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Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes

NOTE 10 Income Taxes

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”). The Tax Reform Act makes changes to the U.S. tax code that affected our income tax rate in 2017. The Tax Reform Act reduces the U.S. federal corporate income tax rate from 35.0% to 21.0% and requires companies to pay a one-time transition tax on certain unrepatriated earnings from foreign subsidiaries. The Tax Reform Act also establishes new tax laws that became effective January 1, 2018.

ASC 740 requires a company to record the effects of a tax law change in the period of enactment, however, shortly after the enactment of the Tax Reform Act, the SEC staff issued SAB 118, which allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.

For 2017, we made a reasonable estimate of the impact of the Tax Reform Act and recorded a one-time credit in our 2017 income tax expense of  $120.9 million, which reflects an estimated reduction in our deferred income tax liabilities of $124.2 million as a result of the maximum federal rate decreasing to 21.0% from 35.0%, which was partially offset by an estimated increase in income tax payable in the amount of $3.3 million as a result of the transition tax on cash and cash equivalent balances related to untaxed accumulated earnings associated with our international operations. During 2018, we made a credit adjustment to the transition tax on untaxed international operations in the amount of $1.6 million. This adjustment was a reduction of income tax expense for 2018 as a result of updated calculations based on the Company’s tax filings for the 2017 year end. As of December 31, 2019, management does not expect any further changes to the amounts previously recorded and adjusted under SAB 118.

Significant components of the provision for income taxes for the years ended December 31 are as follows:

 

(in thousands)

 

2019

 

 

2018

 

 

2017

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

85,507

 

 

$

77,694

 

 

$

129,954

 

State

 

 

28,905

 

 

 

25,096

 

 

 

21,392

 

Foreign

 

 

620

 

 

 

409

 

 

 

929

 

Total current provision

 

 

115,032

 

 

 

103,199

 

 

 

152,275

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

14,994

 

 

 

8,483

 

 

 

18,999

 

State

 

 

(2,587

)

 

 

6,519

 

 

 

2,984

 

Foreign

 

 

(24

)

 

 

6

 

 

 

 

Tax Reform Act deferred tax revaluation

 

 

 

 

 

 

 

 

(124,166

)

Total deferred provision

 

 

12,383

 

 

 

15,008

 

 

 

(102,183

)

Total tax provision

 

$

127,415

 

 

$

118,207

 

 

$

50,092

 

 

A reconciliation of the differences between the effective tax rate and the federal statutory tax rate for the years ended December 31 is as follows:

 

 

 

2019

 

 

2018

 

 

2016

 

Federal statutory tax rate

 

 

21.0

%

 

 

21.0

%

 

 

35.0

%

State income taxes, net of federal income tax benefit

 

 

3.8

 

 

 

5.7

 

 

 

3.8

 

Non-deductible employee stock purchase plan expense

 

 

0.3

 

 

 

0.2

 

 

 

0.3

 

Non-deductible meals and entertainment

 

 

0.3

 

 

 

0.3

 

 

 

0.3

 

Non-deductible officers’ compensation

 

 

0.2

 

 

 

0.3

 

 

 

 

Tax Reform Act deferred tax revaluation and transition tax

   impact

 

 

 

 

 

(0.3

)

 

 

(26.9

)

Other, net

 

 

(1.4

)

 

 

(1.6

)

 

 

(1.4

)

Effective tax rate

 

 

24.2

%

 

 

25.6

%

 

 

11.1

%

 

 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding amounts used for income tax reporting purposes.

Significant components of the Company’s net deferred tax liabilities as of December 31 are as follows:

 

(in thousands)

 

2019

 

 

2018

 

Non-current deferred tax liabilities:

 

 

 

 

 

 

 

 

Intangible assets

 

$

360,660

 

 

$

334,200

 

Fixed assets

 

 

10,325

 

 

 

4,929

 

ASC 842 lease liabilities

 

 

46,188

 

 

 

 

Impact of adoption of ASC 606 revenue recognition

 

 

24,687

 

 

 

29,729

 

Net unrealized holding (loss)/gain on available-for-sale

   securities

 

 

36

 

 

 

(78

)

Total non-current deferred tax liabilities

 

 

441,896

 

 

 

368,780

 

Non-current deferred tax assets:

 

 

 

 

 

 

