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Income Taxes
6 Months Ended
Jun. 30, 2014
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The Company’s effective tax rate on income from continuing operations was 24.5% and 29.6% for the three months ended June 30, 2014 and 2013, respectively. The Company’s effective tax rate on income from continuing operations was 22.5% and 27.1% for the six months ended June 30, 2014 and 2013, respectively. The Company’s effective tax rates for the three months and six months ended June 30, 2014 are lower than the statutory rate as a result of tax preferred items including the dividends received deduction and low income housing tax credits, as well as a $17 million benefit in the first quarter of 2014 related to the completion of an Internal Revenue Service (“IRS”) audit.
Included in the Company’s deferred income tax assets are tax benefits related to state net operating losses of $23 million which will expire beginning December 31, 2014.
The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Included in deferred tax assets is a significant deferred tax asset relating to capital losses that have been recognized for financial statement purposes but not yet for tax return purposes. Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes. Significant judgment is required in determining if a valuation allowance should be established, and the amount of such allowance if required. Factors used in making this determination include estimates relating to the performance of the business including the ability to generate capital gains. Consideration is given to, among other things in making this determination, (i) future taxable income exclusive of reversing temporary differences and carryforwards, (ii) future reversals of existing taxable temporary differences, (iii) taxable income in prior carryback years, and (iv) tax planning strategies. Based on analysis of the Company’s tax position, management believes it is more likely than not that the Company will not realize certain state deferred tax assets and state net operating losses and therefore a valuation allowance has been established. The valuation allowance was $19 million at both June 30, 2014 and December 31, 2013.
As of June 30, 2014 and December 31, 2013, the Company had $230 million and $209 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $45 million and $62 million, net of federal tax benefits, of unrecognized tax benefits would affect the effective tax rate as of June 30, 2014 and December 31, 2013, respectively.
It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. Based on the current audit position of the Company, it is estimated that the total amount of gross unrecognized tax benefits may decrease by $170 million to $180 million in the next 12 months.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized a net increase of $4 million and $3 million in interest and penalties for the three months and six months ended June 30, 2014, respectively. The Company recognized a net increase of $1 million and $2 million in interest and penalties for the three months and six months ended June 30, 2013, respectively. At June 30, 2014 and December 31, 2013, the Company had a payable of $45 million and $42 million, respectively, related to accrued interest and penalties.
The Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The IRS has completed its field examination of the 1997 through 2007 tax returns. However, for federal income tax purposes, these years, except for 2007, continue to remain open as a consequence of certain unagreed-upon issues. The IRS completed the audits of the Company’s 2008 and 2009 tax returns in the first quarter of 2014. The IRS is in the process of completing the audits of the Company’s income tax returns for 2010 and 2011 and the Company expects these audits to be completed in 2014. The Company’s or certain of its subsidiaries’ state income tax returns are currently under examination by various jurisdictions for years ranging from 1997 through 2011 and remain open for all years after 2011.