INCOME TAXES

The components of income tax expense (benefit) for the years ended December 31, were as follows:



	2015			2014			2013
				(in thousands)
Current tax expense (benefit):
U.S. federal	$	76,175		$	(8,499	)	$	36,759
State and local	0			0			0
Total	76,175			(8,499		)	36,759
Deferred tax expense (benefit):
U.S. federal	(84,460		)	17,103			295,613
State and local	0			0			0
Total	(84,460		)	17,103			295,613
Total income tax expense (benefit)	(8,285		)	8,604			332,372
Total income tax expense (benefit) reported in equity related to:
Other comprehensive income (loss)	(20,708		)	7,407			(41,149		)
Additional paid-in capital	0			0			4,354
Total income tax expense (benefit)	$	(28,993	)	$	16,011		$	295,577

In July 2014, IRS issued guidance relating to the hedging of variable annuity guaranteed minimum benefits (“Hedging IDD”). The Hedging IDD provides an elective safe harbor tax accounting method for certain contracts which permits the current deduction of losses and the deferral of gains for hedging activities that can be applied to open years under IRS examination beginning with the earliest open year. The Company will apply this tax accounting method for hedging gains and losses covered by the Hedging IDD beginning with 2013. As a result of applying such accounting method in 2014, the Company’s 2014 U.S. current tax includes a tax benefit of $59 million and a corresponding reduction of deferred tax assets.

The Company’s actual income tax expense on continuing operations for the years ended December 31, differs from the expected amount computed by applying the statutory federal income tax rate of 35% to income from continuing operations before income taxes for the following reasons:



	2015			2014			2013

	(in thousands)
Expected federal income tax expense (benefit)	$	57,727		$	90,780		$	413,162
Non taxable investment income	(56,614		)	(69,122		)	(69,665		)
Tax credits	(9,389		)	(13,080		)	(10,595		)
Other	(9		)	26			(529		)
Total income tax expense (benefit)	$	(8,285	)	$	8,604		$	332,372

The dividends received deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and is the primary component of the non-taxable investment income shown in the table above, and, as such, is a significant component of the difference between the Company’s effective tax rate and the federal statutory tax rate of 35%. The DRD for the current period was estimated using information from 2014 and current year results, and was adjusted to take into account the current year’s equity market performance. The actual current year DRD can vary from the estimate based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from mutual fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.

In August 2007, the IRS released Revenue Ruling 2007-54, which included, among other items, guidance on the methodology to be followed in calculating the DRD related to variable life insurance and annuity contracts. In September 2007, the IRS released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54 and informed taxpayers that the U.S. Treasury Department and the IRS intend to address through new guidance the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. In May 2010, the IRS issued an Industry Director Directive (“IDD”) confirming that the methodology for calculating the DRD set forth in Revenue Ruling 2007-54 should not be followed. The IDD also confirmed that the IRS guidance issued before Revenue Ruling 2007-54, which guidance the Company relied upon in calculating its DRD, should be used to determine the DRD. In February 2014, the IRS released Revenue Ruling 2014-7, which modified and superseded Revenue Ruling 2007-54, by removing the provisions of Revenue Ruling 2007-54 related to the methodology to be followed in calculating the DRD and making Revenue Ruling 2007-61 obsolete. These activities had no impact on the Company’s 2013, 2014 or 2015 results. However, there remains the possibility that the IRS and the U.S. Treasury will address, through subsequent guidance, the issues related to the calculation of the DRD. For the last several years, the revenue proposals included in the Obama Administration’s budgets included a proposal that would change the method used to determine the amount of the DRD. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through guidance or legislation, could increase actual tax expense and reduce the Company’s net income.

Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table:



	2015			2014

	(in thousands)
Deferred tax assets
Insurance reserves	$	156,639		$	267,536
Investments	0			13,270
Compensation reserves	0			1,760
Other	833			0
Deferred tax assets	157,472			282,566
Deferred tax liabilities
VOBA and deferred policy acquisition cost	247,825			370,548
Investments	4,467			0
Deferred sales inducements	158,463			232,822
Net unrealized gain on securities	32,414			68,819
Other	0			1,239
Deferred tax liabilities	443,169			673,428
Net deferred tax asset (liability)	$	(285,697	)	$	(390,863	)

The application of U.S. GAAP requires the Company to evaluate the recoverability of deferred tax assets and establish a valuation allowance if necessary to reduce the deferred tax asset to an amount that is more likely than not expected to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance the Company considers many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) in which tax jurisdictions they were generated and the timing of their reversal; (4) taxable income in prior carryback years as well as projected taxable earnings exclusive of reversing temporary differences and carryforwards; (5) the length of time that carryovers can be utilized in the various taxing jurisdictions; (6) any unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, net of valuation allowances, will be realized. The Company had no valuation allowance as of December 31, 2015, and 2014.

Management believes that based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its deferred tax assets. Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount of deferred tax asset that is realizable.

The Company’s income (loss) from continuing operations before income taxes includes income (loss) from domestic operations of $165 million, $259 million and $1,180 million, and no income from foreign operations for the years ended December 31, 2015, 2014 and 2013, respectively.

The Company’s liability for income taxes includes the liability for unrecognized tax benefits and interest that relate to tax years still subject to review by the IRS or other taxing authorities. The completion of review or the expiration of the Federal statute of limitations for a given audit period could result in an adjustment to the liability for income taxes.

The Company classifies all interest and penalties related to tax uncertainties as income tax expense (benefit). As of December 31, 2015, 2014, and 2013 the Company recognized nothing in the Consolidated Statement of Operations and recognized no liabilities in the Statement of Financial Position for tax-related interest and penalties. The Company had zero unrecognized tax benefits as of December 31, 2015 and 2014. The Company does not anticipate any significant changes within the next 12 months to its total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.

At December 31, 2015, the Company remains subject to examination in the U.S. for tax years 2009 through 2015.

For tax years 2009 through 2016, the Company is participating in the IRS’s Compliance Assurance Program (“CAP”). Under CAP, the IRS assigns an examination team to review completed transactions as they occur in order to reach agreement with the Company on how they should be reported in the relevant tax returns. If disagreements arise, accelerated resolutions programs are available to resolve the disagreements in a timely manner before the tax returns are filed.