9. Income Taxes

Income tax expense (benefit) consisted of the following:


	Federal		State		Foreign		Total
	($ in millions)
Year ended December 31, 2016
Current	$	49.4	$	4.9	$	23.4	$	77.7
Deferred		109.6		0.3		(0.5)		109.4

	$	159.0	$	5.2	$	22.9	$	187.1


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

Income before income taxes from domestic operations was $407.7 million, $376.7 million and $633.8 million in 2016, 2015 and 2014, respectfully. Income before income taxes from foreign operations was $240.1 million, $380.7 million and $298.1 million in 2016, 2015 and 2014, respectively. Foreign tax expense was primarily attributable to the United Kingdom (the “U.K.”).

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


	Year Ended December 31,
	2016		2015		2014
Federal income tax rate		35.0%		35.0%		35.0%
Foreign tax credits		(0.6)		(0.4)		-
Income subject to dividends-received deduction		(1.6)		(1.6)		(1.3)
Tax-exempt interest		(6.5)		(6.8)		(6.5)
State taxes, net of federal tax benefit		0.6		0.2		0.4
Prior period adjustment		2.4		(0.2)		0.1
Other, net		(0.4)		(0.4)		(0.7)

Effective tax rate		28.9%		25.8%		27.0%

The increase in the effective tax rate in 2016 from 2015 primarily reflects larger prior period income tax expense adjustments, higher state income taxes and lower tax-exempt interest income arising from municipal bond securities. Prior period income tax expense adjustments for 2016 include $16.1 million of out-of-period reductions to current and deferred TransRe tax assets recorded in 2016 that relate primarily to periods prior to the merger with TransRe in 2012.

The slight decrease in the effective tax rate in 2015 compared with 2014 primarily reflects lower taxable income in 2015, partially offset by lower 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, 2016 and 2015 are as follows:


	As of December 31,
	2016		2015
	($ in millions)
Deferred tax assets:
Loss and LAE reserves	$	212.1	$	242.7
Minimum tax credit carry forward		28.9		110.2
Compensation accruals		166.7		161.9
Unearned premiums		139.1		134.0
OTTI losses		19.5		21.9
State net operating loss carry forward		25.2		17.9
Other		173.3		167.2

Gross deferred tax assets before valuation allowance		764.8		855.8
Valuation allowance		(25.2)		(17.9)

Gross deferred tax assets		739.6		837.9

Deferred tax liabilities:
Net unrealized gains on investments		125.8		120.8
Deferred acquisition costs		163.3		146.8
Purchase accounting adjustments		30.2		43.8
Other		65.4		58.1

Gross deferred tax liabilities		384.7		369.5


Net deferred tax assets	$	354.9	$	468.4

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, 2016 and 2015, Alleghany recognized $25.2 million and $17.9 million, respectively, of deferred tax assets for certain state net operating and capital loss carryovers, and a valuation allowance of $25.2 million and $17.9 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, 2016.


Major Tax Jurisdiction		Open Tax Years
Australia		2012-2015
Canada		2012-2015
France		2009, 2010 and 2013-2015
Germany		2013-2015
Hong Kong		2014-2015
Japan		2010-2015
Singapore		2014-2016
Switzerland		2015
U.K.		2014-2015
U.S.		2007-2015

Alleghany believes that, as of December 31, 2016, 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 were no material liabilities for interest or penalties accrued as of December 31, 2016.