Income Taxes

6 Months Ended

Jun. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes [Text Block]

The Company’s effective tax rate was (2.4%) and 16.1% for the three months ended June 30, 2020 and 2019, respectively. The Company’s effective tax rate was 18.0% and 16.0% for the six months ended June 30, 2020 and 2019, respectively.

The Company had a negative tax rate of (2.4%) for the three months ended June 30, 2020. This negative tax rate is a result of an income tax expense applied to a pretax loss for the current quarter. The income tax expense is primarily due to the reversal of the net operating loss (“NOL”) benefit recorded in the quarter ended March 31, 2020. The Company is no longer forecasting a 2020 NOL due to strong equity market appreciation in the second quarter, which was a reversal of the equity market dislocation experienced in March. The NOL benefit reversal is partially offset by tax preferred items including low income housing tax credits for the three months ended June 30, 2020. The effective tax rate for the six months ended June 30, 2020 is lower than the statutory rate as a result of tax preferred items including low income housing tax credits, partially offset by state income taxes, net of federal benefit.

The effective tax rate for the three months ended June 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 six months ended June 30, 2019 is lower than the statutory rate as a result of tax preferred items including foreign tax credits and low income housing tax credits, partially offset by lower income for the six months ended June 30, 2019 relative to income expected for the full year.

The lower effective tax rate for the three months ended June 30, 2020 compared to June 30, 2019 is primarily the result of the NOL benefit reversal and the pretax loss. The higher effective tax rate for the six months ended June 30, 2020 compared to June 30, 2019 is primarily the result of a decrease in tax preferred items including foreign tax credits and dividends received deduction, partially offset by lower full year projected pretax income in the current period compared to the prior period.

Included in the Company’s deferred income tax assets are tax benefits related to state net operating losses of $20 million, net of federal benefit, which will expire beginning December 31, 2020.

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 net operating losses of $13 million and state deferred tax assets of $4 million; therefore a valuation allowance has been established. The valuation allowance was $17 million and $19 million as of June 30, 2020 and December 31, 2019, respectively.

As of June 30, 2020 and December 31, 2019, the Company had $102 million and $100 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $73 million and $67 million, net of federal tax benefits, of unrecognized tax benefits as of June 30, 2020 and December 31, 2019, 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 nil to $10 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 nil and a net increase of $1 million in interest and penalties for the three months and six months ended June 30, 2020, 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, 2019, respectively. As of June 30, 2020 and December 31, 2019, 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 federal statute of limitations are closed on years through 2015, except for one issue for 2014 and 2015 which was claimed on amended returns. The IRS is currently auditing the Company’s U.S. income tax returns for 2016, 2017 and 2018. The Company’s state income tax returns are currently under examination by various jurisdictions for years ranging from 2010 through 2018. 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.