INCOME TAXES

The Company's effective income tax rate related to continuing operations varied from the maximum federal income tax rate as follows:



	Successor Company						Predecessor Company
	For The Year Ended December 31, 2017		For The Year Ended December 31, 2016		February 1, 2015 to December 31, 2015		January 1, 2015 to January 31, 2015
Statutory federal income tax rate applied to pre-tax income	35.0	%	35.0	%	35.0	%	35.0	%
State income taxes	0.6		0.8		2.0		0.8
Investment income not subject to tax	(5.0	)	(2.7	)	(4.3	)	(3.2	)
Uncertain tax positions	(0.2	)	(0.3	)	0.2		(0.1	)
Federal Tax law changes	(183.3	)	—		—		—
Other	(1.4	)	1.0		—		(0.1	)
	(154.3	)%	33.8	%	32.9	%	32.4	%

The annual provision for federal income tax in these financial statements differs from the annual amounts of income tax expense reported in the Company's income tax returns. Certain significant revenues and expenses are appropriately reported in different years with respect to the financial statements and the tax returns.

The components of the Company's income tax are as follows:



	Successor Company									Predecessor Company
	For The Year Ended December 31, 2017			For The Year Ended December 31, 2016			February 1, 2015 to December 31, 2015			January 1, 2015 to January 31, 2015
	(Dollars In Thousands)									(Dollars In Thousands)
Current income tax expense:
Federal	$	21,853		$	(50,638	)	$	5,715		$	(32,803	)
State	4,399			3,919			(4,244		)	1,685
Total current	$	26,252		$	(46,719	)	$	1,471		$	(31,118	)
Deferred income tax expense:
Federal	$	(693,860	)	$	240,127		$	118,338		$	30,858
State	(3,867		)	7,560			11,734			(67		)
Total deferred	$	(697,727	)	$	247,687		$	130,072		$	30,791

The components of the Company's net deferred income tax liability are as follows:



	Successor Company
	As of December 31,
	2017			2016
	(Dollars In Thousands)
Deferred income tax assets:
Loss and credit carryforwards	$	209,401		$	453,880
Deferred compensation	138,945			209,979
Deferred policy acquisition costs	23,876			156,012
Premium on corporate debt	57,402			104,839
Net unrealized loss on investments	—			353,448
Other	28,179			44,956
Valuation allowance	(3,951		)	(6,007		)
	453,852			1,317,107
Deferred income tax liabilities:
Premium receivables and policy liabilities	573,469			884,255
VOBA and other intangibles	433,321			720,750
Invested assets (other than unrealized gains (losses))	672,549			1,311,866
Net unrealized gains on investments	6,920			—
	1,686,259			2,916,871
Net deferred income tax liability	$	(1,232,407	)	$	(1,599,764	)

The deferred tax assets reported above include certain deferred tax assets related to nonqualified deferred compensation and other employee benefit liabilities that were assumed by AXA and they were not acquired by the Company in connection with the acquisition of MONY. The future tax deductions stemming from these liabilities will be claimed by the Company on MONY's tax returns in its post-acquisition periods. These deferred tax assets have been estimated as of the MONY Acquisition date (and through the December 31, 2017 reporting date) based on all available information. However, it is possible that these estimates may be adjusted in future reporting periods based on actuarial changes to the projected future payments associated with these liabilities. Any such adjustments will be recognized by the Company as an adjustment to income tax expense during the period in which they are realized.

On December 22, 2017, the President of the United States signed into law the Tax Reform Act. The legislation significantly changes U.S. tax law by, among other things, lowering the corporate income tax rate. The Tax Reform Act permanently 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 from 35% to 21% and changes to tax law related to the deductibility of certain deferred tax assets under the Tax Reform Act, we revalued our ending net deferred tax liabilities at December 31, 2017, and recognized a provisional $797.6 million tax benefit in our consolidated statement of income for the year ended December 31, 2017.

Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has recognized the provisional tax impacts based on reasonable estimates made by the Company as to the effects of tax reform on deferred assets as discussed below and included these amounts in its 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 regulatory guidance that may be issued, additional analysis, and resulting changes in interpretations and assumptions the Company has made. Any adjustments to these provisional amounts will be reported as a component of income tax expense (benefit) in the reporting period in which any such adjustments are determined. The Company will not extend the measurement period beyond December 22, 2018.

As a result of the Tax Reform Act, compensation paid to our covered employees in excess of $1 million will not be deductible unless it qualifies for transition relief applicable to certain written binding arrangements that were in place as of November 2, 2017 and that have not been materially modified after such date. Because of ambiguities and uncertainties as to the application and interpretation of Section 162(m), including the uncertain application of transition relief to companies that had not been subject to Section 162(m) prior to the effectiveness of the Tax Reform Act, it is unclear whether or to what extent the deferred tax assets related to amounts paid or payable by the Company to covered employees after January 1, 2018 pursuant to written binding arrangements that were in place on November 2, 2017 will be subject to the $1 million dollar deduction limit of Section 162(m).

In management's judgment, the gross deferred income tax asset as of December 31, 2017 (Successor Company) will more likely than not be fully realized. The Company has recognized a valuation allowance of $5.0 million and $9.2 million as of December 31, 2017 (Successor Company) and December 31, 2016 (Successor Company), respectively, related to state-based loss carryforwards that it has determined are more likely than not to expire unutilized. This resulting favorable change of $4.2 million, before federal income taxes, decreased state income tax expense in 2017 by the same amount.

At December 31, 2017 (Successor Company), the Company has non-life net operating loss carryforwards for federal income tax purposes of $259.6 million, which are available to offset future non-life group federal taxable income (and life group taxable income with limitations) and begin to expire in 2035. The Company also has life net operating loss carryforwards for federal income tax purposes of $578.3 million which are available to offset both future life group taxable income and non-life group taxable income through 2031. Alternative minimum tax credits of $8.9 million are available to offset regular tax beginning in 2018, as a result of The Tax Reform Act, with any remaining credits being fully refundable beginning in 2021. Foreign tax credits of $7.2 million are available to offset both future life group income tax and non-life group income tax and will begin to expire in 2024. Research and Development credits of $1.2 million are available to offset both future life group income tax and non-life group income tax and will begin to expire in 2036. In addition, included in the deferred income tax assets above are approximately $22.8 million in state net operating loss carryforwards attributable to certain jurisdictions, which are available to offset future tax in the respective state jurisdictions, expiring between 2018 and 2036.

As of December 31, 2017 (Successor Company) and December 31, 2016 (Successor Company), some of the Company's fixed maturities were reported at an unrealized loss, although the net amount is an unrealized gain at December 31, 2017 (Successor Company). If the Company were to realize a tax-basis net capital loss for a year, then such loss could not be deducted against that year's other taxable income. However, such a loss could be carried back and forward against any prior year or future year tax-basis net capital gains. Therefore, the Company has relied upon a prudent and feasible tax-planning strategy regarding its fixed maturities that were reported at an unrealized loss. The Company has the ability and the intent to either hold such fixed maturities to maturity, thereby avoiding a realized loss, or to generate an offsetting realized gain from unrealized gain fixed maturities if such unrealized loss fixed maturities are sold at a loss prior to maturity.

