Income Taxes

Income tax provision (benefit) applicable to continuing operations consists of the following:



	Year ended December 31,
(in thousands)	2017			2016			2015
Current:
Federal	$	(1,668	)	$	(702	)	$	(3,237	)
State and local	643			199			(762		)
Foreign	1,125			1,385			1,224
	$	100		$	882		$	(2,775	)

Deferred:
Federal	$	(61,655	)	$	3,523		$	1,756
State and local	(2,107		)	1,696			519
Foreign	528			810			258
	$	(63,234	)	$	6,029		$	2,533

Total:
Federal	$	(63,323	)	$	2,821		$	(1,481	)
State and local	(1,464		)	1,895			(243		)
Foreign	1,653			2,195			1,482
	$	(63,134	)	$	6,911		$	(242	)

Income (loss) before income taxes from continuing operations consists of the following:



	Year ended December 31,
(in thousands)	2017			2016		2015
U.S.	$	(25,645	)	$	11,526	$	(18,867	)
Foreign	5,120			9,855		7,303
	$	(20,525	)	$	21,381	$	(11,564	)

A reconciliation from the statutory U.S. federal tax rate to the effective tax rate follows:



	Year ended December 31,
	2017		2016		2015
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in rate resulting from:
Effect of noncontrolling interest	0.2		(4.7	)	5.3
State and local income taxes, net of related federal taxes	(4.2	)	5.8		1.4
Income taxes on foreign earnings	(2.2	)	(1.3	)	9.4
Change in federal and state tax rates	374.8		—		—
Goodwill impairment	(93.5	)	—		(35.6	)
Equity Method Investments	(0.4	)	0.3		1.9
Tax effect of one-time transition tax	(7.1	)	—		—
Release of unrecognized tax benefts	3.0		0.1		0.5
Nondeductible compensation	(2.5	)	2.0		(5.0	)
Tax associated with accrued and unpaid dividends	0.1		3.2		(13.6	)
Federal income tax credits	—		(7.3	)	—
Change in pre-acquisition tax liability and other costs	—		—		3.5
Other, net	4.4		(0.8	)	(0.7	)
Effective tax rate	307.6	%	32.3	%	2.1	%

Net income tax payments of $2.1 million were paid in 2017. Net income refunds of $10.6 million were received in 2016. Net income taxes of $4.9 million were paid in 2015.

Significant components of the Company's deferred tax liabilities and assets are as follows:



	December 31,
(in thousands)	2017			2016
Deferred tax liabilities:
Property, plant and equipment and Rail Group assets leased to others	$	(129,876	)	$	(179,250	)
Equity method investments	(31,223		)	(45,244		)
Other	(8,754		)	(22,286		)
	(169,853		)	(246,780		)
Deferred tax assets:
Employee benefits	15,229			25,403
Accounts and notes receivable	2,317			2,964
Inventory	6,100			9,979
Federal income tax credits	10,225			7,150
Net operating loss carryforwards	5,753			3,322
Other	9,674			16,224
Total deferred tax assets	49,298			65,042
Valuation allowance	(1,024		)	(310		)
	48,274			64,732
Net deferred tax liabilities	$	(121,579	)	$	(182,048	)

On December 22, 2017, the US enacted the Tax Cuts and Jobs Act (the “Act”). The Act, which is also commonly referred to as “US tax reform”, significantly changes US corporate income tax laws by, among other things, reducing the US corporate income tax rate to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of US subsidiaries. As a result, the Company recorded a net benefit of $73.5 million during the fourth quarter of 2017. This amount, which is included in tax expense (benefit) in the Consolidated Statement of Income (Loss), consists of two components: (i) a $1.4 million net charge relating to the one-time mandatory tax on previously deferred earnings of certain non-US subsidiaries that are owned either wholly or partially by a US subsidiary of the Company, and (ii) a $74.9 million credit resulting from the remeasurement of the Company's net deferred tax liabilities in the US based on the new lower corporate income tax rate.

