NOTE 12. INCOME TAXES

Earnings from continuing operations before income taxes shown below are based on the geographic location to which such earnings are attributable.



Years ended June 30,	2018		2017		2016

Earnings from continuing operations before income taxes:
United States	$	1,849.8	$	2,232.8	$	2,028.5
Foreign	321.3		298.3		206.2
	$	2,171.1	$	2,531.1	$	2,234.7

The provision (benefit) for income taxes consists of the following components:



Years ended June 30,	2018			2017			2016

Current:
Federal	$	366.7		$	615.3		$	579.0
Foreign	105.5			91.6			85.0
State	77.6			82.7			76.6
Total current	549.8			789.6			740.6

Deferred:
Federal	(24.8		)	6.2			17.7
Foreign	19.7			7.2			(15.7		)
State	5.6			(5.3		)	(1.3		)
Total deferred	0.5			8.1			0.7
Total provision for income taxes	$	550.3		$	797.7		$	741.3

A reconciliation between the Company's effective tax rate and the U.S. federal statutory rate is as follows:



Years ended June 30,	2018			%		2017			%		2016			%

Provision for taxes at U.S. statutory rate	$	609.2		28.1		$	885.9		35.0		$	782.1		35.0

Increase (decrease) in provision from:
State taxes, net of federal tax benefit	51.0			2.4		52.2			2.1		47.2			2.1
U.S. tax on foreign income	12.0			0.5		66.1			2.6		122.6			5.5
Utilization of foreign tax credits	(19.6		)	(0.9	)	(76.0		)	(3.0	)	(155.4		)	(7.0	)
Section 199 - Qualified production activities	(31.9		)	(1.5	)	(33.2		)	(1.3	)	(31.9		)	(1.4	)
Section 199 - Qualified production activities and research tax credit refund claim - net of reserves	—			—		(51.8		)	(2.1	)	—			—
Resolution of tax matters - Section 199 Qualified production activities and research tax credit refund claim	(33.3		)	(1.6	)	—			—		—			—
Excess tax benefit - Stock-based compensation	(26.7		)	(1.2	)	(32.1		)	(1.3	)	—			—
Other	(10.4		)	(0.5	)	(13.4		)	(0.5	)	(23.3		)	(1.0	)
	$	550.3		25.3		$	797.7		31.5		$	741.3		33.2

The effective tax rate for fiscal 2018 and 2017 was 25.3% and 31.5%, respectively. The decrease in the effective tax rate is primarily due to the impacts of the Tax Cuts and Jobs Act ("the Act") and the release of reserves for uncertain tax positions in fiscal 2018, partially offset by prior period impacts of the sale of the CHSA and COBRA businesses and the impact of a benefit due to tax incentives associated with the domestic production activity deduction and research tax credit in fiscal 2017.

The Act reduces the U.S. federal corporate income tax rate from 35% to 21%. In accordance with ASC 740 companies are required to re-measure deferred tax balances using the new enacted tax rates. The Act requires companies to pay a one-time transition tax on earnings of the Company's foreign subsidiaries that were previously tax deferred for U.S. income taxes and creates new taxes on the Company's foreign sourced earnings. The rate change is administratively effective at the beginning of the Company's fiscal year resulting in a blended corporate statutory tax rate for fiscal 2018 of 28.1%.

Income tax expense reported for fiscal 2018 reflects the effects of the Act and includes a one-time net charge of $1.6 million. The $1.6 million is comprised of foreign withholding taxes on future distributions, the one-time transition tax and the recording of a valuation allowance against the Company's foreign tax credits which may not be realized, partially offset by the application of the newly enacted rates to the Company's U.S. deferred tax balances. The Act’s foreign tax credit provisions may limit the Company’s ability to utilize existing foreign tax credits in future periods, accordingly we have estimated that approximately $34.5 million could expire unutilized. The Company has also accrued $28.3 million related to foreign withholding taxes on future distributions of earnings and profits ("E&P") that may not be utilizable as foreign tax credits.

In response to the Tax Act, the Securities and Exchange Commission (“SEC”) staff issued a Staff Accounting Bulletin No. 118 (“SAB 118”) that provides guidance on accounting for the impact of the Tax Act. SAB 118 allows companies to record provisional amounts while the accounting impact of the Tax Act is still under analysis, not to extend beyond the measurement period of one year from the enactment of the Tax Act.

The accounting for the effects of the rate change on deferred tax balances is not complete and provisional amounts were recorded for these items. The Company re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The benefit recorded relating to the re-measurement of the Company's deferred tax balances was $68.0 million. The Company is still analyzing certain aspects of the Act and refining calculations, which could potentially affect the re-measurement of these balances or potentially give rise to new deferred tax amounts.

The one-time transition tax is based on the total post-1986 E&P that was previously deferred from US income taxes. The Company recorded a provisional amount for the one-time transition tax liability of $22.9 million for the Company's foreign subsidiaries. The Company has not yet completed the calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from US federal taxation and finalizes the amounts held in cash or other specified assets.

