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Income Taxes
6 Months Ended
Jun. 30, 2017
Income Tax Disclosure [Abstract]  
Income Taxes [Text Block]
Income Taxes
The Company’s effective tax rate was 23.1% and 18.4% for the three months ended June 30, 2017 and 2016, respectively. The Company’s effective tax rate was 19.3% and 21.0% for the six months ended June 30, 2017 and 2016, respectively. The effective tax rates are lower than the statutory rate as a result of tax preferred items including the dividends received deduction, low income housing tax credits, and lower taxes on net income from foreign subsidiaries. The increase in the effective tax rate for the three months ended June 30, 2017 compared to the prior year period is primarily due to a $17 million benefit in the second quarter of 2016 primarily related to the completion of tax audits from previous years, partially offset by a $4 million benefit for stock compensation due to the adoption of stock compensation accounting guidance. The decrease in the effective tax rate for the six months ended June 30, 2017 compared to the prior year period is primarily due to a $32 million benefit for stock compensation due to the adoption of stock compensation accounting guidance.
Included in the Company’s deferred income tax assets are tax benefits related to state net operating losses of $15 million, net of federal benefit, which will expire beginning December 31, 2017.
The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. 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. 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 $12 million and $11 million as of June 30, 2017 and December 31, 2016, respectively.
As of June 30, 2017 and December 31, 2016, the Company had $119 million and $115 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $49 million and $46 million, net of federal tax benefits, of unrecognized tax benefits as of June 30, 2017 and December 31, 2016, respectively, would affect the effective tax rate.
It is reasonably possible that the total amount of unrecognized tax benefits will change in the next 12 months. The Company estimates that the total amount of gross unrecognized tax benefits may decrease by $20 million to $30 million in the next 12 months primarily due to resolution of audits and statute expirations.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized nil and a net increase of $1 million in interest and penalties for the three months and six months ended June 30, 2017, respectively. The Company recognized nil and a net decrease of $44 million in interest and penalties for the three months and six months ended June 30, 2016, respectively. As of June 30, 2017 and December 31, 2016, the Company had a payable of $9 million and $8 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 examination of the 2006 through 2011 tax returns and these years are effectively settled; however, the statutes of limitation, except for 2007, remain open for certain carryover adjustments. The IRS is currently auditing the Company’s U.S. income tax returns for 2012 through 2015. The Company’s state income tax returns are currently under examination by various jurisdictions for years ranging from 2005 through 2015.