me tax expense (benefit) was calculated based upon the following components of income (loss) from continuing operations before income taxes:



	Fiscal
	2016		2015			2014
Income (loss) from continuing operations before income taxes:
United States	$	31.7	$	(497.1	)	$	(100.0	)
Outside the United States	200.2		190.0			204.0
Total income (loss) from continuing operations before income taxes	$	231.9	$	(307.1	)	$	104.0

The components of income tax expense (benefit) were as follows:



	Fiscal
	2016			2015			2014
Current:
Federal	$	(16.3	)	$	(14.7	)	$	13.4
Foreign	60.2			40.4			46.6
State	2.4			4.5			6.2
Total current	46.3			30.2			66.2
Deferred:
Federal	(6.5		)	(54.1		)	41.3
Foreign	(1.1		)	11.2			(8.3		)
State	2.8			(3.5		)	(9.6		)
Total deferred	(4.8		)	(46.4		)	23.4
Income tax expense (benefit)	$	41.5		$	(16.2	)	$	89.6

The differences between income taxes expected at the U.S. Federal statutory income tax rate of 35.0% and reported income tax expense (benefit) are summarized as follows:



	Fiscal
	2016			2015			2014
Expected income tax expense at Federal statutory rate	$	81.2		$	(107.5	)	$	36.4
State and local income taxes	12.3			(5.1		)	1.5
Valuation allowance for deferred tax assets	(42.3		)	190.8			(31.8		)
Preferred stock equity conversion feature	—			—			4.4
Residual tax on foreign earnings	19.7			24.8			90.9
Foreign rate differential	(38.9		)	(29.0		)	(23.1		)
Foreign tax law changes	(3.7		)	—			(7.7		)
Impact of IRC Section 9100 relief	(16.4		)	—			—
Share based compensation adjustments	(3.4		)	—			—
Benefit from adjustment to tax basis in assets	(8.4		)	—			—
Provision to return adjustment	4.9			—			—
Permanent items	12.9			14.4			7.9
Exempt foreign income	—			(4.7		)	(5.7		)
Unrecognized tax benefits	33.0			(1.5		)	2.2
State tax law and rate changes	—			(54.5		)	—
NOL adjustments	—			9.2			—
Gain on deconsolidation	—			(23.3		)	—
Non-deductible goodwill impairment	—			9.9			—
Purchase accounting benefit	—			(22.8		)	—
Outside basis difference	(5.1		)	(16.2		)	—
Other	(4.3		)	(0.7		)	14.6
Reported income tax expense (benefit)	$	41.5		$	(16.2	)	$	89.6
Effective tax rate	17.9		%	5.3		%	86.2		%

For Fiscal 2016, the Company’s effective tax rate of 17.9% differed from the expected U.S. statutory tax rate of 35.0%. The Company’s tax rate was reduced by the change in judgement in the realizability on a portion of Spectrum Brands’ U.S. net operating loss (“NOL”) carryforwards that were previously recorded with valuation allowance. This reduction was offset by an increase in valuation allowance needed for current year losses from the Corporate and Other segment in the U.S. that are not more-likely-than-not to be realized. The effective tax rate for Fiscal 2016 also included the tax effects related to the adoption of ASU 2016-09 which resulted in the recognition of excess tax benefits in the Company’s provision for income taxes rather than paid-in capital of $25.6, and $5.9 of excess tax benefits that were recognized in (Loss) income from discontinued operations, net of tax as the excess tax benefits increased net operating loss carryforwards that are expected to offset the tax effects of the FGL Merger. See Note 2, Significant Accounting Policies and Practices and Recent Accounting Pronouncements, for the adoption of ASU 2016-09.

For Fiscal 2015, the Company’s effective tax rate of 5.3% differed from the expected U.S. statutory tax rate of 35.0%. This difference was primarily driven by pretax losses in certain foreign and U.S. entities and jurisdictions, book valuations and impairments and bad debt expense in the Company’s Insurance and Corporate and Other segments in the U.S. for which we concluded that a majority of the tax benefits are not more-likely-than-not to be realized, resulting in the recording of valuation allowances. Partially offsetting these items in Fiscal 2015 were: (i) income earned outside the U.S. that is subject to statutory tax rates lower than 35.0%; and (ii) recognition of a $22.8 income tax benefit from the reversal of a portion of Spectrum Brands’ U.S. valuation allowance on deferred tax assets in connection with the acquisition of AAG. As a result, Spectrum Brands determined that a portion of its pre-existing deferred tax assets are more-likely-than-not to be realized by the combined entity and a portion of the historical valuation allowance was no longer required. In addition, the Company recognized a non-recurring net income tax benefit of $12.3 attributable to the tax impact related to the impairment of certain FOH indefinite lived intangible assets for which a deferred tax liability was previously recorded. Due to the indefinite life of these assets for book purposes, the related deferred tax liability was not regarded as a source of taxable income to support the realization of deferred tax assets.

