CIT GROUP INC

INCOME TAXES

The following table presents the U.S. and non-U.S. components of income/ (loss) before provision (benefit) for income taxes:

Income (Loss) From Continuing Operations Before Provision (Benefit) for Income Taxes (dollars in millions)



	Years Ended December 31,
	2017			2016			2015
U.S. operations	$	251.9		$	157.5		$	227.6
Non-U.S. operations	(60.3		)	(136.6		)	(41.6		)
Income from continuing operations before (benefit) / provision for income taxes	$	191.6		$	20.9		$	186.0

The (benefit) provision for income taxes is comprised of the following:

(Benefit) Provision for Income Taxes (dollars in millions)



	Years Ended December 31,
	2017			2016		2015
Current U.S. federal income tax provision	$	73.7		$	0.3	$	0.3
Deferred U.S. federal income tax (benefit) / provision	24.8			906.9		(566.3		)
Total federal income tax (benefit) / provision	98.5			907.2		(566.0		)
Current state and local income tax (benefit) / provision	(0.7		)	14.6		5.8
Deferred state and local income tax (benefit) / provision	(27.8		)	1.8		(21.0		)
Total state and local income tax (benefit) / provision	(28.5		)	16.4		(15.2		)
Total non-U.S. income tax (benefit) / provision	(31.4		)	90.8		82.4
Total provision / (benefit) for income taxes	$	38.6		$	1,014.4	$	(498.8	)
Continuing operations (benefit) / provision	$	(67.8	)	$	203.5	$	(538.0	)
Discontinued operations (benefit) / provision	106.4			810.9		39.2
Total provision / (benefit) for income taxes	$	38.6		$	1,014.4	$	(498.8	)

A reconciliation from the U.S. Federal statutory rate to the Company's actual effective income tax rate is as follows:

Percentage of Pretax Income Years Ended December 31 (dollars in millions)



	Effective Tax Rate
	2017							2016							2015
Continuing Operations	Pretax Income		Income tax expense (benefit)			Percent of pretax income		Pretax Income		Income tax expense (benefit)			Percent of pretax Income		Pretax Income		Income tax expense (benefit)			Percent of pretax income
Federal income tax rate	$	191.6	$	67.0		35.0	%	$	20.9	$	7.3		35.0	%	$	186.0	$	65.1		35.0	%
Increase (decrease) due to:
State and local income taxes, net of federal income tax benefit	—		4.4			2.3		—		21.0			101.0		—		(10.8		)	(5.9	)
Non-deductible goodwill	—		58.7			30.7		—		126.2			606.6		—		8.3			4.5
Domestic tax credits	—		(20.7		)	(10.8	)	—		(18.1		)	(87.0	)	—		(7.5		)	(4.0	)
Cumulative Method Change — Tax Advantaged Investments⁽¹⁾	—		26.6			13.9		—		—			—		—		—			—
Effect of tax law changes	—		(22.6		)	(11.8	)	—		—			—		—		—			—
Lower tax rates applicable to non-U.S. earnings	—		(1.6		)	(0.8	)	—		(10.3		)	(49.6	)	—		0.6			0.3
International income subject to U.S. tax	—		1.2			0.6		—		29.2			140.3		—		42.1			22.6
Unrecognized tax expense (benefit)	—		(0.2		)	(0.1	)	—		(14.4		)	(69.3	)	—		4.5			2.4
Deferred income taxes on international unremitted earnings	—		4.6			2.4		—		41.8			200.7		—		30.2			16.2
International Restructuring	—		(237.9		)	(124.2	)	—		—			—		—		—			—
Valuation allowances	—		60.5			31.6		—		14.7			70.6		—		(693.8		)	(373.0	)
International tax settlements	—		(3.5		)	(1.8	)	—		(0.6		)	(2.7	)	—		(3.5		)	(1.9	)
Other	—		(4.3		)	(2.4	)	—		6.7			32.4		—		26.8			14.6
Effective Tax Rate — Continuing operations			$	(67.8	)	(35.4	)%			$	203.5		978.0	%			$	(538.0	)	(289.2	)%
Discontinued Operation
Federal income tax rate	$	315.2	$	110.3		35.0	%	$	145.5	$	50.9		35.0	%	$	349.2	$	122.2		35.0	%
Increase (decrease) due to:
State and local income taxes, net of federal income tax benefit	—		7.2			2.3		—		(9.5		)	(6.5	)	—		0.6			0.2
Non-deductible penalties	—		—			—		—		16.6			11.4		—		—			—
Lower tax rates applicable to non-U.S. earnings	—		(93.2		)	(29.6	)	—		(110.8		)	(76.1	)	—		(89.3		)	(25.6	)
International income subject to U.S. tax	—		44.2			14.0		—		16.7			11.5		—		8.1			2.3
Deferred income taxes on international unremitted earnings			39.7			12.6				847.3			582.1				—			—
Other	—		(1.8		)	(0.5	)	—		(0.3		)	(0.3	)	—		(2.4		)	(0.7	)
Effective Tax Rate — Discontinued operation			$	106.4		33.8	%			$	810.9		557.1	%			$	39.2		11.2	%
Total Effective Tax Rate			$	38.6		7.6	%			$	1,014.4		609.7	%			$	(498.8	)	(93.2	)%

