Note 8—Income Taxes

The components of income taxes were as follows:


	Year Ended December 31,
	2013			2012			2011
Income tax expense from continuing operations	$	234,654		$	236,669		$	226,166
Income tax expense (benefit) from discontinued operations		0			0			(467	)
Shareholders’ equity:
Other comprehensive income (loss)		(386,752	)		201,950			284,355
Tax basis compensation expense (from the exercise of stock options and vesting of restricted stock awards) in excess of amounts recognized for financial reporting purposes		(21,314	)		(22,602	)		(13,121	)

	$	(173,412	)	$	416,017		$	496,933

Income tax expense from continuing operations consists of:


	Year Ended December 31,
	2013		2012		2011
Current income tax expense	$	176,427	$	161,332	$	169,500
Deferred income tax expense		58,227		75,337		56,666

	$	234,654	$	236,669	$	226,166

In each of the years 2011 through 2013, deferred income tax expense was incurred because of certain differences between net income before income taxes as reported on the Consolidated Statements of Operations and taxable income as reported on Torchmark’s income tax returns. As explained in Note 1—Significant Accounting Policies, these differences caused the financial statement book values of some assets and liabilities to be different from their respective tax bases.

The effective income tax rate differed from the expected 35% rate as shown below:


	Year Ended December 31,
	2013			%			2012			%			2011			%
Expected income taxes	$	267,094			35.0	%	$	268,098			35.0	%	$	253,324			35.0	%

Increase (reduction) in income taxes resulting from:
Tax-exempt investment income	$	(3,107	)		(.4	)		(3,506	)		(.4	)		(3,468	)		(.5	)
Low income housing investments		(32,417	)		(4.2	)		(28,877	)		(3.8	)		(24,258	)		(3.4	)
Other		3,084			.4			954			.1			568			.1

Income tax expense	$	234,654			30.8	%	$	236,669			30.9	%	$	226,166			31.2	%

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:


	December 31,
	2013		2012
Deferred tax assets:
Fixed maturity investments	$	16,868	$	22,387
Carryover of tax losses		11,415		14,177
Other assets		0		4,084

Total gross deferred tax assets		28,283		40,648

Deferred tax liabilities:
Unrealized gains		92,772		481,804
Employee and agent compensation		68,911		65,877
Deferred acquisition costs		829,032		791,254
Future policy benefits, unearned and advance premiums, and policy claims		315,291		311,366
Other liabilities		1,126		0

Total gross deferred tax liabilities		1,307,132		1,650,301

Net deferred tax liability	$	1,278,849	$	1,609,653

Torchmark and its subsidiaries, excluding Family Heritage, file a life-nonlife consolidated Federal income tax return. Family Heritage files its Federal income tax return on a separate company basis. Torchmark’s consolidated Federal income tax returns are routinely audited by the Internal Revenue Service (IRS). The IRS is currently examining Torchmark’s 2008-2011 consolidated income tax returns. The statutes of limitations for the assessment of additional tax are closed for all tax years prior to 2008 with respect to Torchmark’s consolidated Federal income tax returns and are closed for all tax years prior to 2010 with respect to Family Heritage’s Federal income tax returns. Management believes that adequate provision has been made in the consolidated financial statements for any potential assessments that may result from current or future tax examinations and other tax-related matters for all open years.

Torchmark has net operating loss carryforwards of approximately $32.6 million at December 31, 2013 which will begin to expire in 2025 if not otherwise used to offset future taxable income. A valuation allowance is to be provided when it is more likely than not that deferred tax assets will not be realized by the Company. No valuation allowance has been recorded relating to Torchmark’s deferred tax assets since, in management’s judgment, Torchmark will more likely than not have sufficient taxable income in future periods to fully realize its existing deferred tax assets.

Torchmark’s tax liability is adjusted to include the provision for uncertain tax positions taken or expected to be taken in a tax return. A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding effects of accrued interest, net of Federal tax benefits) for the years 2011 through 2013 is as follows:


	2013		2012		2011
Balance at January 1,	$	0	$	0	$	875
Increase based on tax positions taken in current period		0		0		0
Increase related to tax positions taken in prior periods		0		0		0
Decrease related to tax positions taken in prior periods		0		0		(875	)
Decrease due to settlements		0		0		0

Balance at December 31,	$	0	$	0	$	0

Torchmark’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company recognized interest income of $0, $56 thousand, and $0, net of Federal income tax benefits, in its Consolidated Statements of Operations for 2013, 2012, and 2011, respectively. The Company had no accrued interest or penalties at December 31, 2013 or 2012.