For Fiscal 2014, the Company’s effective tax rate of 86.2% differed from the expected U.S. statutory tax rate of 35.0%. This difference was primarily driven by pretax losses in the U.S. and some foreign jurisdictions for which the Company concluded that the tax benefits are not more-likely-than-not realizable, resulting in valuation allowances, that were partially offset by income earned outside the U.S. that is subject to statutory rates lower than 35.0%.

The following table summarizes the components of deferred income tax assets and liabilities:



	September 30,
	2016			2015
Deferred tax assets:
Employee benefits	$	101.6		$	84.2
Property, plant and equipment	8.9			4.1
Inventories and receivables	32.6			35.3
Marketing and promotional accruals	17.6			14.4
Net operating loss, credit and capital loss carry forwards	992.3			871.4
Prepaid royalty	6.0			6.3
Unrealized losses on mark-to-market securities	16.4			19.9
Insurance reserves and claim related adjustments	23.3			43.3
Insurance receivables	—			21.2
Outside basis difference	51.1			217.3
Intangibles	3.7			6.1
Investments	—			13.1
Other	57.3			106.2
Total deferred tax assets	1,310.8			1,442.8
Less: Valuation allowance	512.1			894.2
Net deferred tax assets	798.7			548.6

Deferred tax liabilities:
Property, plant and equipment	(20.1		)	(15.1		)
Outside basis differences on held for sale assets	(367.8		)	(23.8		)
Intangibles	(813.4		)	(841.1		)
Investments	(39.3		)	(87.4		)
Insurance reserves and claim related adjustments	(5.0		)	(14.9		)
Redemption of long term debt	(10.2		)	(11.8		)
Other	(46.3		)	(72.3		)
Total deferred tax liabilities	(1,302.1		)	(1,066.4		)
Net deferred tax liability	$	(503.4	)	$	(517.8	)

In accordance with ASC Topic 740, the Company establishes valuation allowances for deferred tax assets that, in its judgment, are not more-likely-than-not realizable. These judgments are based on projections of future income, including tax-planning strategies, by individual tax jurisdiction. Changes in industry and economic conditions and the competitive environment may impact the accuracy of these projections. In accordance with ASC Topic 740, during each reporting period, the Company assesses the likelihood that its deferred tax assets will be realized and determines if adjustments to its valuation allowances are appropriate. As a result of this assessment, for Fiscal 2016, 2015 and 2014, the Company had a net charge (release) of valuation allowance to earnings totaling $(42.3), $190.8 and $(31.8), respectively, as more fully described below.

HRG

At September 30, 2016, a partial valuation allowance was reversed on certain deferred tax assets related to NOLs and capital loss carryforwards that are expected to be realized to offset the deferred tax liability recognized as a result of classifying HRG’s ownership interest in FGL as held for sale. See Note 4, Divestitures, for additional information. Management concluded that the remaining net deferred tax asset balance primarily related to NOLs was not more-likely-than-not to be realized and a valuation allowance against the remaining deferred tax assets at September 30, 2016 was appropriate. HRG’s valuation allowance at September 30, 2016 and 2015 totaled $266.4 and $594.5, respectively. This resulted from the Company’s conclusion that tax benefits on its NOLs are not more-likely-than-not realizable. At September 30, 2016 and 2015, HRG had approximately $1,170.5 and $815.3, respectively, of gross U.S. Federal NOL carryforwards, which, if unused, will expire in years 2028 through 2036. HRG had approximately $322.4 and $77.8 of gross U.S. federal capital loss carryforwards at September 30, 2016 and 2015, respectively, which, if unused, will expire in the tax years ended December 31, 2016 through 2021. The increase in capital loss carryforwards in Fiscal 2016 was due to the Compass Sale. At September 30, 2016 and 2015, HRG had approximately $93.9 and $109.8, respectively, of tax benefits related to U.S. state NOL carryforwards at September 30, 2016, which, if unused, will expire in the tax years ended December 31, 2028 through 2036.