⁽¹⁾ Amount relates to the change in accounting policy for LIHTC. See Note 1 — Business and Summary of Significant Accounting Policies.

The tax effects of temporary differences that give rise to deferred income tax assets and liabilities are presented below:

Components of Deferred Income Tax Assets and Liabilities (dollars in millions)



	December 31,
	2017			2016
Deferred Tax Assets:
Net operating loss (NOL) carry forwards	$	877.3		$	2,528.3
Basis difference in loans	181.5			281.4
Provision for credit losses	117.8			185.7
Accrued liabilities and reserves	116.6			274.9
FSA adjustments — aircraft and rail contracts	—			24.2
Deferred stock-based compensation	19.5			34.5
Domestic tax credits	87.1			40.5
Capital Loss Carryforward	54.0			3.3
Other	46.8			75.8
Total gross deferred tax assets	1,500.6			3,448.6
Deferred Tax Liabilities:
Operating leases	(1,066.5		)	(1,818.5		)
Loans and direct financing leases	(38.1		)	(100.3		)
Basis difference in mortgage backed securities	(24.6		)	(100.0		)
Basis difference in federal home loan bank stock	(17.5		)	(28.1		)
Non-U.S. unremitted earnings	(61.0		)	(1,032.6		)
Unrealized foreign exchange gains	(12.5		)	(27.7		)
Goodwill and intangibles	(23.5		)	(116.7		)
Other	(16.9		)	(21.6		)
Total deferred tax liabilities	(1,260.6		)	(3,245.5		)
Total net deferred tax asset before valuation allowances	240.0			203.1
Less: Valuation allowances	(280.6		)	(278.4		)
Net deferred tax asset (liability) after valuation allowances	$	(40.6	)	$	(75.3	)

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (or “U.S. Tax Reform legislation”) was enacted on December 22, 2017. The Tax Cuts and Jobs Act signed the following key changes to U.S. tax law:


•	Reduces the corporate federal income tax rate to 21%,


•	Creates a territorial tax system (with a one-time mandatory tax on previously deferred foreign earnings),


•	Broadens the tax base,


•	Allows for immediate capital expensing of certain qualified property,


•	Creates anti-base erosion rules that require companies to pay global minimum taxes on foreign earnings,


•	Subjects certain payments from U.S. corporations to foreign related parties to additional taxes.

As a result of the U.S. Tax Reform legislation, the Company recognized a net deferred tax benefit of $11.6 million.

The Tax Cuts and Jobs Act required management to make certain adjustments to the Company’s year-end financial statements for the effects of the law relating to the remeasurement of deferred taxes, liabilities for taxes due on mandatory deemed repatriation, liabilities for taxes due on other foreign income, and the reassessment of the Company’s valuation allowance. The SEC staff has afforded registrants a measurement period, per Staff Accounting Bulletin No. 118 Income Tax Accounting Implications of the Tax Cuts and Jobs Act, similar to the measurement period used when accounting for business combinations to record adjustments for the effects of the law. As of December 31, 2017, the Company has reviewed information relating to these tax law changes, and concluded that the procedures and methods utilized in developing assumptions, estimates and judgments for final and provisional amounts recorded in the financial statements are appropriate. The Company anticipates refinements to the amounts resulting from the issuance of future legislative and accounting guidance as well as those in the normal course of business, including true-ups resulting from the tax return to be filed later in 2018. However, Management does not anticipate any adjustments to the provisional amounts arising from further analysis of these tax law changes would be material.

Net Operating Loss Carry-forwards

CIT's reorganization in 2009 constituted an ownership change under Section 382 of the Internal Revenue Code, which placed an annual dollar limit on the use of the remaining pre-bankruptcy NOLs. In general, the Company's annual limitation on use of pre-bankruptcy NOLs is approximately $265 million per annum. NOLs arising in post-emergence years are not subject to this limitation absent another ownership change as defined by Section 382. The OneWest Transaction created no further annual dollar limit under Section 382.

