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.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("the Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code by, among other things, reducing the federal corporate income tax rate, requiring payment of a one-time transition tax on unrepatriated earnings of foreign subsidiaries, generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, creating a new limitation on deductible interest expense, creating a bonus depreciation that will allow for full expensing on qualified property, and imposing limitation on deductibility of certain executive compensation.

The Tax Act reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the reduction in the U.S. corporate income tax rate, we re-measured our ending net deferred tax liabilities at December 31, 2017 at the rate at which they are expected to reverse in the future and recognized a provisional tax benefit of $168.4 million. We are still analyzing certain aspects of the Tax Act, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.

The Tax Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign E&P through the year ended December 31, 2017. We had an estimated $195.1 million of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized a provisional $22.2 million of income tax expense, payable over eight years. As of December 31, 2017, foreign withholding taxes have not been provided on the undistributed E&P of our foreign subsidiaries as we intend to permanently reinvest these foreign earnings in those businesses outside the U.S. However, if we were to repatriate such foreign E&P, the foreign withholding tax liability is estimated to be $10 million. We have calculated our best estimate of the impact of this provision in accordance with our understanding of the Tax Act and guidance available as of the date of this filing.

Beginning in 2018, the Tax Act includes a new U.S. tax base erosion provision designed to tax the global intangible low-taxed income (“GILTI”). The GILTI provisions require us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. We do not expect GILTI to be material in the future. We have not yet adopted an accounting policy for GILTI pursuant to the recent guidance under SAB 118.

In accordance with SAB 118, we have recognized the provisional tax impacts related to deemed repatriated earnings and the remeasurement of deferred tax assets and liabilities and included these amounts in our consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act.

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



	2017		2016		2015
	(In thousands)
United States	$	347,680	$	287,946	$	331,622
Foreign	52,578		38,712		38,729
	$	400,258	$	326,658	$	370,351

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



	2017			2016			2015
	(In thousands)
Current:
United States	$	154,128		$	113,629		$	94,502
Foreign	12,187			12,084			9,270
State	4,934			16,150			13,207
Total current income taxes	171,249			141,863			116,979
Deferred:
United States	$	(314,389	)	$	(19,496	)	$	15,918
Foreign	618			22,708			(878		)
State	(4,067		)	4,278			3,008
Total deferred income taxes	(317,838		)	7,490			18,048
Total income taxes	$	(146,589	)	$	149,353		$	135,027

We made income tax payments of $170.2 million, $115.0 million, and $105.4 million in 2017, 2016, and 2015, respectively, and received refunds of $3.4 million, $2.4 million, and $1.9 million, respectively. The income tax payments for 2017 include $34.2 million settlement payments to the IRS.

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:



	2017			2016			2015
	(In thousands)
Computed tax provision at the applicable federal statutory income tax rate	$	140,090		$	114,331		$	129,623
State and local taxes, net of federal income tax benefits	8,216			13,279			10,542
Foreign jurisdiction differences	(6,782		)	(2,557		)	(5,183		)
Permanent differences associated with divestitures	1,925			9,267			2,909
Changes in uncertain tax positions and audit settlements	(105,821		)	5,669			4,046
Foreign valuation allowance, net of federal income tax benefits	1,186			15,850			—
Enactment of US Tax Reform	(146,160		)	—			—
Excess tax benefit from share-based compensation	(18,521		)	—			—
Other	(20,722		)	(6,486		)	(6,910		)
(Benefit from) Provision for income taxes	$	(146,589	)	$	149,353		$	135,027
Total consolidated effective tax rate	(36.6		)%	45.7		%	36.5		%

The lower effective tax rate for the twelve months ended December 31, 2017 was primarily due to the effects of the Tax Act discussed above, and the recent IRS audit settlement as well as the result of tax benefits recognized on the settlement of employee share-based awards from the adoption of new accounting guidance in the first quarter of 2017 (See Note 2 for further information). 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.

