NOTE 13. INCOME TAXES

As a REIT, we generally are not subject to federal and state corporate income taxes on income from investments in real estate that we distribute to our shareholders. We are required to pay federal and state corporate income taxes on income from our non-real estate investments which are held in taxable REIT subsidiaries (TRS). These activities are principally comprised of our wood products manufacturing operations and certain real estate investments held for sale.

As of January 1, 2016, we are no longer subject to corporate income taxes on built-in gains, the excess of fair market value over tax basis, on sales of real property held at the time of our REIT conversion.

Income tax expense consists of the following for the years ended December 31:

(Dollars in thousands)	2016			2015			2014
Current	$	(6,178	)	$	128		$	21,205
Deferred		2,143			1,097			(2,143	)
Net operating loss carryforwards		(290	)		(6,793	)		625
Income tax (benefit) provision	$	(4,325	)	$	(5,568	)	$	19,687

Income tax expense differs from the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes due to the following for the years ended December 31:

(Dollars in thousands)	2016			2015			2014
U.S. federal statutory income tax	$	2,314		$	9,151		$	38,359
REIT income not subject to federal income tax		(7,199	)		(14,110	)		(16,812	)
Intercompany profit-in-inventory elimination adjustment		1,465			—			—
Change in valuation allowance		162			488			(1,818	)
State income taxes, net of federal income tax		(740	)		(838	)		2,234
Domestic production activities deduction		(2	)		—			(1,055	)
Permanent book-tax differences		(218	)		(70	)		(1,073	)
Research and development credits		(689	)		—			—
All other items		582			(189	)		(148	)
Income tax provision (benefit)	$	(4,325	)	$	(5,568	)	$	19,687
Effective tax rate		(65.4	%)		(21.3	%)		18.0	%

The tax effects of significant temporary differences creating deferred tax assets and liabilities at December 31 were:

(Dollars in thousands)	2016			2015
Deferred tax assets:
Pensions	$	37,423		$	35,066
Other postretirement employee benefits		13,002			13,834
Net operating loss carryforwards		983			6,935
Inventories		443			2,325
Tax credits		2,207			2,123
Nondeductible accruals		2,067			2,041
Incentive compensation		1,643			2,009
Employee benefits		1,444			1,769
Other		120			116
Total deferred tax assets		59,332			66,218
Valuation allowance		(650	)		(488	)
Deferred tax assets, net of valuation allowance		58,682			65,730
Deferred tax liabilities:
Timber and timberlands, net		(2,165	)		(5,010	)
Property, plant and equipment, net		(14,018	)		(14,120	)
Other		(448	)		—
Total deferred tax liabilities		(16,631	)		(19,130	)
Net deferred tax assets	$	42,051		$	46,600

As of December 31, 2016, we have no federal net operating loss carryforwards, state net operating loss carryforwards of $21.6 million that expire from 2017 through 2036 and Idaho Investment Tax Credits of $3.4 million that expire from 2017 through 2030. We use the flow-through method of accounting for investment tax credits.

With the exception of the valuation allowance discussed below, we believe it is more likely than not that we will have sufficient future taxable income to realize our deferred tax assets.

The valuation allowance on our deferred tax assets increased during 2016 by $0.2 million, and was $0.7 million as of December 31, 2016. The valuation allowance is related to certain Idaho Investment Tax Credit carryforwards we expect will expire prior to realization. During 2015, the valuation allowance increased from zero to $0.5 million due to the actual use and expected future use of certain Idaho Investment Tax Credits.

The following table summarizes the tax years subject to examination by major taxing jurisdictions:

Jurisdiction		Years
Federal		2013 — 2016
Arkansas		2013 — 2016
Michigan		2012 — 2016
Minnesota		2012 — 2016
Idaho		2013 — 2016

As of December 31, 2016, our 2015 TRS federal income tax return is under examination. We do not expect the outcome of the examination to have a material effect on our Consolidated Financial Statements.

As of December 31, 2016, we had $0.9 million of unrecognized benefits which, if recognized, would impact the effective tax rate. There were no unrecognized benefits at December 31, 2015 and 2014. We do not currently believe there is a reasonable possibility that the amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months.

A reconciliation of the beginning and ending unrecognized tax benefits is as follows:

(Dollars in thousands)	2016
Balance at January 1	$	—
Additions for tax positions of prior years		850
Balance at December 31	$	850

We reflect accrued interest related to tax obligations, as well as penalties, in our provision for income taxes. For the years ended December 31, 2016, 2015 and 2014, we recognized insignificant amounts related to interest and penalties in our tax provision. At December 31, 2016 and 2015, we had insignificant amounts of accrued interest related to tax obligations and no accrued interest receivable with respect to open tax refunds.