11. Income Taxes

Income Tax Expense

Our income tax expense was as follows:

	For the year ended December 31,

	2013			2012			2011
	(in millions)
Current income taxes (benefits):
U.S. federal	$	109.5		$	(66.9	)	$	115.4
State		7.7			(4.7	)		7.2
Foreign		69.7			48.7			44.4
Tax benefit of operating loss carryforward		(134.1	)		(73.7	)		(0.2	)


Total current income taxes (benefits)		52.8			(96.6	)		166.8
U.S. federal		155.1			221.3			43.9
State		(3.1	)		(1.7	)		(2.6	)
Foreign		(16.9	)		11.6			(9.8	)


Total deferred income taxes		135.1			231.2			31.5


Total income taxes	$	187.9		$	134.6		$	198.3

Effective Income Tax Rate

Our provision for income taxes may not have the customary relationship of taxes to income. A reconciliation between the U.S. corporate income tax rate and the effective income tax rate was as follows:

	For the year ended December 31,

	2013			2012			2011
U.S. corporate income tax rate		35	%		35	%		35	%
Dividends received deduction		(10	)		(10	)		(9	)
Impact of equity method presentation		(3	)		(4	)		(4	)
Interest exclusion from taxable income		(2	)		(2	)		(3	)
Foreign tax rate differential		(2	)		(2	)		—
Impact of court ruling on some uncertain tax positions		—			—			7
Other		(1	)		(3	)		(3	)


Effective income tax rate		17	%		14	%		23	%

Unrecognized Tax Benefits

A summary of the changes in unrecognized tax benefits follows.

	For the year ended December 31,

	2013			2012
	(in millions)
Balance at beginning of period	$	119.5		$	114.3
Additions based on tax positions related to the current year		10.5			10.5
Additions for tax positions of prior years		10.9			4.4
Reductions for tax positions related to the current year		(3.3	)		(4.2	)
Reductions for tax positions of prior years		(28.7	)		(5.5	)


Balance at end of period (1)	$	108.9		$	119.5

(1): Of this amount, $55.4 million, if recognized, would reduce the 2013 effective income tax rate. We recognize interest and penalties related to uncertain tax positions in operating expenses.

As of December 31, 2013 and 2012, we had recognized $37.0 million and $44.1 million of accumulated pre-tax interest and penalties related to unrecognized tax benefits, respectively.

Net Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We reclassified certain components of deferred income taxes for the year ended December 31, 2012, to conform with December 31, 2013, presentation. The reclassification resulted in an increase in gross deferred income tax assets of $138.9 million and a corresponding increase in gross deferred tax liabilities of $138.9 million. The reclassification had no impact on the amount of valuation allowance established by us and, as a result, the net deferred tax liability remains unchanged. Significant components of our net deferred income taxes were as follows:

	December 31,

	2013			2012
	(in millions)
Deferred income tax assets:
Insurance liabilities	$	241.1		$	544.0
Investments, including derivatives		464.2			530.5
Net operating and capital loss carryforwards		339.8			386.2
Employee benefits		320.6			491.9
Other deferred income tax assets		90.4			55.9


Gross deferred income tax assets		1,456.1			2,008.5
Valuation allowance		(0.7	)		(2.7	)


Total deferred income tax assets		1,455.4			2,005.8
Deferred income tax liabilities:
Deferred acquisition costs		(807.2	)		(635.3	)
Investments, including derivatives		(418.3	)		(562.7	)
Net unrealized gains on available-for-sale securities		(584.5	)		(1,114.9	)
Real estate		(117.3	)		(102.0	)
Intangible assets		(297.7	)		(160.0	)
Other deferred income tax liabilities		(4.8	)		(10.1	)


Total deferred income tax liabilities		(2,229.8	)		(2,585.0	)


Total net deferred income tax liabilities	$	(774.4	)	$	(579.2	)

Net deferred income taxes by jurisdiction were as follows:

	December 31,

	2013			2012
	(in millions)
Deferred income tax assets:
State	$	—		$	3.9
Foreign		49.6			16.9


Net deferred income tax assets		49.6			20.8
Deferred income tax liabilities:
U.S. Federal		(503.4	)		(446.2	)
State		(1.5	)		—
Foreign		(319.1	)		(153.8	)


Net deferred income tax liabilities		(824.0	)		(600.0	)


