Income Taxes

The provision or benefit for income taxes includes U.S. federal income taxes (determined on a consolidated return basis), foreign income taxes, and state income taxes.

Income from continuing operations before income taxes for the years ended December 31 was composed of the following components:



	2016		2015		2014
	(In thousands)
United States	$	287,946	$	331,622	$	360,800
Foreign	38,712		38,729		41,800
	$	326,658	$	370,351	$	402,600

Income tax provision (benefit) for the years ended December 31 consisted of the following:



	2016			2015			2014
	(In thousands)
Current:
United States	$	113,629		$	94,502		$	67,511
Foreign	12,084			9,270			10,859
State	16,150			13,207			17,939
Total current income taxes	141,863			116,979			96,309
Deferred:
United States	$	(19,496	)	$	15,918		$	108,514
Foreign	22,708			(878		)	(653		)
State	4,278			3,008			21,810
Total deferred income taxes	7,490			18,048			129,671
Total income taxes	$	149,353		$	135,027		$	225,980

We made income tax payments of $115.0 million, $105.4 million, and $106.3 million in 2016, 2015, and 2014, respectively, and received refunds of $2.4 million, $1.9 million, and $0.6 million, respectively.

The differences between the U.S. federal statutory income tax rate and our effective tax rate for the years ended December 31 were as follows:



	2016			2015			2014
	(In thousands)
Computed tax provision at the applicable federal statutory income tax rate	$	114,331		$	129,623		$	140,910
State and local taxes, net of federal income tax benefits	13,279			10,542			25,736
Foreign jurisdiction differences	(2,557		)	(5,183		)	(4,424		)
Permanent differences associated with divestitures	9,267			2,909			61,892
Changes in uncertain tax positions	5,669			4,046			4,624
Foreign valuation allowance, net of federal income tax benefits	15,850			—			—
Other	(6,486		)	(6,910		)	(2,758		)
Provision for income taxes	$	149,353		$	135,027		$	225,980
Total consolidated effective tax rate	45.7		%	36.5		%	56.1		%

The higher effective tax rate for the twelve months ended December 31, 2016 was a result of a valuation allowance recorded against foreign net deferred tax assets for which a future net benefit may not be realized, and non-deductible goodwill resulting from gains on divestitures. The higher effective tax rate for the twelve month ended December 31, 2014 was due primarily to the non-deductible goodwill resulting from gains on required divestitures associated with the Stewart acquisition.

Deferred taxes are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates. The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities as of December 31 consisted of the following:



	2016			2015
	(In thousands)
Inventories and cemetery property	$	(335,795	)	$	(338,143	)
Property and equipment	(149,450		)	(168,265		)
Intangibles	(294,251		)	(302,217		)
Other	(6,980		)	(12,047		)
Deferred tax liabilities	(786,476		)	(820,672		)
Loss and tax credit carryforwards	157,795			171,725
Deferred revenue on preneed funeral and cemetery contracts	223,174			226,483
Accrued liabilities	84,230			102,351
Deferred tax assets	465,199			500,559
Less: Valuation allowance	(132,500		)	(126,654		)
Net deferred income tax liability	$	(453,777	)	$	(446,767	)

Deferred tax assets and deferred income tax liabilities are recognized in our Consolidated Balance Sheet at December 31 as follows:



	2016			2015
	(In thousands)
Non-current deferred tax assets	$	861		$	23,817
Non-current deferred tax liabilities	(454,638		)	(470,584		)
Net deferred income tax liability	$	(453,777	)	$	(446,767	)

In addition to the loss and tax credit carryforward amounts reflected as deferred tax assets in the table above, we have taken certain tax deductions related to the exercised employee stock options and vested restricted shares that are in excess of the share-based compensation amounts recorded in our consolidated financial statements (“windfall tax benefits”). Such windfall tax benefits are not recognized in our consolidated financial statements unless they reduce income taxes payable. For the year ended December 31, 2016, restricted share vesting and stock option exercises resulted in windfall tax benefits where the tax deduction exceeded the previously disallowed book expense in the amount of $34.0 million or $12.7 million, net of tax.

At December 31, 2016 and 2015, U.S. income taxes had not been provided on $308.6 million and $259.8 million, respectively, of the remaining undistributed earnings of our Canadian subsidiaries. We intend to permanently reinvest these undistributed foreign earnings in those businesses outside the United States. It is not practicable to determine the amount of federal income taxes, if any, that might become due if such earnings are repatriated.

