INCOME TAXES

6 Months Ended

Jun. 30, 2012

INCOME TAXES

INCOME TAXES

12.          INCOME TAXES

There was a $1.0 million increase in the balance of unrecognized tax benefits, where such benefits impacted earnings, for the six months ended June 30, 2012. The total amount of unrecognized tax benefits at June 30, 2012 and December 31, 2011that would, if recognized, affect the effective tax rate were $3.4 million and $2.3 million, respectively. During the six months ended June 30, 2012, there was a $26.9 million increase in total unrecognized tax benefits, of which $8.6 million occurred in the three months ended June 30, 2012. This increase related to items for which the ultimate deductibility is highly certain but for which there is uncertainty about the year in which such items should be deducted. Other than interest or penalties, a disallowance of the shorter deductibility period would not affect the effective tax rate. However, such disallowance would accelerate the payment date of cash to the taxing authority.

In the IRS audit that concluded during the quarter, the IRS proposed favorable and unfavorable adjustments to the Company’s 2003 through 2007 reported taxable incomes. The Company protested certain unfavorable adjustments and is seeking resolution at the IRS’ Appeals Division. Although it cannot be certain, the Company believes that the Appeals process may conclude within the next 12 months. If the IRS prevails at Appeals, and the Company does not litigate these issues, then an acceleration of tax payments will occur. However, if these payments were to occur, they would not materially impact the Company or its effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	As of
	June 30, 2012		December 31, 2011
	(Dollars In Thousands)
Balance, beginning of period	$	4,318	$	12,659
Additions for tax positions of the current year	—		—
Additions for tax positions of prior years	26,925		106
Reductions of tax positions of prior years:
Changes in judgment	—		(8,447		)
Settlements during the period	—		—
Lapses of applicable statute of limitations	—		—
Balance, end of period	$	31,243	$	4,318

The Company believes that it is possible that in the next 12 months approximately $16.1 million of these unrecognized tax benefits will be reduced due to the expected closure of the Appeals process. This reduction could occur because of the Company’s successful negotiation of certain issues at Appeals, coupled with its unsuccessful negotiations on other issues. This possible scenario includes an assumption that the Company would pay the IRS-asserted deficiencies on issues that it loses at Appeals, rather than litigating such issues.

During 2011, there was an $8.4 million reduction in the amount of unrecognized tax benefits due to a change in the Company’s judgment regarding the probability of realizing such unrecognized tax benefits. This was caused by new technical guidance and other developments which caused the Company to conclude that the full amount of the associated tax benefits was more than 50 percent likely to be realized. These issues were almost entirely related to timing issues. Therefore, aside from the cost of interest, this reduction did not cause a decrease in the Company’s effective tax rate.

In general, the Company is not subject to adjustments to its current tax expense by any taxing authority for any tax year prior to 2003.

The Company used its estimate of its annual 2012 and 2011 income in computing its effective income tax rates for the three and six months ended June 30, 2012 and 2011. The effective tax rate for the three and six months ended June 30, 2012 was 30.3% and 31.2%, respectively, and 34.6% and 34.7% for the three and six months ended June 30, 2011, respectively. During the quarter, as a result of the IRS audit, the Company changed its estimate regarding an issue whose tax effect has affected, and will continue to affect, the Company’s effective tax rate. This change in estimate contributed $3.0 million to a $3.4 million benefit that was part of the Company’s second quarter 2012 income tax provision in its Statements of Income. The remainder of this benefit related to a change in estimate regarding accrued interest on uncertain tax benefits. Without this benefit, this quarter’s effective tax rate would have been 33.2% and this year’s six-month period’s effective tax rate would have been 32.6%.

Based on the Company’s current assessment of future taxable income, including available tax planning opportunities, the Company anticipates that it is more likely than not that it will generate sufficient taxable income to realize all of its material deferred tax assets. The Company did not record a valuation allowance against its material deferred tax assets as of June 30, 2012.

In the first quarter of 2012, the Company retrospectively adopted ASU No. 2010-26. The Company’s retrospective adoption of this Update resulted in a reduction in its deferred acquisition cost asset as well as a decrease in the amortization associated with those previously deferred costs. There was also a reduction in the level of costs the Company defers. The retrospective adoption of this Update reduced the opening balance of the Company’s shareowners’ equity, the deferred acquisition costs asset balance, and the deferred income tax liability balance as of the adoption date. The Company had an adjustment of approximately $279.8 million to its deferred income tax liability balance and a $7.7 million adjustment to the Company’s income tax expense.