Income Taxes

9 Months Ended

Sep. 30, 2018

Income Tax Disclosure [Abstract]

Income Taxes [Text Block]

Income Taxes

In December of 2017, the Tax Act reduced federal income tax rates from 35% to 21% for tax years after 2017. The Company’s effective tax rate was 14.4% and 19.9% for the three months ended September 30, 2018 and 2017, respectively. The Company’s effective tax rate was 14.9% and 19.5% for the nine months ended September 30, 2018 and 2017, respectively.

The effective tax rate for the three months ended September 30, 2018 is lower than the statutory rate as a result of low income housing tax credits and a $20 million benefit due to the finalization of the prior year’s tax return. The effective tax rate for the nine months ended September 30, 2018 is lower than the statutory rate as a result of tax preferred items including low income housing tax credits, stock compensation and the dividends received deduction, as well as the $20 million benefit due to the finalization of the prior year’s tax return.

The effective tax rate for the three months ended September 30, 2017 was lower than the statutory rate as a result of tax preferred items including the dividends received deduction, low income housing tax credits, stock compensation and lower taxes on net income from foreign subsidiaries. The effective tax rate for the nine months ended September 30, 2017 was lower than the statutory rate as a result of tax preferred items including the dividends received deduction, low income housing tax credits, stock compensation and lower taxes on net income from foreign subsidiaries, as well as a $20 million benefit in the first quarter of 2017 related to an out-of-period correction for a reversal of a tax reserve.

The decrease in the effective tax rate for the three months ended September 30, 2018 compared to the prior year period is primarily due to the reduced federal income tax rate and the $20 million benefit due to the finalization of the prior year’s tax return, partially offset by decreases in the dividends received deduction and benefits from stock compensation.

The decrease in the effective tax rate for the nine months ended September 30, 2018 compared to the prior year period is primarily due to the reduced federal income tax rate, partially offset by decreases in the dividends received deduction, benefits from stock compensation and foreign taxes.

As of December 31, 2017, the Company had not fully completed its accounting for the tax effects of the enactment of the Tax Act. However, the Company was able to provide reasonable estimates of the Tax Act’s impact; accordingly, the Company recorded provisional tax amounts of $221 million to remeasure certain deferred tax assets and liabilities and $57 million for the foreign provisions of the Tax Act as of December 31, 2017. In the third quarter of 2018, the Company finalized its accounting related to the Tax Act and recorded a $3 million benefit related to the foreign provisions.

Included in the Company’s deferred income tax assets are tax benefits related to state net operating losses of $18 million, net of federal benefit, which will expire beginning December 31, 2018.

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 $18 million and $17 million as of September 30, 2018 and December 31, 2017, respectively.

As of September 30, 2018 and December 31, 2017, the Company had $80 million and $76 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $61 million and $58 million, net of federal tax benefits, of unrecognized tax benefits as of September 30, 2018 and December 31, 2017, 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 $30 million to $40 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 nine months ended September 30, 2018, respectively. The Company recognized nil and a net increase of $1 million in interest and penalties for the three months and nine months ended September 30, 2017, respectively. As of September 30, 2018 and December 31, 2017, 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. In the first quarter of 2018, the Company received cash settlements for final resolution of the 2008 through 2010 Internal Revenue Service (“IRS”) audits. In the third quarter of 2018, the Company reached an agreement with IRS appeals to resolve the 2012 and 2013 audit. Accordingly, the Company’s IRS audits are effectively settled through 2013. The IRS is currently auditing the Company’s U.S. income tax returns for 2014 and 2015. The Company’s state income tax returns are currently under examination by various jurisdictions for years ranging from 2009 through 2016.