As of December 31, 2017, CIT has deferred tax assets ("DTAs") from continuing operations totaling $877.3 million on its global NOLs. This includes: (1) a DTA of $504.0 million relating to its cumulative U.S. federal NOLs of $2.4 billion; (2) DTAs of $322.0 million relating to cumulative state NOLs of $6.1 billion, including amounts of reporting entities that file in multiple jurisdictions, and (3) DTAs of $51.1 million relating to cumulative non-U.S. NOLs of $203.8 million.

Of the $2.4 billion U.S. federal NOLs, approximately $1.0 billion relate to the pre-emergence bankruptcy period and are subject to the Section 382 limitation discussed above. Approximately $1.4 billion of the U.S. federal NOL is not subject to the limitation. The U.S. federal NOLs will start to expire beginning in 2028 through 2036. Approximately $188 million of state NOLs will expire in 2018. While most of the non-U.S. NOLs have no expiration date, a small portion will expire over various periods, including an insignificant amount expiring in 2018.

Valuation Allowances

The determination of whether or not to maintain the valuation allowances on certain reporting entities' DTAs requires significant judgment and an analysis of all positive and negative evidence to determine whether it is more likely than not that these future benefits will be realized. ASC 740-10-30-18 states that "future realization of the tax benefit of an existing deductible temporary difference or NOL carry-forward ultimately depends on the existence of sufficient taxable income within the carryback and carry-forward periods available under the tax law." As such, the Company considered the following potential sources of taxable income in its assessment of a reporting entity's ability to recognize its net DTA:


•	Taxable income in carryback years,


•	Future reversals of existing taxable temporary differences (deferred tax liabilities),


•	Prudent and feasible tax planning strategies, and


•	Future taxable income forecasts.

During the third quarter of 2015, Management updated the Company's long-term forecast of future U.S. federal taxable income to include the anticipated impact of the OneWest Bank acquisition. The updated long-term forecast supports the utilization of all of the U.S. federal DTAs (including those relating to the NOLs prior to their expiration). Accordingly, Management concluded that it is more likely than not that the Company will generate sufficient future taxable income within the applicable carry-forward periods to enable the Company to reverse the remaining $690 million of U.S. federal valuation allowance, $647 million of which was recorded as a discrete item in the third quarter, and the remainder of which was included in determining the annual effective tax rate as normal course in the third and fourth quarters of 2015 as the Company recognized additional U.S. taxable income related to the OneWest Bank acquisition.

The Company also evaluated the impact of the OneWest Bank acquisition on its ability to utilize the NOLs of its state income tax reporting entities and concluded that no additional reduction to the U.S. state valuation allowance was required in 2015. These state income tax reporting entities include both combined unitary state income tax reporting entities and separate state income tax reporting entities in various jurisdictions. The Company analyzed the state net operating loss carry-forwards for each of these reporting entities to determine the amounts that are expected to expire unused. Based on this analysis, it was determined that the valuation allowance was still required on U.S. state DTAs on certain net operating loss carry-forwards. The Company retained a valuation allowance of $250 million against the DTA on the U.S. state NOLs at December 31, 2016.

During 2017, Management updated the Company's long term forecast of future U.S. federal taxable income incorporating recent actions including its decision to sell Commercial Air, which closed in the second quarter of 2017. The updated forecasts continue to support no valuation allowance on the U.S. federal DTAs on NOLs but the valuation allowance of $208.6 million was retained on U.S. state DTAs on certain NOLs as of December 31, 2017.

Additionally, as of December 31, 2017, the Company maintained a $33.2 million and $6.4 million U.S. federal and state valuation allowance, respectively, on the deferred tax asset established on capital loss carryforwards mainly generated from the liquidation of a foreign subsidiary. Capital losses can be carried forward for 5 years to offset future capital gains but requires a valuation allowance until additional capital gains are identified.

The Company maintained a valuation allowance of $32.4 million against certain non-U.S. reporting entities' net DTAs at December 31, 2017, down from $38.9 million at December 31, 2016. In the evaluation process related to the net DTAs of the Company's other international reporting entities, uncertainties surrounding the future international business operations have made it challenging to reliably project future taxable income. Management will continue to assess the forecast of future taxable income as the business plans for these international reporting entities evolve and evaluate potential tax planning strategies to utilize these net DTAs.

