NOTE 11. Income Taxes:
2017 Tax Reform
On December 22, 2017, comprehensive tax reform legislation known as the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Tax Reform Act amends the Internal Revenue Code to reduce U.S. tax rates and modify policies, credits and deductions for individuals and businesses. The Company recorded $114.1 million in estimated net tax benefits to net income for 2017 related to the Tax Reform Act, as follows:
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|
• |
Remeasurement of Deferred Taxes. The Tax Reform Act permanently reduces the U.S. federal corporate income tax rate from 35% to 21%, effective for tax years beginning after 2017. GAAP requires an adjustment to deferred taxes as a result of a change in the corporate tax rate in the period that the change is enacted, with the change recorded to the current year tax provision. Accordingly, the Company has remeasured its deferred tax assets and liabilities at the new tax rate and recorded a one-time noncash tax benefit of $130.9 million to deferred income taxes for the year ended December 31, 2017. This benefit is reflected in the Company’s reduced effective tax rate for the year. |
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• |
Immediate Expensing of Assets. The Tax Reform Act allows taxpayers to immediately expense the entire cost of qualified tangible property placed in service after September 27, 2017. As a result, the Company has recorded a tax benefit of $4.7 million for the year ended December 31, 2017 (included in the Remeasurement of Deferred Taxes discussed above), and expects to continue to expense qualified property in future years. This provision will be phased out from 2023 through 2026. |
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• |
Deemed Repatriation of Foreign Earnings. In connection with the move by the U.S. to a partial territorial tax system, the Tax Reform Act provides for the exclusion of foreign-sourced dividends received by a U.S. corporation from its foreign-owned corporations beginning in 2018. In addition, the Tax Reform Act imposes a toll charge in 2017 on the deemed repatriation of a U.S. shareholder’s pro-rata share of certain foreign subsidiaries’ post-1986 accumulated earnings. The toll charge assesses an effective tax rate of 15.5% on cash and other liquid assets of U.S.-owned foreign corporations, while subjecting all other property of such corporations to an effective tax rate of 8.0%, and allows for available foreign tax credits to reduce the resulting toll charge. Taxpayers may elect to pay this tax liability over eight years on an interest-free basis. The Company has accrued an estimated toll charge liability of $1.8 million, reflected in current taxes payable as of December 31, 2017, and will elect to pay the tax over eight years. |
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• |
Investment of Foreign Earnings. For years prior to 2017, the Company asserted that earnings from foreign affiliates would be indefinitely reinvested into those foreign businesses. Accordingly, deferred taxes were not provided on outside basis differences in the Company’s investments in foreign subsidiaries. With the transition by the U.S. to a partial territorial tax system, including the one-time deemed repatriation of historical foreign earnings and a participation exemption for the distribution of future foreign earnings, the Company has determined that it will no longer assert the indefinite reinvestment of foreign earnings. Accordingly, estimated deferred taxes of $15.0 million have been provided for anticipated foreign withholding and U.S. state taxes due on hypothetical future distributions of earnings from foreign subsidiaries. |
Other provisions of the Tax Reform Act that are not expected to materially impact the Company’s consolidated financial statements include, among others, the elimination of the performance-based exception to the limitation on the deduction of certain executive compensation in excess of $1.0 million, elimination of the tax deduction for entertainment expenses, a limitation on the deductibility of net interest expense, the repeal of the corporate alternative minimum tax, changes to net operating loss rules, and various international provisions; all effective for years beginning after 2017. In addition, for years beginning after 2017, the computation of tax-basis discounted unpaid loss reserves for title insurance companies is modified to incorporate a discount rate based on a corporate bond yield curve and extended loss payment patterns. While this change is likely to reduce future tax deductions claimed by the Company in connection with its title insurance loss reserves, no material impact to its consolidated financial statements is expected.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 on December 22, 2017, which provides for a one-year measurement period that allows businesses time to evaluate the financial statement implications of the Tax Reform Act. Companies are required to disclose in financial filings whether their accounting for the income tax effects of the Tax Reform Act is complete, incomplete but reasonably estimated, or incomplete with no estimate provided. The measurement period allows businesses to gather the information necessary to prepare and analyze the income tax accounting effects of the Tax Reform Act on financial statements issued during the measurement period. During the measurement period, an entity may need to reflect adjustments to provisional amounts previously recorded after obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enactment date that, if known, would have affected the income tax effects initially reported as provisional amounts. Such adjustments to provisional amounts included in an entity’s financial statements during the measurement period would be included in income from continuing operations as an adjustment to income tax expense or benefit in the reporting period the amounts are determined. As noted above, the Company has recorded in income tax expense for 2017 the estimated impact of various provisions of the Tax Reform Act. The ultimate impact of the Tax Reform Act on the Company’s consolidated financial statements may differ materially from the amounts estimated herein due to further refinement of the Company’s calculations, changes in interpretations and assumptions that the Company has made, guidance that may be issued by income taxing authorities and regulatory bodies, and actions the Company may take as a result of the Tax Reform Act. The Company anticipates completing its tax accounting for the Tax Reform Act during the one-year measurement period, and will record and disclose any adjustments made to its initial estimates during that time frame.
