10. Income Taxes

Income Taxes (Benefits)

Our income taxes (benefit) were as follows:


	For the year ended December 31,
	2018		2017		2016
	(in millions)
Current income taxes (benefits):
U.S. federal	$	(48.9)	$	(4.4)	$	38.6
State		10.3		48.9		(1.9)
Foreign		51.7		38.1		36.6
Tax benefit of operating loss carryforward		(13.5)		(21.5)		(17.5)
Total current income taxes (benefits)		(0.4)		61.1		55.8
Deferred income taxes (benefits):
U.S. federal		224.3		(208.2)		171.7
State		19.2		42.5		(20.6)
Foreign		(12.4)		32.3		23.0
Total deferred income taxes (benefits)		231.1		(133.4)		174.1
Income taxes (benefits)	$	230.7	$	(72.3)	$	229.9

Our income before income taxes was as follows:


	For the year ended December 31,
	2018		2017		2016
	(in millions)
Domestic	$	1,658.1	$	1,848.5	$	1,261.4
Foreign		126.3		403.7		330.3
Total income before income taxes	$	1,784.4	$	2,252.2	$	1,591.7

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,
	2018		2017		2016

U.S. corporate income tax rate	21	%	35	%	35	%
Dividends received deduction	(4)		(8)		(10)
Impact of the Tax Cuts and Jobs Act	(3)		(25)		—
Tax credits	(3)		(2)		(2)
Impact of equity method presentation	(1)		(2)		(3)
Interest exclusion from taxable income	(1)		(1)		(1)
State income taxes	1		2		—
Local country permanent tax adjustments	1		—		—
Other	2		(2)		(5)
Effective income tax rate	13	%	(3)	%	14	%

The U.S. tax reform enacted on December 22, 2017, made broad and complex changes to the U.S. Internal Revenue Code applicable to us. The U.S. statutory tax rate was reduced from 35% to 21% effective January 1, 2018. Other provisions of U.S. tax reform effective January 1, 2018, included, but were not limited to: 1) provisions reducing the dividends received deduction; 2) essentially eliminating U.S. federal income taxes on dividends from foreign subsidiaries; 3) retaining an element of current inclusion of certain earnings of controlled foreign corporations; 4) eliminating the corporate alternative minimum tax (“AMT”); and, 5) changing how existing AMT credits are realized.

Unrecognized Tax Benefits

Our changes in unrecognized tax benefits were as follows:


	For the year ended December 31,
	2018		2017
	(in millions)
Balance at beginning of period	$	194.1	$	207.8
Additions based on tax positions related to the current year		0.8		7.2
Additions for tax positions of prior years		43.7		20.2
Reductions for tax positions related to the current year		(10.6)		(3.3)
Reductions for tax positions of prior years		(23.2)		(1.1)
Settlements		(162.7)		(36.7)
Balance at end of period (1)	$	42.1	$	194.1

(1)

If recognized, $4.9 million of the above amount of unrecognized tax benefits would reduce our 2018 effective income tax rate. We recognize interest and penalties related to uncertain tax positions in operating expenses within the consolidated statements of operations.

As of December 31, 2018 and 2017, we had recognized $1.6 million and $125.5 million of accumulated pre-tax interest and penalties related to unrecognized tax benefits, respectively. We do not believe there is a reasonable possibility the total amount of the unrecognized tax benefits will significantly increase or decrease in the next twelve months considering recent settlements and the status of current and pending Internal Revenue Service (“IRS”) examinations. Settlement agreements applicable to tax years 1995 to 2003 were executed in 2018 with the Department of Justice, as previously approved by the Joint Committee of Taxation in August 2017. An IRS 30-day letter on examination of tax years 2009 through 2012, and the start of IRS examination of tax years 2015 through 2017 are expected in 2019.

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. The deferred tax balances as of December 31, 2017, were remeasured as a result of the U.S. tax reform reducing the U.S. statutory tax rate from 35% to 21% effective January 1, 2018. This was because the new rate was applicable to the reversal of cumulative temporary differences thereafter. Our significant components of net deferred income taxes were as follows:


	December 31,
	2018		2017
	(in millions)
Deferred income tax assets:
Insurance liabilities	$	—	$	26.3
Investments, including derivatives		165.6		205.8
Net operating and capital loss carryforwards		80.8		68.3
Tax credit carryforwards		163.3		307.5
Employee benefits		327.3		314.5
Foreign currency translation		28.1		20.4
Other deferred income tax assets		33.8		42.7
Gross deferred income tax assets		798.9		985.5
Valuation allowance		(17.0)		(5.2)
Total deferred income tax assets		781.9		980.3
Deferred income tax liabilities:
Deferred acquisition costs		(615.8)		(587.0)
Investments, including derivatives		(298.1)		(343.9)
Net unrealized gains on available-for-sale securities		(98.1)		(597.9)
Real estate		(144.9)		(147.1)
Intangible assets		(310.0)		(253.9)
Insurance liabilities		(60.2)		—
Repatriation toll charge		—		(19.8)
Other deferred income tax liabilities		(71.9)		(74.8)
Total deferred income tax liabilities		(1,599.0)		(2,024.4)
Total net deferred income tax liabilities	$	(817.1)	$	(1,044.1)

Our net deferred income taxes by jurisdiction were as follows:


	December 31,
	2018		2017
	(in millions)
Deferred income tax assets:
State	$	108.2	$	10.9
Foreign		33.1		37.5
Net deferred income tax assets		141.3		48.4
Deferred income tax liabilities:
U.S. federal		(708.2)		(803.9)
Foreign		(250.2)		(288.6)
Net deferred income tax liabilities		(958.4)		(1,092.5)
Total net deferred income tax liabilities	$	(817.1)	$	(1,044.1)

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 tax carryforwards available to offset future taxable income or income taxes. As of December 31, 2018 and 2017, we had tax credit carryforwards for U.S. federal income tax purposes of $163.3 million and $307.5 million, respectively. Alternative minimum, foreign and general business tax credit carryovers were generated during and since the period we utilized net operating losses, primarily attributable to our captive reinsurance companies that joined our consolidated U.S. federal income tax return beginning in 2012 and 2013. The AMT credit carryforwards became refundable in 2018 and will be fully recovered by 2021, and the other tax credits will expire by 2023 if unused. As of December 31, 2018, all accumulated U.S. federal tax credit carryforwards are anticipated to be utilized before expiration; therefore, no valuation allowance has been provided for the related deferred income tax assets.