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



	Successor Company									Predecessor Company
	As of December 31, 2017			As of December 31, 2016			February 1, 2015 to December 31, 2015			January 1, 2015 to January 31, 2015
	(Dollars In Thousands)									(Dollars In Thousands)
Balance, beginning of period	$	9,856		$	13,138		$	137,593		$	193,244
Additions for tax positions of the current year	1,857			2,122			2,213			(5,010		)
Additions for tax positions of prior years	70			1,318			1,811			7,724
Reductions of tax positions of prior years:
Changes in judgment	(430		)	(975		)	(16,416		)	(58,365		)
Settlements during the period	—			(5,747		)	(112,063		)	—
Lapses of applicable statute of limitations	—			—			—			—
Balance, end of period	$	11,353		$	9,856		$	13,138		$	137,593

Included in the end of period balance above, as of December 31, 2017 (Successor Company), December 31, 2016 (Successor Company), the period of February 1, 2015 to December 31, 2015 (Successor Company), and the period of January 1, 2015 to January 31, 2015 (Predecessor Company), are approximately $0.7 million, $0.7 million, $5.6 million, and $126.0 million of unrecognized tax benefits, respectively, for which the ultimate deductibility is certain but for which there is uncertainty about the timing of such deductions. Other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective income tax rate but would accelerate to an earlier period the payment of cash to the taxing authority. The total amount of unrecognized tax benefits, if recognized, that would affect the effective income tax rate is approximately $10.7 million, $9.2 million, $7.5 million, and $11.5 million for the year ended December 31, 2017 (Successor Company), the year ended December 31, 2016 (Successor Company), the period of February 1, 2015 to December 31, 2015 (Successor Company), and the period of January 1, 2015 to January 31, 2015 (Predecessor Company), respectively.

Any accrued interest related to the unrecognized tax benefits and other accrued income taxes have been included in income tax expense. These amounts were a $2.4 million benefit, a $3.1 million benefit, a $1.6 million detriment, and a $0.9 million benefit for the year ended December 31, 2017 (Successor Company), the year ended December 31, 2016 (Successor Company), the period of February 1, 2015 to December 31, 2015 (Successor Company), and the period of January 1, 2015 to January 31, 2015 (Predecessor Company), respectively. The Company has approximately $1.1 million, $2.8 million, $15.4 million, and $12.7 million of accrued interest associated with unrecognized tax benefits as of December 31, 2017 (Successor Company), as of December 31, 2016 (Successor Company), as of December 31, 2015 (Successor company), and as of January 31, 2015 (Predecessor Company), respectively (before taking into consideration the related income tax benefit that is associated with such an expense).

In June 2012, the IRS proposed favorable and unfavorable adjustments to the Company’s 2003 through 2007 reported taxable incomes. The Company protested certain unfavorable adjustments and sought resolution at the IRS’ Appeals Division. In October 2015, Appeals accepted the Company’s earlier proposed settlement offer. In September 2015, the IRS proposed favorable and unfavorable adjustments to the Company’s 2008 through 2011 reported taxable income. The Company agreed to these adjustments. In April 2017, a routine review by Congress' Joint Committee on Taxation was finalized without change and the Company received an approximate $6.2 million net refund in the fourth quarter of 2017.

The resulting net adjustment to the Company’s current income taxes for the years 2003 through 2011 did not materially affect the Company or its effective tax rate.

In July 2016, the IRS proposed favorable and unfavorable adjustments to the Company's 2012 and 2013 reported taxable income. The Company agreed to these adjustments. The resulting settlement paid in September 2016 did not materially impact the Company or its effective tax rate.

These agreements with the IRS are the primary cause for the reductions of unrecognized tax benefits shown in the above chart. The Company believes that in the next 12 months, $0.7 million of the unrecognized tax benefits will be reduced due to recent changes in tax law. In general, the Company is no longer subject to income tax examinations by taxing authorities for tax years that began before 2014. Due to the aforementioned IRS adjustments to the Company's pre-2014 taxable income, the Company is amending certain of its 2003 through 2013 state income tax returns. Such amendments will cause such years to remain open, pending the states' acceptances of the returns.

During the year ended December 31, 2016 (Successor Company), the Company filed a non-automatic tax accounting method change related to income recognition for unearned premium reserve and discounted loss reserve for claims incurred. The IRS accepted the Company's request for the non-automatic tax accounting method. This change did not materially impact the Company or its effective tax rate.