Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

CICA International, a wholly-owned subsidiary of Citizens, is considered a controlled foreign corporation for federal income tax purposes. As a result, the insurance activity of CICA International is subject to Subpart F of the IRC and is included in Citizens’ taxable income. Due to the 0% enacted tax rate in Bermuda there are no deferred taxes recorded for CICA International's temporary differences. For the years ended December 31, 2021, 2020 and 2019, the Subpart F income inclusion generated $2.1 million, $2.2 million and $5.9 million of federal income tax expense, respectively.

A reconciliation between the U.S. corporate income tax rate and the effective income tax rate is as follows:

Years ended December 31, (In thousands, except for %)	2021		%		2020		%		2019		%
Expected tax expense (benefit)	$	(1,404)	21.0	%	$	(2,586)	21.0	%	$	1,186	21.0	%
Foreign income tax rate differential	(2,912)		43.5		(1,817)		14.8		(1,562)		(27.7)
Tax-exempt interest and dividends-received deduction	(114)		1.7		(146)		1.2		(145)		(2.6)
Adjustment of prior year taxes	(61)		0.9		194		(1.6)		(99)		(1.8)
Effect of uncertain tax position	(43,834)		655.4		1		—		1,148		20.3
Nondeductible costs to remediate tax compliance issue	(176)		2.6		(620)		5.0		(27)		(0.5)
Compensation limitation under 162(m) and 280(g)	(21)		0.3		2,386		(19.4)		480		8.5
Subpart F income	2,102		(31.4)		2,217		(18.0)		5,853		103.6
Rate differential on net operating loss carryback claim	295		(4.4)		(999)		8.1		—		—
Goodwill impairment	2,651		(39.6)		—		—		—		—
Other	(1)		—		41		(0.3)		281		5.2
Total federal income tax expense (benefit)	$	(43,475)	650.0	%	$	(1,329)	10.8	%	$	7,115	126.0	%

Income tax expense (benefit) consists of:

Years ended December 31, (In thousands)	2021		2020	2019
Income tax expense (benefit):
Current - normal operations	$	(68)	(927)	5,542
Current - UTP release impact	(43,834)		—	—
Deferred	427		(402)	1,573
Total income tax expense (benefit)	$	(43,475)	(1,329)	7,115

The components of deferred federal income taxes are as follows:

December 31, (In thousands)	2021		2020
Deferred tax assets:
Future policy benefit reserves	$	2,572	2,657
Net operating and capital loss carryforwards	1,545		1,395
Accrued policyholder dividends and expenses	115		124
Investments	218		147
Deferred intercompany loss	1,848		2,002
Accrued compensation	337		513
Lease liability	2,274		2,514
Other	236		584
Total gross deferred tax assets	9,145		9,936
Deferred tax liabilities:
DAC, COIA and intangible assets	(8,955)		(8,693)
Unrealized gains on investments available-for-sale	(10,350)		(4,522)
Tax reserves transition liability	(2,989)		(3,736)
Right-of-use lease asset	(2,274)		(2,514)
Other	(33)		(35)
Total gross deferred tax liabilities	(24,601)		(19,500)
Net deferred tax liability	$	(15,456)	(9,564)

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

December 31, (In thousands)	2021		2020
Deferred federal and state income taxes:
Balance January 1,	$	(9,564)	(12,428)
Deferred tax benefit (expense)	(427)		402
Investments available-for-sale	(5,709)		2,774
Effects of unrealized gains on DAC, COIA and reserves	244		(391)
Adoption of ASU 2016-13	—		79
Balance December 31,	$	(15,456)	(9,564)

The Company and our subsidiaries have net operating loss carryforwards of $6.3 million at December 31, 2021, which will begin expiring in 2036. MGLIC joined the Company's consolidated tax return filing group in 2020 and had a $0.4 million net operating loss carryforward as of December 31, 2021, which will begin expiring in 2037. The MGLIC net operating losses were incurred while it was owned by the Company; thus, there will be no IRC Section 382 limit on the utilization of these net operating losses.

The Company and our subsidiaries had capital loss carryforwards of $1.0 million at December 31, 2021, which begin expiring in 2026.

At December 31, 2021 and 2020, we determined that as a result of our taxable capital gain income in carryback periods, the expected reversal of existing deferred tax liabilities, and tax planning strategies, it was more likely than not that the deferred tax assets would be realized. Thus, the Company holds no valuation allowance in operations or other comprehensive income at December 31, 2021 and 2020.

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, (In thousands)	2021		2020	2019
Balance at January 1,	$	45,990	45,989	44,841
Additions for tax positions of prior years	—		1	1,148
Reductions for tax positions of prior years	(43,834)		—	—
Balance December 31,	$	2,156	45,990	45,989

This unrecognized tax benefit is reported net in current federal income tax payable on the consolidated balance sheets. Included in these amounts are interest expense of $0.4 million and $9.9 million with respect to unrecognized tax benefits as of December 31, 2021 and 2020, respectively.

The Company’s unrecognized tax benefits at December 31, 2021 would affect the effective tax rate if recognized. The Company accrued an uncertain tax position of $46.0 million at December 31, 2020. However, the Company released $43.8 million of this uncertain tax position, including interest, during the fourth quarter of 2021 following the expiration of the statute of limitations on the tax year ended December 31, 2017. The Company believes it is reasonably possible that $1.0 million of the uncertain tax benefits will decrease within 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 operations and comprehensive income (loss), the amount of interest income recorded was $9.5 million for the year ended December 31, 2021, and interest expense of $0.0 million and $1.1 million were recorded for the years ended December 31, 2020 and 2019, respectively.

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020 in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating losses incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. During the year ended December 31, 2020, the Company was able to claim a net refund for taxes paid in preceding years as a result of the CARES Act. As of December 31, 2021, the Company has an accrued tax refund remaining of $2.6 million.

The Consolidated Appropriations Act was enacted on December 27, 2020 and the American Rescue Plan Act of 2021 was enacted March 11, 2021. These Acts did not have a material impact on the Company's financial statements.

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

Citizens National Life Insurance Company

Magnolia Guaranty Life Insurance Company

Security Plan Life Insurance Company

Security Plan Fire Insurance Company

Computing Technology, Inc.

The method of tax 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 pursuant to the wait-and-see method.  Under this method, consolidated group members are not given current credit or refunds for net operating losses until taxable income on a separate return basis is generated. Intercompany tax balances are settled at least annually.

The Company and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various U.S. states. Our subsidiaries are subject to examination by U.S. tax authorities for tax years 2013 - 2016 and 2018 - 2020.