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:



	2017			2016
	(In thousands)
Inventories and cemetery property	$	(222,431	)	$	(335,795	)
Property and equipment	(109,631		)	(149,450		)
Intangibles	(194,159		)	(294,251		)
Other	(4,902		)	(6,980		)
Deferred tax liabilities	(531,123		)	(786,476		)
Loss and tax credit carryforwards	170,979			157,795
Deferred revenue on preneed funeral and cemetery contracts	155,679			223,174
Accrued liabilities	62,727			84,230
Deferred tax assets	389,385			465,199
Less: Valuation allowance	(141,154		)	(132,500		)
Net deferred income tax liability	$	(282,892	)	$	(453,777	)

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



	2017			2016
	(In thousands)
Non-current deferred tax assets	$	873		$	861
Non-current deferred tax liabilities	(283,765		)	(454,638		)
Net deferred income tax liability	$	(282,892	)	$	(453,777	)

The following table summarizes the activity related to our gross unrecognized tax benefits from January 1, 2015 to December 31, 2017 (in thousands):



	Federal, State, and Foreign Tax
	(In thousands)
Balance at December 31, 2014	$	191,680
Additions to tax positions related to the current year	3,235
Reductions to tax positions related to prior years	(12,370		)
Balance at December 31, 2015	$	182,545
Reduction to tax positions related to prior years	(4,219		)
Balance at December 31, 2016	$	178,326
Reductions to tax positions as a result of audit settlement	(30,333		)
Reductions to tax positions related to prior years	$	(68,538	)
Balance at December 31, 2017	$	79,455

Our total unrecognized tax benefits that, if recognized, would affect our effective tax rates were $79.5 million, $161.8 million, and $157.2 million as of December 31, 2017, 2016, and 2015, respectively.

We include potential accrued interest and penalties related to unrecognized tax benefits within our income tax provision account. We have accrued $11.1 million, $57.3 million, and $51.6 million for the payment of interest, net of tax benefits, and penalties as of December 31, 2017, 2016, and 2015, respectively. We recorded a decrease of interest and penalties of $46.2 million, and an increase of $5.7 million, and $4.0 million for the years ended December 31, 2017, 2016, and 2015, 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.

In March 2017, we received from the IRS Office of Appeals the fully executed Form 870-AD for the years 1999-2005,

which effectively settled the issues under audit for those years. As a result of this resolution, we recognized a reduction in our

unrecognized tax benefits of $143.0 million, of which $102.5 million was recognized as an income tax benefit for the matters

that were effectively settled with an increase in our taxes payable of $40.5 million. In June 2017, we made $34.2 million in

settlement payments and associated interest to the IRS. Tax years subsequent to 2005 remain open to review and adjustment by the IRS. Moreover, various state jurisdictions are auditing years 2000 through 2016. It is reasonably possible that the amount of unrecognized tax benefits could significantly decrease over the next 12 months. However, since the years to which uncertain tax positions relate remain subject to review by the tax authorities, 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)
2018	$	—	$	108,312	$	—	$	108,312
2019	—		127,914		—		127,914
2020	—		176,591		—		176,591
2021	—		158,672		—		158,672
Thereafter	—		3,232,606		7,151		3,239,757
Total	$	—	$	3,804,095	$	7,151	$	3,811,246

In addition to the above loss carryforwards, we have $58.4 million of foreign losses that have an indefinite expiration.

In assessing the usefulness of deferred tax assets, we consider 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. During 2017, we recorded a net $3.2 million increase in state valuation allowance, due primarily to the reduction of federal benefit related to the new lower federal tax rate, partially offset by state net operating loss expirations. We also recorded a $4.8 million increase in foreign valuation allowance, due primarily to the effects of the federal tax rate reduction. The valuation allowances can be affected in future periods by changes to tax laws, changes to statutory tax rates, and changes in estimates of future taxable income.

At December 31, 2017, 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	$	—	$	150,031	$	20,948	$	170,979
Valuation allowance	$	—	$	104,637	$	36,517	$	141,154