8.	INCOME TAXES

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


	2011		2010		2009
	(in thousands)
Current tax expense:
U.S.	$	32,230	$	(27,926)	$	(239,798)
State and local		-		(693)		2

Total	$	32,230	$	(28,619)	$	(239,796)

Deferred tax expense:
U.S.		(198,293)		148,362		173,161
State and local		-		(237)		2,595

Total	$	(198,293)	$	148,125	$	175,756

Total income tax (benefit) expense on income from operations		(166,063)		119,506		(64,040)
Income Tax reported in equity related to:
Other comprehensive income (loss)		(16,240)		25,591		82,326
Cumulative effect of changes in accounting policy		-		-		4,772
Stock based compensation programs		-		-		-

Total income tax (benefit) expense	$	(182,303)	$	145,097	$	23,058

The Company’s income (loss) from continuing operations before income taxes includes income (loss) from domestic operations of $(317.6) million, $533.3 million and $(3.9) million, and no income from foreign operations for the years ended December 31, 2011, 2010 and 2009, respectively.

The Company’s actual income tax expense on continuing operations for the years ended December 31, 2011, 2010, and 2009, 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:


	2011		2010		2009
	(in thousands)
Expected federal income tax (benefit) expense	$	(111,165)	$	186,653	$	(1,358)
Non taxable investment income		(47,451)		(55,497)		(56,870)
Tax credits		(7,517)		(11,290)		(6,150)
State income taxes, net of federal benefit		-		(604)		1,688
Other		70		244		(1,350)

Total income tax (benefit) expense	$	(166,063)	$	119,506	$	(64,040)

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


	2011		2010
	(in thousands)
Deferred tax assets
Insurance reserves	$	470,084	$	580,606
Investments		88,757		108,698
Compensation reserves		4,546		4,401
Other		1,695		-

Deferred tax assets		565,082		693,705

Deferred tax liabilities
VOBA and deferred acquisition cost		166,753		353,189
Net unrealized gains		154,314		175,199
Deferred annuity bonus		156,044		278,777
Other		-		12,251

Deferred tax liabilities		477,111		819,416

Net deferred tax asset (liability)	$	87,971	$	(125,711)

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, 2011, and 2010.

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 had no unrecognized tax benefits as of December 31, 2011 and 2010.

The Company classifies all interest and penalties related to tax uncertainties as income tax expense. In December 31, 2011 and 2010, the Company recognized nothing in the statement of operations and recognized no liabilities in the statement of financial position for tax-related interest and penalties.

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 2010, 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. On February 13, 2012, the Obama Administration released the “General Explanations of the Administration’s Revenue Proposals.” One proposal 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. These activities had no impact on the Company’s 2009, 2010 or 2011 results.

The Company is not currently under audit by the IRS or any state or local jurisdiction for the years prior to 2009.

In 2009, the Company joined in filing the federal tax return with its ultimate parent, Prudential Financial. For tax years 2009 through 2011, the Company is participating in the IRS’s Compliance Assurance Program (“CAP”). Under CAP, the IRS assigns an examination team to review completed transactions contemporaneously during these tax years in order to reach agreement with the Company on how they should be reported in the tax returns. If disagreements arise, accelerated resolutions programs are available to resolve the disagreements in a timely manner before the tax returns are filed. It is management’s expectation this program will shorten the time period between the filing of the Company’s federal income tax returns and the IRS’s completion of its examination of the returns.