9. Income Taxes

Income tax expense (benefit) consists of the following:


	Federal		State			Foreign		Total
	($ in millions)
Year ended December 31, 2015
Current	$	93.3	$	3.1		$	50.0	$	146.4
Deferred		49.2		(0.4	)		-		48.8

	$	142.5	$	2.7		$	50.0	$	195.2

Year ended December 31, 2014
Current	$	115.4	$	4.9		$	118.2	$	238.5
Deferred		12.9		0.4			-		13.3

	$	128.3	$	5.3		$	118.2	$	251.8

Year ended December 31, 2013
Current	$	68.4	$	4.6		$	62.7	$	135.7
Deferred		90.4		(0.2	)		-		90.2

	$	158.8	$	4.4		$	62.7	$	225.9

Income before income taxes from domestic operations was $376.7 million, $633.8 million and $616.0 million in 2015, 2014 and 2013, respectfully. Income before income taxes from foreign operations was $380.7 million, $298.1 million and $239.2 million in 2015, 2014 and 2013, respectfully. Foreign tax expense was primarily attributable to the United Kingdom.

The difference between the federal income tax rate and the effective income tax rate is as follows:


	Year Ended December 31,
	2015		2014		2013
Federal income tax rate		35.0 %		35.0 %		35.0 %
Foreign tax credit and other adjustments		(0.4)		-		(0.5)
Income subject to dividends-received deduction		(1.6)		(1.3)		(0.9)
Tax-exempt interest		(6.8)		(6.5)		(8.1)
State taxes, net of federal tax benefit		0.2		0.4		0.3
Prior period adjustment		(0.2)		0.1		0.6
Other, net		(0.4)		(0.7)		-

Effective tax rate		25.8 %		27.0 %		26.4 %

The slight decrease in the effective tax rate in 2015 compared to 2014 primarily reflects lower taxable income in 2015, partially offset by lower interest income arising from municipal bond securities.

The slightly higher effective tax rate in 2014 compared to 2013 primarily reflects higher taxable income in 2014 relative to a fairly steady level of tax-exempt interest income arising from municipal bond securities.

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities as of December 31, 2015 and 2014 are as follows:


	As of December 31,
	2015		2014
	($ in millions)
Deferred tax assets:
Loss and LAE reserves		$ 242.7		$ 288.9
Minimum tax credit carry forward		110.2		146.3
Compensation accruals		161.9		149.6
Unearned premiums		134.0		116.6
OTTI losses		21.9		20.8
Foreign tax credit carry forward		-		8.4
State net operating loss carry forward		17.9		16.6
Other		167.2		139.9

Gross deferred tax assets before valuation allowance		855.8		887.1
Valuation allowance		(17.9)		(16.6)

Gross deferred tax assets		837.9		870.5

Deferred tax liabilities:
Net unrealized gains on investments		120.8		239.1
Deferred acquisition costs		146.8		123.6
Purchase accounting adjustments		43.8		60.1
Other		58.1		58.1

Gross deferred tax liabilities		369.5		480.9


Net deferred tax assets		$ 468.4		$ 389.6

A valuation allowance is provided against deferred tax assets when, in the opinion of management, it is more likely than not that a portion of the deferred tax asset will not be realized. As of December 31, 2015 and 2014, Alleghany recognized $17.9 million and $16.6 million, respectively, of deferred tax assets for certain state net operating and capital loss carryovers, and a valuation allowance of $17.9 million and $16.6 million, respectively, has been established against these deferred tax assets as Alleghany does not currently anticipate it will generate sufficient income in these states to absorb such loss carryovers.

The Internal Revenue Code provides for limits on the utilization of certain tax benefits following a corporate ownership change. Upon the closing of the merger with TransRe, TransRe was subject to an annual limitation on its ability to use its foreign tax credit carryforwards and its minimum tax credit carryforwards. The total amount of foreign tax credit carryforwards and minimum tax credit carryforwards that were available prior to the merger are not diminished by this provision. The limitation provides for an annual limit on the amount of the carryforwards that can be used each year. The unused carryovers are available to be used in subsequent years, subject to the annual limitation. The annual limitation is estimated at approximately $42.7 million.

Alleghany’s income tax returns are currently under examination by the Internal Revenue Service for the 2012, 2013 and 2014 tax years. TransRe’s income tax returns, which all relate to periods prior to the merger with Alleghany, are currently under examination by the Internal Revenue Service. The following table lists the tax years of Alleghany and TransRe tax returns that remain subject to examination by major tax jurisdictions as of December 31, 2015


		Major Tax Jurisdiction		Open Tax Years
		Australia		2011-2014
		Canada		2011-2014
		France		2009-2010 and 2012-2014
		Germany		2013-2014
		Hong Kong		2014
		Japan		2010-2014
		Switzerland		2014
		U.K		2013-2014
		U.S.		2007-2014

Alleghany believes that, as of December 31, 2015, it had no material uncertain tax positions. Interest and penalties relating to unrecognized tax expenses (benefits) are recognized in income tax expense, when applicable. There was no material liabilities for interest or penalties accrued as of December 31, 2015.