During Fiscal 2016, HRG decreased its net valuation allowance for deferred tax assets by $331.6, of which $373.8 was primarily related to the reversal of valuation allowance against certain U.S. federal net deferred tax assets as a result of recognizing a deferred tax liability on HRG’s investment in FGL and was included in Net (loss) income from discontinued operations. Partially offset by an increase of $145.3, which was allocated to accumulated other comprehensive income consistent with the source of taxable income available for realization. See Note 4, Divestitures for discussion of the FGL Merger. Included in the net decrease in valuation allowance was an increase of $89.5 which resulted from the tax effect related to current year losses from the Corporate and Other segment. During Fiscal 2015, HRG increased its valuation allowance for deferred tax assets by $309.0, of which $248.6 was related to an increase in valuation allowance against U.S. net deferred taxes and $60.4 was related to an increase in valuation allowance against state net deferred taxes.

On September 30, 2013, HRG triggered a change of ownership, as defined under Internal Revenue Code (the “IRC”) Section 382 which limits the utilization of HRG’s U.S. federal and state NOLs and other tax attributes. The amount of the limitation is based on a number of factors, including the value of HRG’s stock (as defined for tax purposes) on the date of the ownership change, its net unrealized gain position on that date (as defined for tax purposes), the occurrence of realized gains in years subsequent to the ownership change, and the effects of subsequent changes in ownership, if any. Such factors, including the recognition of unrealized gains, may not be relied upon when assessing the realizability of HRG’s deferred tax assets on its U.S. federal and state net operating losses. The majority of NOL, capital loss and tax credit carryforwards of HRG was historically subject to valuation allowances, as the Company concluded that all or a portion of the related tax benefits are not more-likely-than-not to be realized. Utilization of a portion of the NOL, capital loss and tax credit carryforwards of HRG is subject to limitations under Sections 382 and 383 of IRC. Such limitations resulted from ownership changes of more than 50 percentage points over a three-year period. When consummated, the FGL Merger is expected to result in a significant amount of tax attribute carryforwards to be realized. As a result, in Fiscal 2016, we reversed a significant portion of the Company’s valuation allowance previously recorded against tax attribute carryforwards that are expected to be realized against the tax effects of the FGL Merger. HRG has considered the impact of the 2013 Section 382 ownership change and the related limitations in assessing its need for a valuation allowance. There has been no further ownership change since the September 30, 2013 ownership change.

Spectrum Brands

During the fourth quarter of Fiscal 2015, Spectrum Brands recognized $23.3 of deferred tax assets related to its investment in one of its foreign subsidiaries because it was expected to reverse in the foreseeable future. The deferred tax asset reversed during Fiscal 2016. Spectrum Brands also recorded $14.4 reduction in its NOL deferred tax assets, with a corresponding reduction in the valuation allowance, to reflect losses used as a result of prior year adjustments.

To the extent necessary, Spectrum Brands intends to utilize earnings of foreign subsidiaries in order to support management’s plans to voluntarily accelerate pay down of U.S. debt, fund distributions to shareholders, fund U.S. acquisitions and satisfy ongoing U.S. operational cash flow requirements. As a result, current and certain prior period earnings of Spectrum Brands’ non-U.S. subsidiaries are generally not considered to be permanently reinvested, except in jurisdictions where repatriation is either precluded or restricted by law. Spectrum Brands annually estimates the available earnings, permanent reinvestment classification and the availability of and management’s intent to use alternative mechanisms for repatriation for each jurisdiction in which Spectrum Brands does business. Accordingly, Spectrum Brands is providing residual U.S. and foreign deferred taxes on these earnings to the extent they cannot be repatriated in a tax-free manner. Spectrum Brands has provided residual taxes on $102.0 of distributions from foreign earnings for Fiscal 2016 with $93.6 of earnings not yet taxed in the U.S. resulting in an increase in income tax expense of $36.7. The residual domestic taxes from foreign earnings are recognized as a reduction to NOL and credit carryforwards deferred tax assets and taxes on unremitted foreign earnings are recognized as a deferred tax liability. Spectrum Brands has provided residual taxes on $37.5 of distributions from foreign earnings for Fiscal 2015 with no earnings not yet taxed in the U.S. resulting in a decrease in income tax expense of $0.3. Remaining undistributed earnings of Spectrum Brands’ foreign operations are $219.4 at September 30, 2016, and are intended to remain permanently invested. Accordingly, no residual income taxes have been provided on those earnings. If at some future date these earnings cease to be permanently invested, Spectrum Brands may be subject to U.S. income taxes and foreign withholding and other taxes on such amounts, which cannot be reasonably estimated at this time.

