Income Taxes

Our federal income tax expense was $3.5 million, $1.2 million and $4.0 million in 2016, 2015 and 2014, respectively. This represents effective tax rates of 64.1%, (61.8)% and (206.2)%, respectively. The high effective rate in 2016 was primarily due to the effect of our uncertain tax position and the nondeductible costs to remediate our tax compliance issues. The 2014 impact is the result of costs to remediate the tax compliance issue we identified in early 2015 which impacted the 2014 effective tax rate negatively by approximately $3.5 million due to approximately $10.0 million of these costs not being deductible for tax. Additionally, after further refinement of these amounts in 2015 plus the effects of toll charges for the IRC Section 72(s) tax compliance issue identified in the second quarter of 2015, an additional $3.3 million of nondeductible toll charges were recorded in 2015, which negatively impacted the 2015 tax rate by $1.2 million.

The Company holds no valuation allowance in other comprehensive income at December 31, 2016 or 2015.

The table below summarizes the changes in the valuation allowance.



	Deferred Tax Liability		Other Comprehensive Income		Goodwill	Income Tax Expense (Benefit)
	(In thousands)
Balance at December 31, 2013	$	—	(63	)	1,058	(995	)
Release of valuation allowance in 2014	—		21		—	(21	)
Balance at December 31, 2014	—		(42	)	1,058	(1,016	)
Release of valuation allowance in 2015	—		42		—	(42	)
Balance at December 31, 2015	—		—		1,058	(1,058	)
Release of valuation allowance in 2016	—		—		—	—
Balance at December 31, 2016	$	—	—		1,058	(1,058	)

A reconciliation of federal income tax expense computed by applying the federal income tax rate of 35% in 2016, 2015 and 2014 to income (loss) before federal income tax expense is as follows:



	Years Ended December 31,
	2016					2015 (a)					2014 (a)
	Amount			%		Amount			%		Amount			%
	(In thousands)
Expected tax expense (benefit)	$	1,919		35.0	%	$	(680	)	35.0	%	$	(682	)	35.0	%
Release of valuation allowance previously held in other comprehensive income	—			—		(42		)	2.2		(21		)	1.1
Taxable stock sales	263			4.8		—			—		—			—
Tax-exempt interest and dividends-received deduction	(553		)	(10.1	)	(746		)	38.4		(862		)	44.2
Adjustment of prior year taxes	29			0.5		(317		)	16.3		1			(0.1	)
Effect of graduated rates	(57		)	(1.0	)	(71		)	3.7		(89		)	4.6
Effect of uncertain tax position	1,672			30.5		1,890			(97.3	)	2,136			(109.5	)
Nondeductible costs to remediate tax compliance issue	241			4.4		1,152			(59.3	)	3,514			(180.2	)
Other	—			—		14			(0.8	)	23			(1.3	)
Total income tax expense	$	3,514		64.1	%	$	1,200		(61.8	)%	$	4,020		(206.2	)%

(a) Certain previously reported information has been corrected to reflect immaterial corrections to the financial statements. For more information, refer to Note 1.

Income tax expense consists of:



	Years Ended December 31,
	2016			2015 (a)		2014 (a)
	(In thousands)
Current	$	13,348		(2,315	)	82,900
Deferred	(9,834		)	3,515		(78,880	)
Total income tax expense	$	3,514		1,200		4,020

(a) Certain previously reported information has been corrected to reflect immaterial corrections to the financial statements. For more information, refer to Note 1.

Deferred tax expense is comprised of $9.8 million deferred tax expense less $0 tax benefit released from OCI.

The components of deferred federal income taxes are as follows:



	December 31,
	2016			2015 (a)
	(In thousands)
Deferred tax assets:
Future policy benefit reserves	$	123,101		116,246
Net operating and capital loss carryforwards	—			583
Accrued expenses	104			121
Investments	6,803			3,848
State income tax credits	119			123
Other	56			165
Total gross deferred tax assets	130,183			121,086
Deferred tax liabilities:
Deferred policy acquisition costs, cost of customer relationships acquired and intangible assets	(44,709		)	(45,417	)
Unrealized gains on investments available-for-sale	(7,556		)	(7,428	)
Accrued policyholder dividends	(815		)	(984	)
Other	(234		)	(112	)
Total gross deferred tax liabilities	(53,314		)	(53,941	)
Net deferred tax asset	$	76,869		67,145

(a) Certain previously reported information has been corrected to reflect immaterial corrections to the financial statements. For more information, refer to Note 1.

A summary of the changes in the components of deferred federal and state income taxes is as follows:



	December 31,
	2016			2015 (a)
	(In thousands)
Deferred federal and state income taxes:
Balance January 1,	$	67,145		64,122
Deferred tax benefit	9,834			(3,557	)
Investments available-for-sale	(128		)	6,695
Effects of unrealized gains on DAC, CCRA and reserves	18			(115	)
Balance December 31,	$	76,869		67,145

(a) Certain previously reported information has been corrected to reflect immaterial corrections to the financial statements. For more information, refer to Note 1.

The Company and our subsidiaries had no net operating losses at December 31, 2016. At December 31, 2016 and 2015, we determined that as a result of our taxable income in carryback periods, tax planning strategies, and the expected reversal of existing deferred tax liabilities, it was more likely than not that the deferred tax assets would be realized.

The Company and our subsidiaries had no capital loss carry-forwards at December 31, 2016.

The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority.

A reconciliation of unrecognized tax benefits is as follows:



	Years ended December 31,
	2016			2015		2014
	(In thousands)

Balance at January 1,	$	78,079		81,459		1,539
Additions based on tax positions related to the current year	3,546			3,608		10,132
Additions for tax positions of prior years	4,706			1,570		71,327
Reductions for tax positions of prior years	(569		)	(8,558	)	(1,539	)
Balance December 31,	$	85,762		78,079		81,459

This unrecognized tax benefit is reported net in current federal income tax payable in the Consolidated Statements of Financial Position. Included in these amounts is $5.7 million and $3.5 million of interest expense with respect to unrecognized tax benefit as of December 31, 2016 and 2015, respectively.

None of the Company’s unrecognized tax benefits at December 31, 2016 would affect the effective tax rate if recognized. The Company does not believe there is a reasonable possibility the total amount of uncertain tax benefits will significantly increase or decrease in the next twelve months.

The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. In the Consolidated Statements of Comprehensive Income (Loss), the amount of interest expense recorded was $2.2 million, $0.4 million and $3.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.

The Company's Federal income tax return is filed on a consolidated basis with the following entities:

Citizens, Inc.

CICA Life Insurance Company of America

Security Plan Life Insurance Company

Security Plan Fire Insurance Company

Computing Technology, Inc.

Insurance Investors, Inc.

Citizens National Life Insurance Company

Magnolia Guaranty Life Insurance Company files its Federal income tax return on a stand-alone basis as it is not eligible to join the consolidated group until 2020.

The method of allocation among companies is subject to a written tax sharing agreement, approved by the Board of Directors, whereby allocation is made primarily on a separate return basis with current credit for any net operating losses or other items utilized in the consolidated tax return. Intercompany tax balances are settled quarterly.

The Company and our subsidiaries file income tax returns in the U.S. Federal jurisdiction and various U.S. states. None of our subsidiaries are subject to examination by U.S. tax authorities for years prior to 2012.