 

 

Deferred compensation

 

 

52,566

 

 

 

41,293

 

Accruals and reserves

 

 

7,743

 

 

 

10,455

 

ASC 842 ROU asset

 

 

52,185

 

 

 

 

Net operating loss carryforwards and 163(j) disallowed carryforwards

 

 

2,377

 

 

 

2,196

 

Valuation allowance for deferred tax assets

 

 

(1,252

)

 

 

(896

)

Total non-current deferred tax assets

 

 

113,619

 

 

 

53,048

 

Net non-current deferred tax liability

 

$

328,277

 

 

$

315,732

 

 

On adoption of the new Lease Standard ASC 842, the Company has recorded the 2019 lease liabilities of $46.2 million and ROU assets total $52.2 million. In 2018, the accruals and reserves total of $10.5 million includes the net deferred tax assets associated with accrued leases of $3.9 million.

Income taxes paid in 2019, 2018 and 2017 were $110.0 million, $110.6 million and $152.0 million, respectively.

At December 31, 2019, the Company had net operating loss carryforwards of $0.1 million and $39.9 million for federal and state income tax reporting purposes, respectively, portions of which expire in the years 2020 through indefinite. The federal carryforward is derived from insurance operations acquired by the Company in 2001. The state carryforward amount is derived from the operating results of certain subsidiaries and from the 2013 stock acquisition of Beecher Carlson Holdings, Inc.

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

 

(in thousands)

 

2019

 

 

2018

 

 

2017

 

Unrecognized tax benefits balance at January 1

 

$

1,639

 

 

$

1,694

 

 

$

750

 

Gross increases for tax positions of prior years

 

 

778

 

 

 

594

 

 

 

1,070

 

Gross decreases for tax positions of prior years

 

 

(791

)

 

 

(5

)

 

 

 

Settlements

 

 

(499

)

 

 

(644

)

 

 

(126

)

Unrecognized tax benefits balance at December 31

 

$

1,127

 

 

$

1,639

 

 

$

1,694

 

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2019, 2018 and 2017 the Company had $217,635, $197,205 and $228,608 of accrued interest and penalties related to uncertain tax positions, respectively.

The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized was $1.1 million as of December 31, 2019, $1.6 million as of December 31, 2018 and $1.7 million as of December 31, 2017. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.

As a result of a 2006 Internal Revenue Service (“IRS”) audit, the Company agreed to accrue at each December 31, for tax purposes only, a known amount of profit-sharing contingent commissions represented by the actual amount of profit-sharing contingent commissions received in the first quarter of the related year, with a true-up adjustment to the actual amount received by the end of the following March. Since this method for tax purposes differed from the method used for book purposes, it resulted in a current deferred tax asset as of December 31, 2017. As of January 1, 2018, pursuant to ASU 606, Revenue Recognition, the deferred tax asset was removed and was included in the Company’s overall beginning retained earnings adjustment per ASC 606. The Company will now follow book treatment for accrued profit-sharing contingent commissions.

The Company is subject to taxation in the United States and various state jurisdictions. The Company is also subject to taxation in the United Kingdom and Canada. In the United States, federal returns for fiscal years 2016 through 2019 remain open and subject to examination by the IRS. The Company files and remits state income taxes in various states where the Company has determined it is required to file state income taxes. The Company’s filings with those states remain open for audit for the fiscal years 2015 through 2019. In the United Kingdom, the Company’s filings remain open for audit for the fiscal years 2018 and 2019. In Canada, the Company’s filings remain open for audit for the fiscal years 2016 through 2019.

During 2017, the Company settled the previously disclosed IRS income tax audit of The Wright Insurance Group for the short period ended May 1, 2014. Pursuant to the agreement in which the Company acquired The Wright Insurance Group, the Company was fully indemnified for all audit-related assessments.

During 2018, the Company settled the previously disclosed State of Massachusetts income tax audit for the fiscal year 2013 through 2014.

During 2019, the Company settled the previously disclosed State of Colorado income tax audit for the fiscal years 2013-2016, the State of Kansas income tax audit for the fiscal years 2014-2016, and the State of New York income tax audit for the fiscal years 2015-2017. In addition, the Company is currently under audit in the states of California, Illinois, and Massachusetts for the fiscal years 2015 through 2017.

In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations.