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Income Taxes

12 Months Ended

Dec. 31, 2020

CICA Ltd., a wholly-owned subsidiary of Citizens, is considered a controlled foreign corporation for federal income tax purposes. As a result, the insurance activity of CICA Ltd. is subject to Subpart F of the IRC and is included in Citizens’ taxable income and due to the 0% enacted tax rate in Bermuda there are no deferred taxes recorded for CICA Ltd.'s temporary differences. For the years ended December 31, 2020, 2019 and 2018, the Subpart F income inclusion generated $2.2 million, $5.9 million and $18.4 million of federal income tax expense, respectively.

A reconciliation between the U.S. corporate income tax rate and the effective income tax rate is as follows:


Years ended December 31, (In thousands, except for %)	2020		%		2019		%		2018		%
Expected tax expense (benefit)	$	(2,586)	21.0	%	$	1,186	21.0	%	$	420	21.0	%


Foreign income tax rate differential	(1,817)		14.8		(1,562)		(27.7)		(8,133)		(406.3)

Tax-exempt interest and dividends-received deduction	(146)		1.2		(145)		(2.6)		(227)		(11.3)

Adjustment of prior year taxes	194		(1.6)		(99)		(1.8)		113		5.6

Effect of uncertain tax position	1		—		1,148		20.3		2,612		130.5
Nondeductible costs to remediate tax compliance issue	(620)		5.0		(27)		(0.5)		(366)		(18.3)
Compensation limitation under 162(m) and 280 (g)	2,386		(19.4)		480		8.5		53		2.6
Subpart F income	2,217		(18.0)		5,853		103.6		18,403		919.2
Rate differential on net operating loss carryback claim	(999)		8.1		—		—		—		—
Tax reform re-measurement	—		—		—		—		68		3.4

Other	41		(0.3)		281		5.2		121		6.2
Total federal income tax expense (benefit)	$	(1,329)	10.8	%	$	7,115	126.0	%	$	13,064	652.6	%

Income tax expense (benefit) consists of:


Years ended December 31, (In thousands)	2020		2019	2018
Current	$	(927)	5,542	(49,569)
Deferred	(402)		1,573	62,633
Total income tax expense (benefit)	$	(1,329)	7,115	13,064

The components of deferred federal income taxes are as follows:


December 31, (In thousands)	2020		2019
Deferred tax assets:
Future policy benefit reserves	$	2,657	2,641
Net operating and capital loss carryforwards	1,395		230
Accrued policyholder dividends and expenses	124		—
Investments	147		702

Deferred intercompany loss	2,002		3,539
Accrued compensation	513		—
Lease liability	2,514		238
Other	584		700
Total gross deferred tax assets	9,936		8,050
Deferred tax liabilities:
DAC, COIA and intangible assets	(8,693)		(8,417)
Unrealized gains on investments available-for-sale	(4,522)		(7,300)

Tax reserves transition liability	(3,736)		(4,483)
Right-of-use lease asset	(2,514)		(238)
Other	(35)		(40)
Total gross deferred tax liabilities	(19,500)		(20,478)
Net deferred tax liability	$	(9,564)	(12,428)

A summary of the changes in the components of deferred federal and state income taxes is as follows:


December 31, (In thousands)	2020		2019
Deferred federal and state income taxes:
Balance January 1,	$	(12,428)	(5,709)
Deferred tax benefit (expense)	402		(1,573)

Investments available-for-sale	2,774		(5,129)
Effects of unrealized gains on DAC, COIA and reserves	(391)		(17)
Adoption of ASU 2016-13	79		—

Balance December 31,	$	(9,564)	(12,428)

The Company and our subsidiaries have net operating loss carryforwards of $6.6 million at December 31, 2020 which will begin expiring in 2036. MGLIC joined the Company's consolidated tax return filing group in 2020 and had a $1.1 million net operating loss carryforward at January 1, 2020, which will begin expiring in 2036. The MGLIC net operating losses were incurred while it was owned by the Company; thus, there will be no IRC Section 382 limit on the utilization of these net operating losses.

The Company and our subsidiaries had no capital loss carryforwards at December 31, 2020.

At December 31, 2020 and 2019, we determined that as a result of our taxable capital gain income in carryback periods, the expected reversal of existing deferred tax liabilities, and tax planning strategies, it was more likely than not that the deferred tax assets would be realized. Thus, the Company holds no valuation allowance in operations or other comprehensive income at December 31, 2020 and 2019.

The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority.

A reconciliation of unrecognized tax benefits is as follows:


Years ended December 31, (In thousands)	2020		2019	2018
Balance at January 1,	$	45,989	44,841	95,831

Additions for tax positions of prior years	1		1,148	2,268

Reductions for tax positions of prior years	—		—	(53,258)
Balance December 31,	$	45,990	45,989	44,841

This unrecognized tax benefit is reported net in current federal income tax payable on the consolidated balance sheets. Included in these amounts are $9.9 million, $9.9 million and $8.8 million of interest expense with respect to unrecognized tax benefits as of December 31, 2020, 2019 and 2018, respectively.

The Company’s unrecognized tax benefits at December 31, 2020 would affect the effective tax rate if recognized. The Company believes it is reasonably possible that all but $1.0 million of the total amount of uncertain tax benefits will decrease within the next twelve months.

The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. In the consolidated statements of operations and comprehensive income (loss), the amount of interest expense recorded was $0.0 million, $1.1 million and $2.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020 in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating losses incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. As a result of the CARES Act, it is anticipated that the Company will be able to claim a net refund for $1.0 million of taxes paid in preceding years. The financial statements have been updated to reflect the benefit of the anticipated carryback claim accordingly.

The Consolidated Appropriations Act (the "CAA") was enacted on December 27, 2020. The Company does not expect the CAA to have a material impact on the financial statements and will continue to analyze.

The Company's Federal income tax return is filed on a consolidated basis with the following entities:

Citizens, Inc.

CICA Life Insurance Company of America

Citizens National Life Insurance Company

Magnolia Guaranty Life Insurance Company

Security Plan Life Insurance Company

Security Plan Fire Insurance Company

Computing Technology, Inc.

The method of allocation among companies is subject to a written tax sharing agreement, approved by the Board of Directors, whereby allocation is made primarily on a separate return basis pursuant to the wait-and-see method. Under this method, consolidated group members are not given current credit or refunds for net operating losses until taxable income on a separate return basis is generated. Intercompany tax balances are settled at least annually.

The Company and our subsidiaries file income tax returns in the U.S. Federal jurisdiction and various U.S. states. None of our subsidiaries are subject to examination by U.S. tax authorities for years prior to 2017.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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