17. INCOME TAXES

The Company’s effective income tax rate related to continuing operations varied from the maximum federal income tax rate as follows:

	For The Year Ended December 31,
	2013		2012		2011
Statutory federal income tax rate applied to pre-tax income	35.0	%	35.0	%	35.0	%
State income taxes	0.4		0.4		0.4
Investment income not subject to tax	(4.4	)	(3.1	)	(2.2	)
Uncertain tax positions	0.1		0.2		(0.1	)
Other	(0.1	)	0.4		(1.2	)
	31.0	%	32.9	%	31.9	%

The annual provision for federal income tax in these financial statements differs from the annual amounts of income tax expense reported in the respective income tax returns. Certain significant revenues and expenses are appropriately reported in different years with respect to the financial statements and the tax returns.

The components of the Company’s income tax are as follows:

	For The Year Ended December 31,
	2013			2012		2011
	(Dollars In Thousands)
Current income tax expense:
Federal	$	(18,076	)	$	78,510	$	(4,609	)
State	(222		)	2,496		33
Total current	$	(18,298	)	$	81,006	$	(4,576	)
Deferred income tax expense:
Federal	$	149,288		$	66,375	$	153,412
State	(93		)	3,662		2,683
Total deferred	$	149,195		$	70,037	$	156,095

The components of the Company’s net deferred income tax liability are as follows:

	As of December 31,
	2013			2012
	(Dollars In Thousands)
Deferred income tax assets:
Premium receivables and policy liabilities	$	185,073		$	51,276
Intercompany losses	85,134			45,079
Deferred compensation	105,744			3,750
Other	22,854			26,604
Valuation allowance	(1,200		)	(2,552		)
	397,605			124,157
Deferred income tax liabilities:
Deferred policy acquisition costs and value of business acquired	983,254			911,858
Invested assets (other than realized gains)	184,935			20,936
Net unrealized gains (losses) on investments	290,062			975,076
	1,458,251			1,907,870
Net deferred income tax (liability) asset	$	(1,060,646	)	$	(1,783,713	)

The Company’s income tax returns, except for MONY which files separately, are included in PLC’s consolidated U.S. income tax returns.

The deferred tax assets reported above include certain deferred tax assets related to nonqualified deferred compensation and other employee benefit liabilities. These liabilities were assumed by AXA; they were not acquired by the Company in connection with the acquisition of MONY discussed in Note 3, Significant Acquisitions. The future tax deductions stemming from these liabilities will be claimed by the Company on MONY’s tax returns in its post-acquisition periods. These deferred tax assets have been estimated as of the Acquisition date (and through the December 31, 2013 reporting date) based on all available information. However, it is possible that these estimates may be adjusted in future reporting periods based on actuarial changes to the projected future payments associated with these liabilities. Any such adjustments will be recognized by the Company as an adjustment to income tax expense during the period in which they are realized.

In management’s judgment, the gross deferred income tax asset as of December 31, 2013, will more likely than not be fully realized. The Company has recognized a valuation allowance of $1.2 million and $2.6 million as of December 31, 2013 and 2012, respectively, related to state-based loss carryforwards that it has determined are more likely than not to expire unutilized. This resulting favorable change of $1.4 million, before federal income taxes, decreased state income tax expense in 2013 by the same amount. As of December 31, 2013 and 2012, no valuation allowances were established with regard to deferred tax assets relating to impairments on fixed maturities, capital or operating loss carryforwards, and unrealized losses on investments. As of December 31, 2013, the Company had U.S. life subgroup operating loss carryforwards of $171.3 million which will expire if not used by PLC in the consolidated U.S. income tax return by 2028. As of December 31, 2013 and 2012, the Company relied upon a prudent and feasible tax-planning strategy regarding its fixed maturities that were reported at an unrealized loss. The Company has the ability and the intent to either hold such bonds to maturity, thereby avoiding a realized loss, or to generate a realized gain from unrealized gain bonds if such unrealized loss bond is sold at a loss prior to maturity. As of December 31, 2013, the Company recorded a net unrealized gain on its fixed maturities.

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

	As of December 31,
	2013			2012
	(Dollars In Thousands)
Balance, beginning of period	$	74,335		$	4,318
Additions for tax positions of the current year	7,464			9,465
Additions for tax positions of prior years	6,787			64,050
Reductions of tax positions of prior years:
Changes in judgment	(2,740		)	(3,498		)
Settlements during the period	—			—
Lapses of applicable statute of limitations	—			—
Balance, end of period	$	85,846		$	74,335

Included in the balance above, as of December 31, 2013 and 2012, are approximately $78.5 million and $67.5 million of unrecognized tax benefits, respectively, for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductions. Other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective income tax rate but would accelerate to an earlier period the payment of cash to the taxing authority. The total amount of unrecognized tax benefits, if recognized, that would affect the effective income tax rate is approximately $7.4 million and $6.8 million as of December 31, 2013 and as of December 31, 2012, respectively.

Any accrued interest related to the unrecognized tax benefits have been included in income tax expense. There were no amounts included in 2013 or 2012 and a $1.4 million benefit in 2011. The Company has no accrued interest associated with unrecognized tax benefits as of December 31, 2013 and 2012 (before taking into consideration the related income tax benefit that is associated with such an expense).

During 2012, an IRS audit concluded in which the IRS proposed favorable and unfavorable adjustments to the Company’s 2003 through 2007 reported taxable incomes. The Company protested certain unfavorable adjustments and sought resolution at the IRS’ Appeals Division. In January 2014, the Appeals Division followed its normal procedure and sent the Company’s case to Congress’ Joint Committee on Taxation for review. Although it cannot be certain, the Company believes this review process may conclude within the next 12 months. If this is the case, approximately $7.5 million of these unrecognized tax benefits on the above chart will be reduced. This reduction could occur because of the Company’s successful negotiation of certain issues at Appeals coupled with its unsuccessful negotiation on others. 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. If the IRS prevails at Appeals and the Company does not litigate these issues, the tax payments that would occur as a result would not materially impact the Company or its effective tax rate.

During the 12 months ending December 31, 2013, the Company’s uncertain tax position liability decreased $2.7 million primarily due to the interaction of various taxable income dividends received deduction limitations and the taxable income impacts of other uncertain tax positions. During the 12 months ended December 31, 2012, the Company’s uncertain tax position liability decreased $3.5 million as a result of new technical guidance and other developments which led the Company to conclude that the full amount of the associated tax benefit was more than 50% likely to be realized.

In general, the Company is no longer subject to U.S. federal, state and local income tax examinations by taxing authorities for tax years that began before 2003.