The Company's ability to recognize DTAs will be evaluated on a quarterly basis to determine if there are any significant events that would affect our ability to utilize existing DTAs. If events are identified that affect our ability to utilize our DTAs, valuation allowances may be adjusted accordingly.

Indefinite Reinvestment Assertion

The 2017 Tax Cuts and Jobs Act will require a mandatory deemed repatriation of post-1986 undistributed Non-U.S. earnings and profits (“Toll Tax”). The rate applied varies depending on whether the earnings and profit ("E&P") is held in liquid or non-liquid assets, and U.S. Corporations would be subject to a one-time mandatory repatriation toll charge of 15.5% for cash and liquid assets and 8% for non-liquid assets. The toll charge will be assessed regardless of whether or not the company brings back the earnings. The Company has a net deficit in E&P and therefore has no liability for the Toll Tax.

As of December 31, 2017, the Company has a deferred income tax liability of $61 million for U.S. and non-U.S. taxes mainly related to international withholding taxes. The net reduction of $967 million in the deferred income tax liabilities from 2016 was comprised of $964 million net reversal of deferred tax liabilities accrued in the current and prior years related to the sale of the Commercial Air business, $13.6 million deferred income tax benefit related to the reduction of deferred tax liabilities on previously untaxed E&P due to provisions in the U.S. Tax Reform mentioned above, partially offset by current year earnings activity in Canada and China pre Tax Reform.

Liabilities for Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Unrecognized Tax Benefits (dollars in millions)



	Liabilities for Unrecognized Tax Benefits			Interest / Penalties			Grand Total
Balance at December 31, 2016	$	36.4		$	11.7		$	48.1
Additions for tax positions related to prior years	1.1			1.9			3.0
Reductions for tax positions of prior years	(6.4		)	(4.2		)	(10.6		)
Income Tax Audit Settlements	(16.6		)	(4.4		)	(21.0		)
Other	(1.0		)	1.3			0.3
Balance at December 31, 2017	$	13.5		$	6.3		$	19.8

During the year ended December 31, 2017, the Company recorded a net $28.3 million reduction on uncertain tax positions ("UTPs"), including interest and penalties. The majority of the net reduction related to a $21.0 million decrease resulting from favorable audit resolutions with state taxing authorities on UTPs taken on prior year U.S. state income tax returns, and $6.6 million related to UTPs in entities that were transferred with the Commercial Air sale.

During the year ended December 31, 2017, the Company recognized $5.4 million income tax benefit relating to interest and penalties on its UTPs. The change in balance is mainly related to the interest and penalties associated with the above mentioned UTPs taken on certain prior-year U.S. state income tax returns and reduction related to UTPs in entities that were transferred with the Commercial Air sale. As of December 31, 2017, the accrued liability for interest and penalties is $6.3 million. The Company recognizes accrued interest and penalties on unrecognized tax benefits in income tax expense.

The entire $19.8 million of unrecognized tax benefits including interest and penalties at December 31, 2017, would lower the Company's effective tax rate, if realized. The Company believes that the total unrecognized tax benefits before interest and penalties may decrease, in the range of $0 to $5 million, from the resolution of open tax matters, settlements of audits, and the expiration of various statutes of limitations prior to December 31, 2018.

Income Tax Audits

In December 2017, the Company received notification from the IRS of commencement of a new federal income tax exam for the 2015 tax year. There are no material tax issues raised by the IRS at this initial state of the audit.

On January 27, 2016, and June 13, 2016, the Company and the IRS concluded the audit examination of IMB Holdco LLC, the parent company of OneWest Bank and its subsidiaries, which was acquired on August 3, 2015 by CIT, for taxable years ended December 31, 2012, and December 31, 2013, respectively. The audit settlement resulted in no additional regular or alternative minimum tax liability but resulted in a significant cash tax refund, which was reflected in the acquisition date balance sheet.

IMB Holdco LLC and its subsidiaries are also under examination by the California Franchise Tax Board ("FTB") for tax years 2009 through 2013. The FTB has completed its audit of the 2009 return and has issued a notice of proposed assessment. The Company, working with its outside advisors, is currently in negotiations to agree to a final Closing Agreement that would settle all outstanding issues for 2009 through 2013. The Company expects final resolution and favorable settlement of the issues in 2018. The issues raised by California were anticipated by the Company, and the Company believes it has provided adequate reserves in accordance with ASC 740 for any potential adjustments.

The Company and its subsidiaries are under examination in various states, provinces and countries for years ranging from 2005 through 2015. Management does not anticipate that these examination results will have any material financial impact.