As of December 31, 2018 and 2017, domestic state net operating loss carryforwards were $309.6 million and $366.1 million, respectively, and will expire between 2026 and 2036. As of December 31, 2018 and 2017, foreign net operating loss carryforwards were $191.3 million and $125.6 million, respectively, with some expiring in 2019 while others never expire. We maintain valuation allowances by jurisdiction against the deferred income tax assets related to certain of these carryforwards and other items, as utilization of these income tax benefits fail the more likely than not criteria in certain jurisdictions. As of December 31, 2018 and 2017, valuation allowances of $17.0 million and $5.2 million, respectively, had been recorded against the income tax benefits associated primarily 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. Provisions of the U.S. tax reform did not affect the valuation allowance assessment.

The effects of tax legislation on deferred taxes are recognized in the period of enactment. The primary impact of U.S. tax reform on our 2017 financial results was associated with the effect of reducing the U.S. statutory tax rate from 35% to 21% on our deferred tax balances as of December 31, 2017, and a one-time deemed repatriation tax on certain unremitted earnings of foreign subsidiaries. The effects of the U.S. tax reform were reflected in the 2017 financial statements as determined or as reasonably estimated provisional amounts based on available information subject to interpretation in accordance with the SEC’s Staff Accounting Bulletin No. 118 (“SAB 118”). The provisional amounts were primarily associated with estimation of the one-time deemed repatriation tax considering complexity as well as limited and changing technical tax guidance. Further, the provisional amounts also apply in regard to other potential technical interpretations of accounting and taxing authorities related to elements of the U.S. tax reform subject to change. Proposed regulations issued August 1, 2018, clarifying the calculation of the one-time deemed repatriation tax, allowed for final determination of the 2017 provisional amount. The impact of final §965 regulations issued on January 15, 2019, is expected to be immaterial; however, analysis is still being completed. The one-time deemed repatriation tax in 2017 was based on the greater of unremitted earnings and profits from foreign operations of our subsidiaries determined as of November 2, 2017 or December 31, 2017, which amounted to $43.0 million. The provisional amount of $43.0 million reported in 2017 was adjusted by $5.9 million in 2018 to $48.9 million to reflect the SAB 118 final determination within the required one-year measurement period.

Deferred tax liabilities are recognized for taxes payable on the unremitted earnings from foreign operations of our subsidiaries, except where it is our intention to indefinitely reinvest a portion or all of these undistributed earnings. As of December 31, 2018 and 2017, any applicable taxes that would be due upon repatriation were not provided on approximately $1,184.0 million and $1,331.2 million, respectively, of such accumulated but undistributed earnings from operations of foreign subsidiaries. We currently do not intend to repatriate these unremitted earnings because we have several liquidity options to fund our domestic operations and obligations. These options include investing and financing activities, such as issuing debt, as well as cash flow and dividends from domestic operations. As of December 31, 2018 and 2017, it was not practicable to determine the amount of the unrecognized deferred tax liability that would arise if foreign earnings were remitted, due to the complexity of our international holding company structure, and other significant tax attributes and varying state tax laws. Under the participation exemption available on distributions post-U.S. tax reform, taxes on remittances would be limited to foreign currency gains or losses, foreign withholding taxes, and state income taxes, which we would anticipate to be immaterial. As of December 31, 2018, 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 in our foreign subsidiaries. A tax liability will be recognized when we no longer plan to indefinitely reinvest a portion or all of these earnings or when we plan to sell a portion or all of our ownership interest.

Other Tax Information

Income tax returns are filed in 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 IRS has completed examination of our consolidated U.S. federal income tax returns for years prior to 2009. A settlement was reached in 2018 with the Department of Justice involving a suit in the Court of Federal Claims, requesting refunds for the years 1995-2003. IRS claims for refund for tax years 2004 through 2018, as a result of the settlement of earlier years with the Department of Justice, are pending. As of December 31, 2018 and 2017, we had $193.0 million and $231.8 million, respectively, of current income tax receivables associated with outstanding audit issues reported as other assets in our consolidated statements of financial position.

We filed claims for refund for tax years 2006 through 2008 in 2015 and tax year 2012 in 2016. The IRS commenced audit of our U.S. federal income tax return for 2009 in the fourth quarter of 2011, 2010 in the first quarter of 2012, 2011 in the first quarter of 2013, and 2012 in the third quarter of 2015. The U.S. federal statute of limitations expired for years prior to 2009, except for pending audit issues. The statute was extended until June 30, 2019 for 2009 through 2012, has expired for 2013 and 2014, and remains open for years thereafter. The ultimate settlement of earlier tax years can be adjusted into subsequent tax years regardless of statute status. We do not expect the results of these audits, subsequent related adjustments 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 believe we have adequate defenses against, or sufficient provisions for, contested issues, but final resolution could take several years while legal remedies are pursued. Consequently, we do not expect the resolved issues from tax years 1995-2003 or those that might arise in tax years subsequent to 2003 to have a material impact on our net income.