For the years ended December 31, 2017, 2016 and 2015, domestic and foreign pretax income from continuing operations before noncontrolling interests were $391.4 million and $53.9 million, $416.5 million and $61.1 million, and $383.5 million and $49.3 million, respectively.
Income taxes are summarized as follows:
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Year ended December 31, |
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|||||||||
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|
2017 |
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|
2016 |
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|
2015 |
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|||
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|
(in thousands) |
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|||||||||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
$ |
116,400 |
|
|
$ |
24,208 |
|
|
$ |
94,036 |
|
|
State |
|
9,382 |
|
|
|
1,943 |
|
|
|
3,636 |
|
|
Foreign |
|
11,533 |
|
|
|
10,806 |
|
|
|
10,589 |
|
|
|
|
137,315 |
|
|
|
36,957 |
|
|
|
108,261 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
(104,062 |
) |
|
|
91,190 |
|
|
|
33,446 |
|
|
State |
|
(10,724 |
) |
|
|
3,753 |
|
|
|
3,413 |
|
|
Foreign |
|
939 |
|
|
|
2,205 |
|
|
|
(1,225 |
) |
|
|
|
(113,847 |
) |
|
|
97,148 |
|
|
|
35,634 |
|
|
|
$ |
23,468 |
|
|
$ |
134,105 |
|
|
$ |
143,895 |
|
Income taxes differ from the amounts computed by applying the federal income tax rate of 35.0%. A reconciliation of these differences is as follows:
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Year ended December 31, |
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2017 |
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2016 |
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2015 |
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(in thousands, except percentages) |
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Taxes calculated at federal rate |
$ |
155,866 |
|
|
|
35.0 |
% |
|
$ |
167,153 |
|
|
|
35.0 |
% |
|
$ |
151,468 |
|
|
|
35.0 |
% |
|
|
State taxes, net of federal benefit |
|
(872 |
) |
|
|
(0.2 |
) |
|
|
3,703 |
|
|
|
0.8 |
|
|
|
4,581 |
|
|
|
1.1 |
|
|
|
Change in liability for tax positions |
|
(3,482 |
) |
|
|
(0.8 |
) |
|
|
(10,512 |
) |
|
|
(2.2 |
) |
|
|
1,094 |
|
|
|
0.3 |
|
|
|
Foreign income taxed at different rates |
|
(6,163 |
) |
|
|
(1.3 |
) |
|
|
(7,983 |
) |
|
|
(1.7 |
) |
|
|
(7,111 |
) |
|
|
(1.6 |
) |
|
|
Federal tax credits |
|
— |
|
|
|
— |
|
|
|
(12,265 |
) |
|
|
(2.6 |
) |
|
|
(1,710 |
) |
|
|
(0.4 |
) |
|
|
Tax reform impact |
|
(129,139 |
) |
|
|
(29.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
Unremitted foreign earnings |
|
14,997 |
|
|
|
3.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
Other items, net |
|
(7,739 |
) |
|
|
(1.7 |
) |
|
|
(5,991 |
) |
|
|
(1.2 |
) |
|
|
(4,427 |
) |
|
|
(1.1 |
) |
|
|
|
$ |
23,468 |
|
|
|
5.3 |
% |
|
$ |
134,105 |
|
|
|
28.1 |
% |
|
$ |
143,895 |
|
|
|
33.3 |
% |
|
The Company’s effective income tax rates (income tax expense as a percentage of income before income taxes) were 5.3% for 2017, 28.1% for 2016 and 33.3% for 2015. The differences in the effective tax rates are typically due to changes in state and foreign income taxes resulting from fluctuations in the Company’s noninsurance and foreign subsidiaries’ contributions to pretax income and changes in the ratio of permanent differences to income before income taxes. The Company’s effective tax rate for 2017 also reflects the estimated impact of the Tax Reform Act, state tax benefits relating to the termination of the Company’s pension plan, and the release of reserves relating to