Although the $73.5 million net benefit represents what the Company believes is a reasonable estimate of the impact of the income tax effects of the Act on the Company's Consolidated Financial Statements as of December 31, 2017, it should be considered provisional. Once the Company finalizes certain tax positions when it files its 2017 US tax return, it will be able to conclude whether any further adjustments are required to its net deferred tax liability balance in the US of $122 million as of December 31, 2017, as well as to the liability associated with the one-time mandatory tax. Any adjustments to these provisional amounts will be reported as a component of Tax expense (benefit) in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.

On December 31, 2017, the Company had $15.7 million, $81.9 million and $0.1 million of U.S. Federal, state and non-U.S. net operating loss carryforwards that begin to expire in 2034, 2018 and 2035, respectively. The Company also has $7.1 million of general business credits that expire after 2036 and $3.1 million of foreign tax credits that begin to expire after 2025.

During 2016, the Company entered into agreements with several unrelated third-parties to fund qualified railroad track maintenance expenditures. In return, railroad track miles were assigned to the Company which enabled the Company to claim railroad track maintenance credits pursuant to section 45G of the Internal Revenue Code of 1986. $2.6 million of tax benefit was realized as a result of the agreements for the year ended December 31, 2016, resulting in a $0.9 million current tax provision benefit. As of December 31, 2016, $6.0 million of credits have been deferred to future periods which, upon realization, will result in a $1.8 million current tax provision benefit. The railroad track maintenance credits are general business credits included in federal income tax credits above. The current year impact for the tax period ending December 31, 2017 was immaterial to the overall provision.

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If it is more-likely-than-not that the deferred tax asset will be realized, no valuation allowance is recorded. Management's judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against the net deferred tax assets. The valuation allowance would need to be adjusted in the event future taxable income is materially different than amounts estimated. Significant judgments, estimates and factors considered by management in its determination of the probability of the realization of deferred tax assets include:


•	Historical operating results


•	Expectations of future earnings


•	Tax planning strategies; and


•	The extended period of time over which retirement, medical, and pension liabilities will be paid.

During the fourth quarter of fiscal year 2017, due to a three-year cumulative loss and future economic uncertainty, we concluded that a valuation allowance was required related to additional State net operating losses. This resulted in a non-cash charge to income tax expense of $0.6 million.

The Company or one of its subsidiaries files income tax returns in the U.S., various foreign jurisdictions and various state and local jurisdictions. The Company is no longer subject to examinations by foreign jurisdictions for years before 2012 and is no longer subject to examinations by U.S. tax authorities for years before 2014. The Company is no longer subject to examination by state tax authorities in most states for tax years before 2014.

A reconciliation of the January 1, 2015 to December 31, 2017 amount of unrecognized tax benefits is as follows:



(in thousands)
Balance at January 1, 2015	$	1,487
Additions based on tax positions related to the current year	55
Additions based on tax positions related to prior years	691
Reductions based on tax positions related to prior years	(518		)
Reductions as a result of a lapse in statute of limitations	(284		)
Balance at December 31, 2015	1,431

Additions based on tax positions related to the current year	113
Reductions based on tax positions related to prior years	(40		)
Reductions as a result of a lapse in statute of limitations	(52		)
Balance at December 31, 2016	1,452

Additions based on tax positions related to the current year	—
Additions based on tax positions related to prior years	—
Reductions based on tax positions related to prior years	(92		)
Reductions as a result of a lapse in statute of limitations	(573		)
Balance at December 31, 2017	$	787

The Company anticipates $0.2 million decrease in the reserve during the next 12 months due to the settling of state tax appeals and a lapse in statute of limitations. Dependent upon the lapse in statute of limitations and the outcome of the state tax appeals, the total liability for unrecognized tax benefits as of December 31, 2017 could impact the effective tax rate.

The Company has elected to classify interest and penalties as interest expense and penalty expense, respectively, rather than as income tax expense. The Company has $0.3 million accrued for the payment of interest and penalties at December 31, 2017. The net interest and penalties benefit for 2017 is $0.1 million, due to decreased uncertain tax positions. The Company had $0.4 million accrued for the payment of interest and penalties at December 31, 2016. The net interest and penalties expense for 2016 was $0.2 million.