The following table summarizes the activity related to our gross unrecognized tax benefits from January 1, 2014 to December 31, 2016 (in thousands):



	Federal, State and Foreign Tax
	(In thousands)
Balance at December 31, 2013	$	177,830
Additions to tax positions related to the current year	8,721
Additions to tax positions related to prior years	10,085
Reductions to tax positions related to the current year	(1,075		)
Reductions to tax positions related to prior years	(2,325		)
Reductions to tax positions related to the acquisition of Stewart, offset to goodwill	(1,556		)
Balance at December 31, 2014	$	191,680
Additions to tax positions related to the current year	3,235
Reduction to tax positions related to prior years	(12,370		)
Balance at December 31, 2015	$	182,545
Reductions to tax positions related to prior years	(4,219		)
Balance at December 31, 2016	$	178,326

Our total unrecognized tax benefits that, if recognized, would affect our effective tax rates were $161.8 million, $157.2 million, and $154.8 million as of December 31, 2016, 2015, and 2014, respectively.

We include potential accrued interest and penalties related to unrecognized tax benefits within our income tax provision account. We have accrued $57.3 million, $51.6 million, and $47.6 million for the payment of interest, net of tax benefits, and penalties as of December 31, 2016, 2015, and 2014, respectively. We recognized an increase of interest and penalties of $5.7 million, $4.0 million, and $3.1 million for the years ended December 31, 2016, 2015, and 2014, respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions or the uncertainty of deductions in the future, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

We file income tax returns, including tax returns for our subsidiaries, with federal, state, local and foreign jurisdictions. We consider the United States to be our most significant jurisdiction; however, all tax returns are subject to routine compliance review by the taxing authorities in the jurisdictions in which we file tax returns in the ordinary course of business.

We have reached an agreement in principle with the IRS to resolve the issues under audit with respect to tax years 1999 through 2005 which cleared the Joint Committee on Taxation without change on February 7, 2017. Final resolution with the IRS is subject to, among other things, the execution of certain agreements and the closing of the case. There can be no assurance that the resolution will be finalized on the terms currently contemplated, or at all. Additionally, SCI and Subsidiaries received a letter of no change to its federal tax liability for the tax years 2008-2010, and its tax years 2006-2007 remain under audit as a result of carryback claims. Our Canadian affiliate, Service Corporation International Canada ULC, concluded the audit of its Canadian income tax returns during 2016 for the years 2010-2012 with no material impact. Furthermore, we are under audit by various state jurisdictions for years 2000 through 2015.

It is reasonably possible that the amount of unrecognized tax benefits could significantly decrease over the next 12 months as a result of the agreement in principle reached with the IRS on the audit with respect to tax years 1999 through 2005. However, due to the uncertainty regarding the timing and amount of the final resolution on this specific audit and possible outcomes on the other outstanding audits, a current estimate of the range of decrease that may occur within the next 12 months cannot be made.

Various subsidiaries have state and foreign loss carryforwards in the aggregate of $3.8 billion with expiration dates through 2032. Such loss carryforwards will expire as follows:



	Federal		State		Foreign		Total
	(In thousands)
2017	$	—	$	241,619	$	—	$	241,619
2018	—		111,084		—		111,084
2019	—		143,491		—		143,491
2020	200		183,071		—		183,271
Thereafter	1,900		3,111,526		6,632		3,120,058
Total	$	2,100	$	3,790,791	$	6,632	$	3,799,523

In addition to the above loss carryforwards, we have $52.0 million of foreign losses that have an indefinite expiration.

In assessing the usefulness of deferred tax assets, management considers whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized. The ultimate realization of net deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Upon reviewing the 2016 foreign operational results as of the fourth quarter, management concluded a foreign valuation allowance was necessary as it was not more likely than not that certain foreign net deferred tax assets would be realized based on all available evidence as of December 31, 2016. During 2016, an additional $15.9 million foreign valuation allowance has been recorded which was partially offset by changes in the existing foreign valuation allowances due to fluctuations in the currency exchange rate. Also, in 2016, the state valuation allowance decreased by $9.6 million due to state net operating loss expirations. These valuation allowances can be affected in future periods by changes in tax laws, changes to statutory tax rates and changes in estimates of future taxable income.

At December 31, 2016, our loss and tax credit carryforward deferred tax assets and related valuation allowances by jurisdiction are as follows (presented net of federal benefit):



	Federal		State		Foreign		Total
			(In thousands)
Loss and tax credit carryforwards	$	914	$	136,462	$	20,419	$	157,795
Valuation allowance	$	—	$	101,417	$	31,083	$	132,500