The significant components of deferred income tax assets and liabilities and their balance sheet classifications are as follows:



Years ended June 30,	2018			2017

Deferred tax assets:
Accrued expenses not currently deductible	$	178.3		$	294.5
Stock-based compensation expense	49.6			75.5
Foreign tax credits	40.0			49.5
Net operating losses	44.6			49.5
Unrealized investment losses, net	83.6			—
Other	20.4			18.7
	416.5			487.7
Less: valuation allowances	(46.0		)	(9.4		)
Deferred tax assets, net	$	370.5		$	478.3

Deferred tax liabilities:
Prepaid retirement benefits	$	19.3		$	125.1
Deferred revenue	16.5			35.5
Fixed and intangible assets	242.4			226.3
Prepaid expenses	71.8			122.5
Unrealized investment gains, net	—			33.4
Tax on unrepatriated earnings	28.3			—
Other	9.4			5.2
Deferred tax liabilities	$	387.7		$	548.0
Net deferred tax liabilities	$	17.2		$	69.7

There are $90.1 million and $93.4 million of long-term deferred tax assets included in other assets on the Consolidated Balance Sheets at June 30, 2018 and 2017, respectively.

Income taxes have not been provided on undistributed earnings of certain foreign subsidiaries in an aggregate amount of approximately $300.9 million as of June 30, 2018, as the Company considers such earnings to be permanently reinvested outside of the United States. The additional U.S. income tax that would arise on repatriation of the remaining undistributed earnings could be offset, in part, by foreign tax credits on such repatriation. However, it is impracticable to estimate the amount of net income tax that might be payable.

The Company has estimated foreign net operating loss carry-forwards of approximately $62.7 million as of June 30, 2018, of which $4.8 million expire through 2026 and $57.9 million have an indefinite utilization period. As of June 30, 2018, the Company has approximately $61.7 million of federal net operating loss carry-forwards from acquired companies. The net operating losses have an annual utilization limitation pursuant to section 382 of the Internal Revenue Code and expire through 2037.

The Company has state net operating loss carry-forwards of approximately $255.4 million as of June 30, 2018, which expire through 2037. The Company has recorded valuation allowances of $46.0 million and $9.4 million at June 30, 2018 and 2017, respectively, to reflect the estimated amount of domestic and foreign deferred tax assets that may not be realized.

Income tax payments were approximately $529.7 million, $817.1 million, and $651.6 million for fiscal 2018, 2017, and 2016, respectively.

As of June 30, 2018, 2017, and 2016 the Company's liabilities for unrecognized tax benefits, which include interest and penalties, were $45.2 million, $74.6 million, and $27.4 million respectively. The amount that, if recognized, would impact the effective tax rate is $36.1 million, $61.0 million, and $18.7 million, respectively. The remainder, if recognized, would principally impact deferred taxes.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:



	2018			2017			2016

Unrecognized tax benefits at beginning of the year	$	74.6		$	27.4		$	27.1
Additions for tax positions	4.0			7.5			3.8
Additions for tax positions of prior periods	19.8			41.9			3.5
Reductions for tax positions of prior periods	(40.5		)	(0.5		)	(0.1		)
Settlement with tax authorities	(11.7		)	(0.9		)	(1.7		)
Expiration of the statute of limitations	(1.0		)	(0.9		)	(4.9		)
Impact of foreign exchange rate fluctuations	—			0.1			(0.3		)
Unrecognized tax benefit at end of year	$	45.2		$	74.6		$	27.4

Interest expense and penalties associated with uncertain tax positions have been recorded in the provision for income taxes on the Statements of Consolidated Earnings. During the fiscal years 2018, 2017, and 2016, the Company recorded interest expense (benefit) of $3.2 million, $3.0 million, and $1.1 million, respectively. Penalties incurred during fiscal years 2018, 2017, and 2016 were not significant.

At June 30, 2018, the Company had accrued interest of $7.9 million recorded on the Consolidated Balance Sheets, of which $4.8 million was recorded within income taxes payable, and the remainder was recorded within other liabilities. At June 30, 2017, the Company had accrued interest of $6.9 million recorded on the Consolidated Balance Sheets, of which $0.1 million was recorded within income taxes payable, and the remainder was recorded within other liabilities. At June 30, 2018, the Company had accrued penalties of $0.3 million recorded on the Consolidated Balance Sheets within other liabilities. At June 30, 2017, the Company had accrued penalties of $0.2 million recorded on the Consolidated Balance Sheets within other liabilities.

The Company is routinely examined by the IRS and tax authorities in foreign countries in which it conducts business, as well as tax authorities in states in which it has significant business operations. The tax years currently under examination vary by jurisdiction. Examinations in progress in which the Company has significant business operations are as follows:



Taxing Jurisdiction		Fiscal Years under Examination
U.S. (IRS)		2018
Illinois		2004-2016
Canada		2014
India		2004-2011, 2013-2015
Germany		2010-2014

The Company regularly considers the likelihood of assessments resulting from examinations in each of the jurisdictions. The resolution of tax matters is not expected to have a material effect on the consolidated financial condition of the Company, although a resolution could have a material impact on the Company's Statements of Consolidated Earnings for a particular future period and on the Company's effective tax rate.

If certain pending tax matters settle within the next twelve months, the total amount of unrecognized tax benefits may increase or decrease for all open tax years and jurisdictions. Based on current estimates, settlements related to various jurisdictions and tax periods could increase earnings up to $2 million and expected cash payments could be up to $25 million in the next twelve months. The liability related to cash payments expected to be paid within the next 12 months has been reclassified from other liabilities to current liabilities on the Consolidated Balance Sheets. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known.

In fiscal 2018, the IRS completed its review of the examination of the Company's tax return for the years ended June 30, 2017 and 2016, which did not have a material impact to the Consolidated Financial Statements of the Company.