NOTE 9: INCOME TAXES

The Tax Cuts and Jobs Act (TCJA) was enacted in December 2017. The TCJA, among other changes, (1) reduces the U.S. federal corporate income tax rate from 35% to 21%, (2) allows for the immediate 100% deductibility of certain capital investments, (3) eliminates the alternative minimum tax (though allows for the future use of previously generated alternative minimum tax credits), (4) repeals the domestic production deduction, (5) requires a one-time “transition tax” on earnings of certain foreign subsidiaries that were previously tax deferred, (6) limits the deductibility of interest expense, (7) further limits the deductibility of certain executive compensation and (8) taxes global intangible low taxed income.

The SEC’s Staff Accounting Bulletin (SAB) 118 provided a one-year measurement period from the TCJA enactment date for companies to complete their income tax accounting.

During 2017, we recorded provisional estimates for the following two elements. During 2018 we recorded measurement-period adjustments to finalize these elements as follows:

DEEMED REPATRIATION TRANSITION TAX — The TCJA subjected companies to a one-time Deemed Repatriation Transition Tax (Transition Tax) on previously untaxed foreign accumulated earnings. We recorded a provisional Transition Tax obligation of $12,301,000 at December 31, 2017. In the fourth quarter of 2018, we completed our accounting for this element, which resulted in an insignificant amount of additional income tax expense.

DEDUCTIBILITY OF EXECUTIVE COMPENSATION — The TCJA eliminated the performance-based compensation exception from the limitation on covered employee remuneration. As a result, we believe that a portion of the performance-based remuneration accounted for in our deferred taxes will no longer be deductible. As such, we included a provisional expense of $1,403,000 at December 31, 2017. In the fourth quarter of 2018, we completed our accounting for this element which resulted in an insignificant amount of additional income tax expense.

Our accounting for the following two elements of the TCJA were recognized solely in 2018 as we were unable to make reasonable estimates of the effects during 2017.

OUTSIDE BASIS DIFFERENCE IN FOREIGN SUBSIDIARIES — We have previously considered the outside basis difference in our foreign subsidiaries to be indefinitely reinvested (the vast majority of which related to the undistributed earnings of our foreign subsidiaries). For U.S. federal income tax purposes, the Transition Tax (mentioned above) greatly reduced the outside basis difference in our foreign subsidiaries. After passage of the TCJA, if we choose to repatriate any previously taxed or undistributed foreign earnings, we have determined that the deferred tax impacts would be: (1) no U.S. federal income tax, (2) no foreign withholding tax, and (3) an insignificant amount of state income tax. As a result, we have chosen to remove our indefinite reinvestment assertion on the earnings of our foreign subsidiaries. We continue to assert indefinite reinvestment on any outside basis differences in excess of our previously taxed and undistributed foreign subsidiary earnings that may be subject to tax in the future.

GLOBAL INTANGIBLE LOW TAXED INCOME — We do not expect to have significant U.S. inclusions in taxable income related to global intangible low taxed income (GILTI). As such, we have made an accounting policy election to treat taxes due on the future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (period cost method) versus factoring such amounts into our measurement of deferred taxes (deferred method).

During the fourth quarter of 2018, we adopted ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” effective as of the beginning of the year. This ASU allowed us to reclassify $29,629,000 of stranded tax effects due to remeasuring certain deferred tax assets as a result of applying the TCJA enacted in December 2017 from accumulated other comprehensive income (AOCI) to retained earnings.

The components of earnings from continuing operations before income taxes are as follows:



in thousands	2018	2017	2016
Earnings from Continuing Operations
before Income Taxes
Domestic	$ 593,446	$ 346,668	$ 513,721
Foreign	29,844	14,648	33,536
Total	$ 623,290	$ 361,316	$ 547,257

Income tax expense (benefit) from continuing operations consists of the following:



in thousands	2018	2017	2016
Income Tax Expense (Benefit) from
Continuing Operations
Current
Federal	$ 21,111	$ (7,416)	$ 72,506
State and local	15,127	4,661	14,774
Foreign	4,278	3,109	6,974
Total	$ 40,516	$ 354	$ 94,254
Deferred
Federal	$ 59,216	$ (202,184)	$ 37,246
State and local	8,369	(30,052)	(6,647)
Foreign	(2,652)	(193)	(2)
Total	$ 64,933	$ (232,429)	$ 30,597
Total expense (benefit)	$ 105,449	$ (232,075)	$ 124,851