At September 30, 2016, Spectrum Brands had U.S. federal NOL carryforwards of $758.9 with a federal tax benefit of $265.6 and tax benefits related to state NOLs of $60.6 and capital loss carryforwards of $19.8 with a federal and state tax benefit of $7.6. Spectrum Brands has an additional $4.3 of federal and state NOLs for which benefits will be recorded to additional paid-in capital when those carryforwards are used. These NOLs expire through years ending in 2036. As of September 30, 2016, Spectrum Brands had foreign NOLs of $136.3 and tax benefits of $38.4, which will expire beginning in Fiscal 2017. Certain of the foreign NOLs have indefinite carryforward periods. Spectrum Brands is subject to an annual limitation on use of its NOL carryforwards that arose prior to its emergence from bankruptcy in the fiscal year ended September 30, 2009. Spectrum Brands has had multiple changes of ownership, as defined under IRC Section 382 of the Internal Revenue Code of 1986 as amended, that limits the utilization of Spectrum Brands’ U.S. federal and state net operating losses and other tax attributes. The annual limitation is based on a number of factors, including the value of the Spectrum Brands’ stock (as defined for tax purposes) on the date of the ownership change, its net unrealized gain position on that date, the occurrence of realized gains in years subsequent to the ownership change, and the effects of subsequent ownership changes (as defined for tax purposes), if any. In addition, separate return year limitations apply to limit Spectrum Brands’ utilization of the acquired Russell Hobbs U.S. federal and state NOLs to future income of the Russell Hobbs subgroup. Due to these limitations, Spectrum Brands estimates, as of September 30, 2016, that $460.4 of U.S. federal NOLs with a federal tax benefit of $161.1 and $16.7 of the tax benefit related to state NOLs will expire unused even if Spectrum Brands generates sufficient income to otherwise use all of its NOLs. Spectrum Brands also projects, as of September 30, 2016, that $35.4 of tax benefits related to its foreign NOLs will not be used. Spectrum Brands has provided a full valuation allowance against these deferred tax assets.

A valuation allowance is recorded when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability of Spectrum Brands to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. Spectrum Brands has earned pretax profits in the U.S. each of the last three years. Large, profitable U.S. businesses were acquired in Fiscal 2015 and Fiscal 2013, and Spectrum Brands debt levels and blended interest rates have decreased over time. The combination of U.S. operating results and the changes in Spectrum Brands U.S. operating profits led Spectrum Brands to conclude during Fiscal 2016 that it is more-likely-than-not its U.S. deferred tax assets will be used to reduce taxable income, except for tax attributes subject to ownership change limitations, capital losses, and certain state operating losses and credits that will expire unused.

Spectrum Brands released $111.1 of domestic valuation allowance during Fiscal 2016. Approximately $25.1 of the domestic valuation allowance released by Spectrum Brands resulted from additional deferred tax assets created by the adoption of ASU No. 2016-09, effective as of October 1, 2015. In December 2015, the Company received a ruling from the Internal Revenue Service (“IRS”) which resulted in $87.8 of U.S. NOLs being restored and a release of $16.2 of domestic valuation allowance from additional deferred tax assets created by the December 2015 IRS ruling. Spectrum Brands recorded tax expense of $3.1 related to additional foreign valuation allowance during Fiscal 2016.

As of September 30, 2016, Spectrum Brands’ valuation allowance was $245.7, of which $203.7 was related to U.S. net deferred tax assets and $42.0 is related to foreign net deferred tax assets. As of September 30, 2015, Spectrum brands’ valuation allowance was $305.4, of which $268.7 was related to the U.S. net deferred tax assets and $36.7 was related to foreign net deferred tax assets. During Fiscal 2016, Spectrum Brands decreased its valuation allowance for deferred tax assets by $59.7, of which $65.0 related to a decrease in valuation allowance against U.S. net deferred tax assets and $5.3 related to an increase in the valuation allowance against foreign net deferred tax assets. During Fiscal 2015, Spectrum Brands decreased its valuation allowance for deferred tax assets by $27.7, of which $30.4 was related to a decrease in the valuation allowance against U.S. net deferred tax assets and $2.7 was related to an increase in the valuation allowance against foreign net deferred tax assets. As a result of the AAG acquisition, Spectrum Brands reversed $22.8 of U.S. valuation allowance during Fiscal 2015. The reversal was attributable to $22.8 of net deferred tax liabilities recorded on the AAG acquisition balance sheet which offset other U.S. net deferred tax assets. During Fiscal 2015, Spectrum Brands recorded valuation allowances of $17.0 against the deferred tax assets of various Latin America entities as it is more-likely-than-not that Spectrum Brands will not obtain tax benefits from these assets. During Fiscal 2014, Spectrum Brands decreased its valuation allowance for deferred tax assets by $121.5, of which $122.6 related to a decrease in the valuation allowance against U.S. net deferred tax assets and $1.1 related to an increase in the valuation allowance against foreign net deferred tax assets. As a result of a one-time internal restructuring and debt refinancing activity, Spectrum Brands reversed $62.6 of U.S. valuation allowance during Fiscal 2014.