tax positions taken on prior year tax returns. In addition, the Company’s effective tax rate for 2017 reflects the adoption of new accounting guidance related to the accounting for share-based payment transactions, which requires, among other items, that all excess tax benefits and tax deficiencies associated with share-based payment transactions be recorded in income tax expense rather than in additional paid-in capital, as previously required. The impact to the Company of adopting this guidance was a reduction in income tax expense of $3.4 million. See Note 1 Basis of Presentation and Significant Accounting Policies for further discussion of the new guidance. The Company’s effective tax rate for 2016 reflects the resolution of certain tax authority examinations and tax credits claimed in 2016 and prior years. The Company’s effective tax rate for 2015 includes a benefit for the release of valuation allowances previously provided against certain foreign net operating losses and other deferred tax assets.
The primary components of temporary differences that give rise to the Company’s net deferred tax liability are as follows:
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|
December 31, |
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|||||
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2017 |
|
|
2016 |
|
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(in thousands) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Deferred revenue |
$ |
7,766 |
|
|
$ |
11,966 |
|
|
Employee benefits |
|
86,519 |
|
|
|
83,100 |
|
|
Bad debt reserves |
|
7,191 |
|
|
|
12,704 |
|
|
Loss reserves |
|
1,372 |
|
|
|
1,974 |
|
|
Pension |
|
22,600 |
|
|
|
89,726 |
|
|
Net operating loss carryforward |
|
13,914 |
|
|
|
14,358 |
|
|
Securities |
|
— |
|
|
|
10,664 |
|
|
Foreign tax credit |
|
7,976 |
|
|
|
4,086 |
|
|
Other |
|
5,673 |
|
|
|
7,557 |
|
|
|
|
153,011 |
|
|
|
236,135 |
|
|
Valuation allowance |
|
(10,333 |
) |
|
|
(8,049 |
) |
|
|
|
142,678 |
|
|
|
228,086 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciable and amortizable assets |
|
204,863 |
|
|
|
320,884 |
|
|
Claims and related salvage |
|
104,323 |
|
|
|
121,812 |
|
|
Investments in affiliates |
|
3,343 |
|
|
|
7,511 |
|
|
Securities |
|
11,656 |
|
|
|
— |
|
|
Unremitted foreign earnings |
|
14,997 |
|
|
|
— |
|
|
|
|
339,182 |
|
|
|
450,207 |
|
|
Net deferred tax liability |
$ |
196,504 |
|
|
$ |
222,121 |
|
The decrease in net deferred tax liability is primarily a result of applying the recently enacted U.S. corporate tax rate of 21% to deferred tax balances as of December 31, 2017. Balances as of December 31, 2016 were computed using the 35% rate then in effect.
The exercise of stock options and vesting of RSUs represent a tax benefit that has been reflected as a reduction of income taxes payable and a reduction of income tax expense for the year ended December 31, 2017, and an increase to equity for the year ended December 31, 2016. The benefits recorded were $3.4 million for the years ended December 31, 2017 and 2016.
In connection with the Company’s June 2010 spin-off from CoreLogic, it entered into a tax sharing agreement which governs the Company’s and CoreLogic’s respective rights, responsibilities and obligations for certain tax-related matters. At December 31, 2017 and 2016, the Company had a net payable to CoreLogic of $15.0 million and $16.3 million, respectively, related to tax matters prior to the spin-off. These amounts are included in the Company’s consolidated balance sheets in accounts payable and accrued liabilities. The decrease during the current year was primarily due to payments made for tax matters prior to the spin-off.
