Note 6. Income Taxes
The following is a reconciliation of the provision for income taxes based on income (loss) before federal income taxes, computed using the federal statutory rate versus the reported provision for income taxes for the years ended December 31, 2017, 2016, and 2015:
|
|
|
December 31, |
|
||||||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
||||||
|
Provisions for income taxes computed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at Federal statutory rate (35%) |
|
$ |
|
35,626 |
|
|
$ |
|
(7,498 |
) |
|
$ |
|
3,129 |
|
|
Increase (decrease) in income taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend received deduction |
|
|
|
(8,047 |
) |
|
|
|
(7,567 |
) |
|
|
|
(6,622 |
) |
|
Tax credits |
|
|
|
(222 |
) |
|
|
|
(458 |
) |
|
|
|
(302 |
) |
|
Valuation allowance on deferred tax assets |
|
|
|
(65,529 |
) |
|
|
|
21,810 |
|
|
|
|
(1,497 |
) |
|
Change in Federal Tax Rate |
|
|
|
41,028 |
|
|
|
|
- |
|
|
|
|
- |
|
|
Provision to return adjustment |
|
|
|
(439 |
) |
|
|
|
(727 |
) |
|
|
|
498 |
|
|
State taxes (benefits) |
|
|
|
712 |
|
|
|
|
211 |
|
|
|
|
(287 |
) |
|
Unrecognized tax benefits |
|
|
|
4 |
|
|
|
|
987 |
|
|
|
|
363 |
|
|
Audit adjustment |
|
|
|
- |
|
|
|
|
(8,225 |
) |
|
|
|
- |
|
|
Other |
|
|
|
(749 |
) |
|
|
|
462 |
|
|
|
|
- |
|
|
Income tax provision |
|
$ |
|
2,384 |
|
|
$ |
|
(1,005 |
) |
|
$ |
|
(4,718 |
) |
The effective tax rate was not meaningful for the years ended December 31, 2017, 2016 or 2015. Differences between the effective rate and the U.S. statutory rate of 35% principally were the result of the Separate Accounts DRD, the valuation allowance on NOL carryforwards and the TCJA.
The Company provides for deferred income taxes resulting from temporary differences that arise from recording certain transactions in different years for income tax reporting purposes than for financial reporting purposes. The asset and liability method requires that deferred taxes be adjusted to reflect the tax rates at which future taxable amounts will be settled or realized. The Company provides for federal income taxes based on amounts it believes it will ultimately owe. Inherent in the provision for federal income taxes are estimates regarding the realization of certain tax deductions and credits. The income tax expense (benefit) for each of the twelve months ended December 31, 2017, 2016 and 2015 was $2,384, ($1,005), and ($4,718) respectively.
Deferred tax assets and liabilities result from temporary differences between the assets and liabilities measured for GAAP reporting versus income tax return purposes. Deferred income tax assets and liabilities are measured at the statutory rate of 21% as of December 31, 2017 and 35% as of December 31, 2016 and were as follows:
|
|
|
December 31, |
|
|||||||
|
|
|
2017 |
|
|
2016 |
|
||||
|
Deferred tax assets |
|
|
|
|
|
|
|
|
|
|
|
Tax DAC |
|
$ |
|
1,205 |
|
|
$ |
|
14,992 |
|
|
Net operating and capital loss carryforward |
|
|
|
116,117 |
|
|
|
|
228,864 |
|
|
Intangible assets |
|
|
|
14,786 |
|
|
|
|
29,824 |
|
|
Transitional reserve amount |
|
|
|
8,849 |
|
|
|
|
- |
|
|
Policyholder reserves |
|
|
|
17,189 |
|
|
|
|
29,546 |
|
|
Tax credits |
|
|
|
19,511 |
|
|
|
|
13,992 |
|
|
Other |
|
|
|
1,999 |
|
|
|
|
1,714 |
|
|
Total deferred tax assets |
|
$ |
|
179,656 |
|
|
$ |
|
318,932 |
|
|
Valuation allowance |
|
|
|
(78,697 |
) |
|
|
|
(154,440 |
) |
|
Net deferred tax assets |
|
$ |
|
100,959 |
|
|
$ |
|
164,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
|
|
VOBA |
|
$ |
|
51,553 |
|
|
$ |
|
95,150 |
|
|
Policyholder reserves |
|
|
|
8,050 |
|
|
|
|
20,106 |
|
|
Transitional reserve amount |
|
|
|
3,988 |
|
|
|
|
- |
|
|
Investments |
|
|
|
39,158 |
|
|
|
|
48,660 |
|
|
Other |
|
|
|
36 |
|
|
|
|
- |
|
|
Total deferred tax liabilities |
|
$ |
|
102,785 |
|
|
$ |
|
163,916 |
|
|
Total net deferred tax asset (liability) |
|
$ |
|
(1,826 |
) |
|
$ |
|
576 |
|
As we complete the collection, preparation and analysis of data relevant to the TCJA, and interpret any additional guidance issued by the IRS, U.S. Department of the Treasury, or other standard-setting organizations, we may make adjustments to these provisional amounts.
As a result of the TCJA, the Company’s tax reserve deductible temporary difference decreased by an estimated ($4,860). This change results in an offsetting $4,860 deductible temporary difference that will be amortized into taxable income evenly over the next eight years. As noted, this transitional change amount was based on provisional estimate at December 31, 2017. Actual results may differ from the estimates and will be adjusted in future periods when the actuarial models and systems are updated for the policyholder tax reserve changes required by the TCJA.