Uncertain Tax Positions

The total amount of unrecognized tax benefits (“UTBs”) at September 30, 2016 and 2015 were $47.9 and $16.1, respectively. If recognized in the future, $47.9 of UTBs would impact the effective tax rate. Consistent with the Company’s accounting policy election, when applicable the Company records interest and penalties related to uncertain tax positions in income tax expense. At September 30, 2016 and 2015, the Company’s accrued balances of interest and penalties on uncertain tax positions totaled $3.2 and $2.8, respectively. For Fiscal 2016 and 2015, interest and penalties increased income tax expense by $0.4 and $0.9, respectively.

HRG files U.S. federal consolidated and state and local combined and separate income tax returns. HRG’s consolidated and combined income tax returns do not include Spectrum Brands, Front Street, or FGL (life insurance subsidiaries), each of which files their own consolidated federal, and combined and separate state and local income tax returns. Spectrum Brands, Front Street and FGL life insurance subsidiaries are consolidated with the Company only for financial reporting.

The Company believes its UTBs for uncertain tax positions are adequate, consistent with the principles of ASC Topic 740. The Company regularly assesses the likelihood of additional tax assessments by jurisdiction and, if necessary, adjusts its UTBs based on new information or developments.

The following table summarizes changes to the Company’s UTB reserves, excluding related interest and penalties:



	Fiscal
	2016			2015			2014
Unrecognized tax benefits at beginning of year	$	16.1		$	12.6		$	13.8
Gross increase — tax positions in prior period	29.9			4.7			2.7
Gross decrease — tax positions in prior period	(2.3		)	(1.9		)	(1.4		)
Gross increase — tax positions in current period	4.8			1.8			0.8
Settlements	(0.6		)	(0.8		)	(2.5		)
Lapse of statutes of limitations	—			(0.3		)	(0.8		)
Unrecognized tax benefits at end of year	$	47.9		$	16.1		$	12.6

The IRS is currently conducting an examination of HRG’s 2013 federal consolidated tax return. In addition, the New York State and New York City tax returns for the 2011 through 2013 tax years are under audit. As of September 30, 2016, the Company is not aware of any significant audit matters related to the U.S federal and state examinations and expects to receive a final closing agreement from both the IRS and New York State within the next 12 months.

Spectrum Brands files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions and is subject to ongoing examination by the various taxing authorities. Spectrum Brand’s major taxing jurisdictions are the U.S., United Kingdom and Germany. In the U.S., federal tax filings for years prior to and including Spectrum Brands’ fiscal year ended September 30, 2012 are closed. However, the federal NOLs from Spectrum Brands’ fiscal years ended September 30, 2012 and prior are subject to IRS examination until the year that such NOL carryforwards are utilized and those years are closed for audit.

The increase in UTB related to Spectrum Brands for Fiscal 2016 includes a $25.5 expense to record a tax contingency reserve for a tax exposure in Germany. During the year, a local court ruled against Spectrum Brands’ characterization of certain assets as amortizable under Germany tax law. Spectrum Brands has appealed this ruling to the German Federal Court.

Filings in various U.S. state and local jurisdictions are also subject to audit and to date, no significant audit matters have arisen.

At September 30, 2016, previously filed income tax returns for certain of the Company’s legal entities in various jurisdictions were undergoing income tax audits. The Company cannot predict the ultimate outcome of these examinations; however, depending on the timing and final terms of actual settlements with the taxing authorities, it is reasonably possible that during the next twelve months some portion of the previously unrecognized tax benefits could be recognized.