Income Taxes
On November 17, 2017, FNF distributed all of common stock of Cannae to the shareholders of FNFV Group in a transaction that qualified as a tax-free split-off under section 355 of the Internal Revenue Code of 1986. As a result of the Split-Off, Cannae is now a separate publicly traded company. All activity through the date of the Split-Off will be included in FNF’s consolidated tax return and Cannae will file an initial federal consolidated tax return, as well as various state tax returns, that will include Cannae’s activity subsequent to the Split-Off.
Income tax (benefit) expense on continuing operations consists of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In millions) |
Current | $ | (28.2 | ) | | $ | 6.2 |
| | $ | 46.5 |
|
Deferred | 11.6 |
| | (16.6 | ) | | (66.2 | ) |
| $ | (16.6 | ) | | $ | (10.4 | ) | | $ | (19.7 | ) |
A reconciliation of the federal statutory rate to our effective tax rate is as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal benefit | 3.1 |
| | 4.4 |
| | 17.1 |
|
Tax credits | 8.6 |
| | (66.1 | ) | | 84.8 |
|
Valuation allowance | 5.9 |
| | — |
| | (2.0 | ) |
Non-deductible expenses and other, net | (5.0 | ) | | 9.1 |
| | 7.6 |
|
Noncontrolling interests | (7.6 | ) | | (2.3 | ) | | 140.8 |
|
Tax Reform | (9.9 | ) | | — |
| | — |
|
Other | (3.7 | ) | | — |
| | — |
|
Effective tax rate excluding equity investments | 26.4 | % | | (19.9 | )% | | 283.3 | % |
Equity investments | (4.4 | ) | | (184.4 | ) | | 229.2 |
|
Effective tax rate | 22.0 | % | | (204.3 | )% | | 512.5 | % |
The significant components of deferred tax assets and liabilities at December 31, 2017 and 2016 consist of the following:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In millions) |
Deferred tax assets: | |
| | |
|
Employee benefit accruals | $ | 0.2 |
| | $ | 1.6 |
|
Net operating loss carryforwards | 10.9 |
| | — |
|
Equity investments | 14.6 |
| | 35.0 |
|
Investment securities | 3.0 |
| | — |
|
Partnerships | — |
| | 4.9 |
|
Accrued liabilities | 3.3 |
| | — |
|
State income taxes | — |
| | 0.7 |
|
Tax credit carryforwards | 1.1 |
| | — |
|
Total gross deferred tax asset | 33.1 |
| | 42.2 |
|
Less: valuation allowance | 0.7 |
| | 5.8 |
|
Total deferred tax asset | $ | 32.4 |
| | $ | 36.4 |
|
Deferred tax liabilities: | |
| | |
|
Investment securities | $ | — |
| | $ | (3.0 | ) |
Amortization of goodwill and intangible assets | (16.8 | ) | | — |
|
Partnerships | (4.4 | ) | | — |
|
Depreciation | (0.6 | ) | | (0.3 | ) |
Total deferred tax liability | $ | (21.8 | ) | | $ | (3.3 | ) |
Net deferred tax asset | $ | 10.6 |
| | $ | 33.1 |
|
The Company's net deferred tax asset was $10.6 million and $33.1 million at December 31, 2017, and 2016, respectively. The primary changes to the deferred taxes relate to acquired intangibles and net operating loss ("NOL") carryforwards; as well as changes in valuation allowance, equity investments, and partnership interests.
The decrease of $20.4 million in our deferred tax asset for equity investments as of December 31, 2017 from 2016 was the result of the current year pick up of equity in earnings of unconsolidated affiliates and the enactment of the Tax Reform Act, as defined below. The change in our deferred taxes for investment securities from a deferred tax liability of $3.0 million to a deferred tax asset of $3.0 million as of December 31, 2016 and December 31, 2017, respectively, was primarily related to valuation adjustments for unrealized losses on corporate debt securities. See Note D. Investments for further discussion on temporary impairment of corporate debt securities. The change in our deferred taxes for partnerships from a deferred tax asset of $4.9 million as of December, 31, 2016 to a deferred tax liability of $4.4 million as of December 31, 2017 was primarily related to the transfer of tax attributes to FNF as a result of the Split-Off.
As a result of the T-System Merger in the fourth quarter of 2017, the Company recorded a deferred tax liability of approximately $16.6 million related to intangibles and an $8.6 million deferred tax asset related to federal and state NOL carryforwards. The NOLs acquired in the T-System Merger are subject to a Section 382 limitation; however based on the section 382 limitation amount all of the NOL carryovers can be fully utilized before they expire.
The Company’s NOL and tax credit carryovers expire in various tax years through 2038.
ASC 740 requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all of the available evidence using a “more likely than not” standard. A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Management evaluated the Company’s deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, in particular, the Company’s historical profitability and any projections of future taxable income or potential future tax planning strategies.
As of December 31, 2017 and 2016, we had a valuation allowance of $0.7 million and $5.8 million, respectively. The valuation allowance recorded as of December 31, 2016 related to tax basis of an investment which would generate capital losses when sold or written off. In the fourth quarter of 2017, management determined that it was more likely than not that the Company would be able to realize such capital losses in the future. As a result, the valuation allowance was released. As of December 31, 2017, a small valuation allowance was recorded against certain state NOLs reflected in the Restaurant Group segment that were not more likely than not to be realized.
The Company did not have any unrecognized tax benefits as of December 31, 2017, 2016 or 2015.
Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). Among other provisions, the Tax Reform Act reduced the Federal statutory corporate income tax rate from 35% to 21% and limited or eliminated certain deductions. During the fourth quarter of 2017, we recorded a one-time non-cash net tax expense of $7.5 million related to the revaluation of our deferred income tax assets and liabilities as a result of the Tax Reform Act. The reduction in tax rate reduced the Company’s 2017 effective tax rate by 9.9%.
The Tax Reform Act significantly changes how the United States taxes corporations. The Company has analyzed and interpreted the current and future impacts of the Tax Reform Act and recorded the provisional effects in its financial statements as of December 31, 2017. However, the legislation remains subject to potential amendments, technical corrections and further guidance. Further, in connection with the filing of its tax return, the Company has the ability to change certain elections it has applied to the calculation of the year-end deferred tax assets and liabilities or amounts related to investments in subsidiaries. When the impact of the Tax Reform Act is finalized, the Company will record any necessary adjustments in the period in which the change occurs.