to noncurrent deferred income taxes. 

The Company’s accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes.  As of January 1, 2017, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $3.8 million ($3.1 million net of federal benefit).  The total amount of penalties and interest, net of federal benefit, related to tax uncertainties recognized in the statement of income for the period ended December 31, 2017 was $0.5 million.  As of December 31, 2017, the Company had total accrued penalties and interest related to uncertain tax positions of $4.0 million ($3.5 million net of federal benefit) in the consolidated balance sheet, which is included in the total unrecognized tax benefits described above.

The following table summarizes the Company's reconciliation of unrecognized tax benefits, excluding penalties and interest, for the years ended December 31, 2017, 2016 and 2015:

 

In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain.  In addition, respective tax authorities periodically audit our income tax returns.  These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions.  During 2017, the Company closed an Internal Revenue Service audit of the 2014 tax year. This audit was settled with no significant adjustments. During 2016, the Company settled two open tax years that were undergoing audit by a state jurisdiction in which the Company operates.  During 2015, the Company settled three open tax years that were undergoing audit by state jurisdictions in which the Company operates.  The Company is currently under one audit in one state jurisdiction in which the Company operates.  The 2014, 2015, 2016 and 2017 federal income tax returns are open tax years that remain subject to potential future audit.  State income tax returns for all years after 2013 and, in certain states, income tax returns for 2013, are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.