At December 31, 2017, the Company had available a foreign tax credit carryover of $8.0 million. The Company expects to utilize this credit within the carryover period.
At December 31, 2017, the Company had available net operating loss carryforwards for income tax purposes totaling $101.6 million, consisting of federal, state and foreign losses of $0.1 million, $57.5 million and $44.0 million, respectively. Of the aggregate net operating losses, $29.9 million has an indefinite expiration and the remaining $71.7 million expires at various times beginning in 2018. The Company carries a valuation allowance of $10.3 million against its deferred tax assets. Of this amount, $9.3 million relates to net operating losses; the remaining $1.0 million relates to other foreign deferred tax assets. The year-over-year increase in the overall valuation allowance is primarily due to additional state and foreign net operating losses incurred in 2017 that are not expected to be realized.
The Company evaluates the realizability of its deferred tax assets by assessing the valuation allowance and adjusts the allowance, if necessary. The factors used to assess the likelihood of realization include the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. The Company’s ability or failure to achieve forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of its deferred tax assets. Based on future operating results in certain jurisdictions, it is possible that the current valuation allowance positions of those jurisdictions could be adjusted in the next 12 months.
As of December 31, 2017, 2016 and 2015, the liability for income taxes associated with uncertain tax positions was $12.8 million, $18.1 million and $23.8 million, respectively. The net decreases in the liabilities during 2017, 2016 and 2015 were primarily attributable to activity related to examinations conducted by various taxing authorities. The liabilities could be reduced by $3.7 million, $5.7 million and $3.4 million as of December 31, 2017, 2016, and 2015, respectively, due to offsetting tax benefits associated with the correlative effects of potential adjustments, including timing adjustments and state income taxes. The net amounts of $9.1 million, $12.4 million and $20.4 million as of December 31, 2017, 2016 and 2015, respectively, if recognized, would favorably affect the Company’s effective tax rate.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 is as follows:
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|
December 31, |
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|
|
2017 |
|
|
2016 |
|
|
2015 |
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|||
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|
(in thousands) |
|
|||||||||
|
Unrecognized tax benefits—beginning balance |
$ |
18,100 |
|
|
$ |
23,800 |
|
|
$ |
24,100 |
|
|
Gross decreases—prior period tax positions |
|
(1,000 |
) |
|
|
(7,100 |
) |
|
|
(800 |
) |
|
Gross increases—current period tax positions |
|
— |
|
|
|
1,400 |
|
|
|
500 |
|
|
Settlements with taxing authorities |
|
(4,300 |
) |
|
|
— |
|
|
|
— |
|
|
Unrecognized tax benefits—ending balance |
$ |
12,800 |
|
|
$ |
18,100 |
|
|
$ |
23,800 |
|
The Company’s continuing practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. As of December 31, 2017, 2016 and 2015, the Company had accrued $5.3 million, $4.1 million and $9.7 million, respectively, of interest and penalties (net of tax benefits of $1.4 million, $1.8 million and $4.1 million, respectively) related to uncertain tax positions.
The Company, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various non-U.S. jurisdictions. The primary non-federal jurisdictions are California, Canada, India and the United Kingdom. During 2016, the Company concluded U.S. federal income tax examinations for calendar years 2005 through 2013. The Company is generally no longer subject to U.S. federal, state or non-U.S. income tax examinations by taxing authorities for years prior to 2005.
It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s unrecognized tax positions may significantly increase or decrease within the next 12 months. This change may be the result of ongoing audits or the expiration of federal and state statutes of limitations for the assessment of taxes.
The Company records a liability for potential tax assessments based on its estimate of the potential exposure. New tax laws and new interpretations of laws and rulings by tax authorities may affect the liability for potential tax assessments. Due to the subjectivity and complex nature of the underlying issues, actual payments or assessments may differ from estimates. To the extent that the Company’s estimates differ from actual payments or assessments, income tax expense is adjusted. The Company’s income tax returns in several jurisdictions are being examined by various taxing authorities. The Company believes that adequate amounts of tax and related interest, if any, from any adjustments that may result from these examinations have been provided for.