Income Taxes

6 Months Ended

Jun. 30, 2019

The following table presents the income tax expense and the effective tax rate for the three and six months ended June 30, 2019 and 2018:




($ in thousands)	Three Months Ended June 30,								Six Months Ended June 30,
($ in thousands)	2019			2018			% Change		2019			2018			% Change
Income before income taxes	$	223,177		$	196,992		13	%	$	418,268		$	408,776		2	%
Income tax expense	$	72,797		$	24,643		195	%	$	103,864		$	49,395		110	%
Effective tax rate	32.6		%	12.5		%	20	%	24.8		%	12.1		%	13	%

The effective tax rates were 32.6% and 24.8% for the three and six months ended June 30, 2019, respectively, compared to 12.5% and 12.1% for the same periods in 2018. The year-over-year increases in the effective tax rate were primarily due to the $30.1 million of additional income tax expense recorded in the second quarter of 2019 to reverse certain previously claimed tax credits related to the Company’s investment in DC Solar. In addition, a year-over-year decrease in tax credits recognized from investments in renewable energy and historic rehabilitation tax credit projects contributed to the higher effective tax rates during three and six months ended June 30, 2019.

Investors in DC Solar funds, including the Company, received tax credits for making these renewable energy investments. The Company had claimed tax credits of approximately $53.9 million in the Consolidated Financial Statements between 2014 and 2018, reduced by a deferred tax liability of $5.7 million related to the 50% tax basis reduction, for a net impact to the Consolidated Financial Statements of $48.2 million. During the three months ended June 30, 2019, the Company reversed $33.6 million out of the $53.9 million previously claimed tax credits, and $3.5 million out of the $5.7 million deferred tax liability, resulting in $30.1 million of additional income tax expense.

ASC 740-10-25-6 states in part, that an entity shall initially recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. The term “more-likely-than-not” means a likelihood of more than 50 percent; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. The level of evidence that is necessary and appropriate to support the technical merits of a tax position is subject to judgment and depends on available information as of the balance sheet date. Under ASC 740, Income Taxes, an entity should not consider new information that is received after the balance sheet date, when evaluating an uncertain tax position as of the balance sheet date. Based on the available information known as of December 31, 2018 and March 31, 2019, the Company reassessed the technical merits of the position taken and concluded, based on initial and ongoing due diligence performed by the Company, it believed that the DC Solar related tax credits the Company had previously claimed continued to meet the more-likely-than-not criterion for recognition as of those dates.

During the first quarter of 2019, the Company, in coordination with other fund investors, engaged an unaffiliated third party inventory firm to report on the actual number of mobile solar generators in existence. As of June 30, 2019, based on the latest inventory report, none of the mobile service generators that had been purchased by the Company’s 2017 and 2018 tax credit funds were found. On the other hand, a vast majority of the Company’s mobile solar generators purchased by the Company’s 2014 and 2015 tax credit funds were found. Therefore, as of June 30, 2019, based on this inventory information, as well as management’s best judgments regarding the future settlement of the related tax positions with the Internal Revenue Service, the Company concluded that a portion of the previously claimed tax credits would be recaptured. Accordingly, the Company recorded $30.1 million of income tax expense during the three months ended June 30, 2019.

The Company continues to conduct an ongoing investigation to gather information related to this matter, including tracking asset seizures of DC Solar and ongoing federal investigations. There can be no assurance that the Company will not recognize additional income tax expense as new information becomes available, or due to changes in tax laws, case law and regulations; or that the Company will not ultimately need to reverse the remaining tax credits previously claimed. For further discussion related to the Company’s investment in DC Solar and the Company’s impairment evaluation and monitoring process in tax credit investments, refer to Note 9 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities and Note 4 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-Q, respectively.