Total net deferred income tax liabilities	$	(774.4	)	$	(579.2	)

In management's judgment, total deferred income tax assets are more likely than not to be realized. Included in the deferred income tax asset are net operating loss and tax credit carryforwards for tax purposes available to offset future taxable income. We have net operating loss and tax credit carryforwards for U.S. federal income tax purposes of $670.8 million and $988.1 million at December 31, 2013 and 2012, respectively, primarily attributable to our captive reinsurance companies that joined our consolidated U.S. federal income tax return in 2012 and 2013. These U.S. federal net operating loss and tax credit carryforwards will expire between 2021 and 2034. All accumulated U.S. federal net operating loss and tax credit carryforwards are anticipated to be utilized before expiration; therefore, no valuation allowance has been provided for the related deferred income tax assets.

Domestic state net operating loss carryforwards were $397.7 million and $328.6 million as of December 31, 2013 and 2012, respectively, and will expire between 2015 and 2033. Foreign net operating loss carryforwards generated in various foreign countries were $95.7 million and $70.6 million as of December 31, 2013 and 2012, respectively, with some net operating loss carryforwards expiring in 2014 while others never expire. We maintain valuation allowances by jurisdiction against the deferred income tax assets related to certain of these carryforwards, as utilization of these income tax benefits fail the more likely than not criteria in certain jurisdictions. As of December 31, 2013 and 2012, valuation allowances of $0.7 million and $2.3 million, respectively, have been recorded on income tax benefits associated with foreign net operating loss carryforwards. Adjustments to the valuation allowance will be made if there is a change in management's assessment of the amount of the deferred income tax assets that are more likely than not to be realized.

U.S. federal and state deferred income taxes have not been provided on approximately $693.7 million and $551.1 million of accumulated but undistributed earnings from operations of foreign subsidiaries at December 31, 2013 and 2012, respectively. These earnings are considered to be indefinitely reinvested in the business. It is not practicable to determine the amount of the unrecognized deferred tax liability that would arise if these earnings were remitted due to foreign tax credits and exclusions that may become available at the time of remittance. At December 31, 2013, deferred taxes were also not provided on the approximately $106.2 million of excess book carrying value over tax basis with respect to the original investment of our foreign subsidiaries. A tax liability will be recognized when we no longer plan to indefinitely reinvest these earnings or when we plan to sell all or a portion of our ownership interest.

Other Tax Information

Income tax returns are filed in the U.S. federal jurisdiction, as well as, various states and foreign jurisdictions where we and one or more of our subsidiaries conduct business. Although determined by jurisdiction, with few exceptions our tax uncertainties relate primarily to the U.S. federal jurisdiction. The Internal Revenue Service ("IRS") has completed examination of our consolidated U.S. federal income tax returns for years prior to 2004. We are contesting certain issues and have filed suit in the Court of Federal Claims, requesting refunds for the years 1995-2003. We do not expect litigation to be resolved within the next twelve months. We had $329.9 million and $334.6 million of current income tax receivables associated with outstanding audit issues reported as other assets in our consolidated statements of financial position as of December 31, 2013 and 2012, respectively.

The IRS completed its examinations of tax years 2004 through 2008. We filed claims for refund for tax years 2004 and 2005 during 2012 and will file claims for refund relating to disputed adjustments for tax years 2006 through 2008 in 2014. The IRS commenced audit of our U.S. federal income tax return for 2009 during the fourth quarter of 2011, for 2010 during the first quarter of 2012 and for 2011 during the first quarter of 2013. We do not expect the results of these audits or developments in other tax areas for all open tax years to significantly change the possible increase in the amount of unrecognized tax benefits, but the outcome of tax reviews is uncertain and unforeseen results can occur.

We do not believe there is a reasonable possibility the total amount of unrecognized tax benefits will significantly increase or decrease in the next twelve months. The range disclosed in our 2012 financial statements was prior to the January 2013 expiration of the right to appeal the U.S. District Court for the Southern District of Iowa decision in the case of Pritired 1, LLC. We believe that we have adequate defenses against, or sufficient provisions for, the contested issues, but final resolution of the contested issues could take several years while legal remedies are pursued. Consequently, we do not expect the ultimate resolution of issues from tax years 1995-2003 to have a material impact on our net income. Similarly, we believe there are adequate defenses against, or sufficient provisions for, any challenges that might arise in tax years subsequent to 2003.