Income tax expense (benefit) differs from the amount computed by applying the federal statutory income tax rate to earnings from continuing operations before income taxes. The sources and tax effects of the differences are as follows:



dollars in thousands	2018		2017		2016
Income tax expense at the federal
statutory tax rate	$ 130,891	21.0%	$ 126,461	35.0%	$ 191,540	35.0%
Expense (Benefit) from
Income Tax Differences
Statutory depletion	(21,733)	-3.5%	(28,995)	-8.0%	(32,230)	-5.9%
State and local income taxes, net of federal
income tax benefit	18,562	3.0%	8,115	2.2%	10,074	1.9%
Share-based compensation	(16,551)	-2.7%	(20,740)	-5.7%	(22,443)	-4.1%
Uncertain tax positions	(6,402)	-1.0%	1,062	0.3%	1,272	0.2%
Revaluation - deferred tax balances	0	0.0%	(301,567)	-83.5%	0	0.0%
AL NOL valuation allowance release	0	0.0%	(28,827)	-8.0%	(4,791)	-0.9%
U.S. production deduction	0	0.0%	2,452	0.7%	(8,790)	-1.6%
Transition tax	595	0.1%	12,301	3.4%	0	0.0%
Foreign tax credit carryforward	0	0.0%	0	0.0%	(6,513)	-1.2%
Other, net	87	0.0%	(2,337)	-0.6%	(3,268)	-0.6%
Total income tax expense (benefit)/
Effective tax rate	$ 105,449	16.9%	$ (232,075)	-64.2%	$ 124,851	22.8%

Deferred taxes on the balance sheet result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred income tax liability at December 31 are as follows:



in thousands	2018	2017
Deferred Tax Assets Related to
Employee benefits	$ 24,407	$ 29,547
Incentive compensation	62,829	59,010
Asset retirement obligations & other reserves	55,822	47,116
State net operating losses	68,436	73,083
Federal credit carryforwards	0	51,284
Other	31,294	37,518
Total gross deferred tax assets	$ 242,788	$ 297,558
Valuation allowance	(29,680)	(29,723)
Total net deferred tax asset	$ 213,108	$ 267,835
Deferred Tax Liabilities Related to
Property, plant & equipment	$ 510,604	$ 490,459
Goodwill/other intangible assets	233,471	216,039
Other	36,316	25,418
Total deferred tax liabilities	$ 780,391	$ 731,916
Net deferred tax liability	$ 567,283	$ 464,081

Each quarter we analyze the likelihood that our deferred tax assets will be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not (a likelihood of more than 50%) that some portion, or all, of a deferred tax asset will not be realized. At December 31, 2018, we have Alabama state net operating loss (NOL) carryforward deferred tax assets of $65,577,000, against which we have a valuation allowance of $29,183,000. At this time, we do not expect any future adjustment to this valuation allowance. The Alabama NOL carryforward, if not utilized, would expire between 2023 and 2032.

Changes in our liability for unrecognized tax benefits for the years ended December 31 are as follows:



in thousands	2018	2017	2016
Unrecognized tax benefits as of January 1	$ 11,643	$ 10,828	$ 8,447
Increases for tax positions related to
Prior years	0	27	1,368
Current year	698	1,039	1,040
Decreases for tax positions related to
Prior years	(655)	(204)	0
Settlements with taxing authorities	0	0	0
Expiration of applicable statute of limitations	(8,025)	(47)	(27)
Unrecognized tax benefits as of December 31	$ 3,661	$ 11,643	$ 10,828

We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense. Interest and penalties recognized as income tax expense (benefit) were $(1,477,000) in 2018, $420,000 in 2017 and $266,000 in 2016. The balance of accrued interest and penalties included in our liability for unrecognized tax benefits as of December 31 was $312,000 in 2018, $1,789,000 in 2017 and $1,369,000 in 2016. Our liability for unrecognized tax benefits at December 31 in the table above include $3,481,000 in 2018, $10,673,000 in 2017 and $9,884,000 in 2016 that would affect the effective tax rate if recognized. We anticipate no single tax position generating a significant increase in our liability for unrecognized tax benefits within 12 months of this reporting date.

As of December 31, 2018, income tax receivables of $922,000 are included in other accounts and notes receivable in the accompanying Consolidated Balance Sheet. There were similar receivables of $106,980,000 ($106,000,000 related to 2017 federal estimated payments which were refunded early 2018) as of December 31, 2017.