Income Taxes

9 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes [Text Block]

Income Taxes

The Company’s effective tax rate was 15.4% and 14.4% for the three months ended September 30, 2019 and 2018, respectively. The Company’s effective tax rate was 15.8% and 14.9% for the nine months ended September 30, 2019 and 2018, respectively.

The effective tax rate for the three months ended September 30, 2019 is lower than the statutory rate as a result of tax preferred items including low income housing tax credits and dividends received deduction. The effective tax rate for the nine months ended September 30, 2019 is lower than the statutory rate as a result of tax preferred items including low income housing tax credits and foreign tax credits.

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.

Included in the Company’s deferred income tax assets are tax benefits related to state net operating losses of $21 million, net of federal benefit, which will expire beginning December 31, 2019.

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 $22 million and $20 million as of September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019 and December 31, 2018, the Company had $107 million and $92 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $71 million and $70 million, net of federal tax benefits, of unrecognized tax benefits as of September 30, 2019 and December 31, 2018, 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 $50 million to $60 million in the next 12 months primarily due to Internal Revenue Service (“IRS”) settlements and state exams.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized a net decrease of $1 million and a net increase of $1 million in interest and penalties for the three months and nine months ended September 30, 2019, 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, 2018, respectively. As of September 30, 2019 and December 31, 2018, the Company had a payable of $11 million and $10 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 third quarter of 2019, the federal statutes of limitation closed for the 2014 and 2015 tax years. The Company’s tax returns for 2014 and 2015 are effectively settled except for one issue which the Company had filed amended returns in the second quarter of 2019. The IRS is currently auditing the Company’s U.S. income tax returns for 2016 and 2017. The Company’s state income tax returns are currently under examination by various jurisdictions for years ranging from 2009 through 2017. In the United Kingdom (“UK”), Her Majesty’s Revenue and Customs is performing a business risk review of the Company’s UK subsidiaries for the 2016 tax year.