The income tax expense (benefit) consists of the following for the years ended December 31, 2017, 2016, and 2015:
|
|
|
December 31, |
|
||||||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
||||||
|
Current federal income tax expense (benefit) |
|
$ |
|
- |
|
|
$ |
|
(179 |
) |
|
$ |
|
- |
|
|
Current state income tax expense (benefit) |
|
|
|
(17 |
) |
|
|
|
(144 |
) |
|
|
|
9 |
|
|
Deferred federal income tax expense (benefit) |
|
|
|
1,290 |
|
|
|
|
(1,150 |
) |
|
|
|
(4,275 |
) |
|
Deferred state income tax expense (benefit) |
|
|
|
1,111 |
|
|
|
|
468 |
|
|
|
|
(452 |
) |
|
Total income tax expense (benefit) |
|
$ |
|
2,384 |
|
|
$ |
|
(1,005 |
) |
|
$ |
|
(4,718 |
) |
The income tax asset (liability) consists of the following at December 31, 2017 and 2016:
|
|
|
|
|
|
December 31, |
|
|||||||
|
|
|
|
|
|
2017 |
|
|
2016 |
|
||||
|
Current federal income tax asset (liability) |
|
|
|
|
$ |
|
- |
|
|
$ |
|
- |
|
|
Current state income tax asset (liability) |
|
|
|
|
$ |
|
(108 |
) |
|
$ |
|
1 |
|
|
Deferred federal income tax asset (liability) |
|
|
|
|
|
|
(1,759 |
) |
|
|
|
- |
|
|
Deferred state income tax asset (liability) |
|
|
|
|
|
|
(67 |
) |
|
|
|
575 |
|
|
Net income tax asset (liability) |
|
|
|
|
$ |
|
(1,934 |
) |
|
$ |
|
576 |
|
At December 31, 2017 and 2016, the Company had a tax valuation allowance for deferred tax assets of $78,697 and $154,440, respectively (this includes losses that are anticipated to be used in the consolidated group to reflect the income statement impact of the losses that wouldn't be used if filing separately). In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.
The Company has analyzed all material tax positions under the guidance of ASC 740, Income Taxes, related to the accounting for uncertainty in income tax, and determined there were tax benefits of $2,637 (gross $12,557) and $4,391 (gross $12,547), respectively, that should not be recognized at December 31, 2017 and 2016. These unrecognized tax benefits primarily relate to uncertainty regarding the sustainability of certain deductions taken on the 2008-2016 U.S. Federal income tax returns. To the extent these unrecognized tax benefits are ultimately recognized, they will affect the effective tax rate in a future period. It is not anticipated that the total amounts of unrecognized tax benefits will significantly increase within twelve months of the reporting date.
During 2016, the Company modified its calculation of dividends that are eligible for the DRD. This resulted in recording a permanent tax benefit of $7,391 in the Company’s 2016 Financial Statements for years 2011-2015. This has been treated as a change in estimate.
The components of the change in the unrecognized tax benefits were as follows at December 31, 2017 and 2016:
|
|
|
December 31, |
|
|||||||
|
|
|
2017 |
|
|
2016 |
|
||||
|
Balance at beginning of period |
|
$ |
|
4,391 |
|
|
$ |
|
3,404 |
|
|
Additions for tax positions of prior years |
|
|
|
4 |
|
|
|
|
987 |
|
|
Change in federal tax rate |
|
|
|
(1,758 |
) |
|
|
|
- |
|
|
Balance at end of period |
|
$ |
|
2,637 |
|
|
$ |
|
4,391 |
|
At December 31, 2017 and 2016, the Company had a NOL carry forward for federal income tax purposes of $554,553 (net of the ASC 740 reduction of $12,557) and $627,860 (net of the ASC 740 reduction of $12,547), respectively, with a carry forward period of fifteen years that expires at various dates between 2023 and 2031. At both December 31, 2017 and 2016, the Company had a capital loss carry forward of $0 and $84, respectively, for federal income tax purposes with a carry forward period of five years that will expire in 2018. At December 31, 2017 and 2016, the Company had a foreign tax credit carry forward of $9,831 and $9,776, respectively, with a carry forward period of ten years that will expire at various dates up to 2026. Also, the Company has an Alternative Minimum Tax credit carry forward for federal income tax purposes of $4,216 at both December 31, 2017 and 2016. The Company is estimating to be refunded $4,216 ($3,937 net of valuation allowance) of a minimum tax credit carryforward by the end of 2021 pursuant to the TCJA.
The Company classifies interest and penalties related to income taxes as interest expense and penalty expense, respectively. The Company did not recognize any penalties in its Financial Statements at December 31, 2017, 2016, or 2015. The Company recognized interest expense (income) of $316, $74 and less than $86 at December 31, 2017, 2016 and 2015, respectively. The total interest payable balance at December 31, 2017 and 2016 is $477 and $161, respectively.
The Company records taxes on a separate company basis. For federal income tax purposes, the Company joins in a consolidated income tax return filing with its direct parent, TA Corp, and other affiliated companies. The method of allocation between the companies is subject to a written tax allocation agreement. Under the terms of the agreement, taxes are payable to or receivable from TA Corp in amounts that would result had the Company filed a separate tax return with taxing authorities. Any tax differences between the Company’s separately calculated provision and cash flows attributable to benefits from consolidation have been recognized as capital contributions from TA Corp. For the years ended December 31, 2017 and 2016 and 2015, the Company recognized capital contributions from (distributions to) TA Corp and contributions from AUSA in connection with the tax allocation agreement in the amount of ($47,465), ($13,381) and $68,492, respectively. Intercompany income tax balances are settled within thirty days of payment to or filing with the Internal Revenue Service.
The Company filed a separate federal income tax return for the years 2008 through 2012. The Company was part of the consolidated tax return for 2013 through 2016. An examination by the Internal Revenue Service is in progress for the years 2011 to 2013. The Company believes that there are adequate defenses against or sufficient provisions established related to any open or contested tax positions. The 2017 return has not yet been filed.