Income Tax

Total income tax expense (benefit) is allocated as follows:



	Year Ended December 31
	2016			2015			2014
	(in millions of dollars)
Net Income	$	416.3		$	371.2		$	139.9
Stockholders' Equity - Additional Paid-in Capital
Stock-Based Compensation	(0.3		)	(3.6		)	(3.0		)
Stockholders' Equity - Accumulated Other Comprehensive Income
Change in Net Unrealized Gain on Securities Before Adjustment	318.0			(892.5		)	725.8
Change in Adjustment to Deferred Acquisition Costs and Reserves for Future Policy and Contract Benefits, Net of Reinsurance	(200.6		)	856.6			(665.1		)
Change in Net Gain on Cash Flow Hedges	(25.4		)	(4.3		)	(2.0		)
Change in Foreign Currency Translation Adjustment	—			(0.1		)	—
Change in Unrecognized Pension and Postretirement Benefit Costs	(34.2		)	3.2			(92.4		)
Total	$	473.8		$	330.5		$	103.2

A reconciliation of the income tax provision at the U.S. federal statutory rate to the income tax rate as reported in our consolidated statements of income is as follows:



	Year Ended December 31
	2016		2015		2014
Statutory Income Tax	35.0	%	35.0	%	35.0	%
Foreign Rate Differential, Inclusive of Foreign Rate Changes	(2.2	)	(2.5	)	(4.0	)
Tax Credits	(1.6	)	(1.4	)	(4.5	)
Other Items, Net	(0.3	)	(1.1	)	(0.7	)
Effective Tax	30.9	%	30.0	%	25.8	%

In 2014, our U.S. earnings included a long-term care reserve charge that resulted in a larger proportion of our 2014 earnings derived from our foreign operations and taxed at the lower rate, therefore reducing our overall effective tax rate.

Our net deferred tax liability consists of the following:



	December 31
	2016		2015
	(in millions of dollars)
Deferred Tax Liability
Deferred Acquisition Costs	$	174.9	$	140.4
Fixed Assets	80.7		87.1
Invested Assets	1,427.6		1,128.4
Other	63.2		55.4
Gross Deferred Tax Liability	1,746.4		1,411.3

Deferred Tax Asset
Reserves	1,308.5		1,060.5
Employee Benefits	307.4		246.0
Other	17.4		14.3
Gross Deferred Tax Asset	1,633.3		1,320.8
Less: Valuation Allowance	17.2		1.3
Net Deferred Tax Asset	1,616.1		1,319.5
Net Deferred Tax Liability	$	130.3	$	91.8

Our consolidated statements of income include amounts subject to both domestic and foreign taxation. The income and related tax expense (benefit) are as follows:



	Year Ended December 31
	2016			2015			2014
	(in millions of dollars)
Income Before Tax
Domestic	$	1,215.8		$	1,057.8		$	391.7
Foreign	131.9			180.5			150.3
Total	$	1,347.7		$	1,238.3		$	542.0

Current Tax Expense (Benefit)
Federal	$	414.8		$	280.5		$	160.6
State and Local	0.3			—			—
Foreign	(29.4		)	61.6			(25.1		)
Total	385.7			342.1			135.5

Deferred Tax Expense (Benefit)
Federal	(14.6		)	56.9			(50.5		)
State and Local	(2.1		)	—			—
Foreign	47.3			(27.8		)	54.9
Total	30.6			29.1			4.4

Total	$	416.3		$	371.2		$	139.9

The U.K. government enacted income tax rate reductions during 2016 and 2015. During 2016, the rate effective April 2020 was reduced to 17 percent. During 2015, the rate was reduced from 20 percent to 19 percent effective April 2017, and to 18 percent effective April 2020. Although the rate reductions in each instance became or will become effective during a subsequent year, we are required to adjust deferred tax assets and liabilities through income on the date of enactment of a rate change. As a result, we recorded income tax benefits of $4.5 million and $6.5 million for the tax rate reductions enacted during 2016 and 2015, respectively.

We have not provided U.S. deferred taxes on the cumulative earnings of our non-U.S. subsidiaries. We consider these unremitted earnings to be permanently invested as they relate to ongoing operations of our non-U.S. subsidiaries. We do not intend to repatriate these earnings to fund our U.S. operations as we expect that future domestic cash flow generation will be sufficient to meet future domestic cash needs. As of December 31, 2016, we had not recorded a deferred tax liability on approximately $1 billion of the excess of the U.S. GAAP carrying value over the tax basis of investments in non-U.S. subsidiaries that is considered permanent in duration. This amount becomes taxable upon repatriation of assets from a foreign subsidiary or a sale or liquidation of foreign subsidiaries. Should we sell the stock in our non-U.S. subsidiaries for an amount equal to the U.S. GAAP carrying value, we would recognize tax expense of approximately $200 million, assuming our ability to fully utilize foreign tax credits.

Our consolidated statements of income include the following changes in unrecognized tax benefits:



	December 31
	2016		2015			2014
	(in millions of dollars)
Balance at Beginning of Year	$	0.8	$	19.8		$	18.4
Additions for Tax Positions Related to Prior Years	0.7		—			1.7
Additions for Tax Positions Related to Current Year	—		—			0.3
Settlements with Tax Authorities	—		(19.0		)	(0.6		)
Balance at End of Year	1.5		0.8			19.8
Less Tax Attributable to Temporary Items Included Above	—		—			(10.4		)
Total Unrecognized Tax Benefits That if Recognized Would Affect the Effective Tax Rate	$	1.5	$	0.8		$	9.4

Included in the balance at December 31, 2014 was $10.4 million of unrecognized tax benefits for tax positions for which the ultimate deductibility was highly certain but for which there was uncertainty about the timing of such deductibility. Other than potential interest and penalties, the disallowance of the shorter deductibility period would not have affected our results of operations but would have accelerated the payment of cash to the taxing authority.

We recognize interest expense and penalties, if applicable, related to unrecognized tax benefits in tax expense net of federal income tax. We recognized a de minimis amount of interest expense related to unrecognized tax benefits during 2016. We recognized an increase (reduction) in interest expense related to unrecognized tax benefits of $(1.0) million and $0.2 million during 2015 and 2014, respectively. We held a de minimis liability in our consolidated balance sheets for accrued interest and penalties related to unrecognized tax benefits at December 31, 2016 and 2015. At December 31, 2014, we held a liability of $1.0 million. There are no positions for which it is reasonably possible that unrecognized tax benefits could materially increase or decrease within the next 12 months.

We file federal and state income tax returns in the United States and in foreign jurisdictions. During 2015, we settled our Internal Revenue Service (IRS) audit for 2009 and 2010 and resolved a claim for refund we filed related to tax credits for years 2003 through 2012. As a result, we recognized a tax benefit of $6.8 million in our consolidated statements of income and paid an immaterial amount of additional tax.

Tax years subsequent to 2012 remain subject to examination by the IRS, and tax years subsequent to 2014 remain subject to examination in major foreign jurisdictions. We believe sufficient provision has been made for all potential adjustments for years that are not closed by the statute of limitations in all major tax jurisdictions and that any such adjustments would not have a material adverse effect on our financial position, liquidity, or results of operations.

We file state income tax returns in nearly every state in the United States. Tax years subsequent to 2011 remain subject to examination depending on the statute of limitation established by the various states, which is generally three to four years. Tax years subsequent to 2009 remain subject to examination in California.

As of the date of the acquisition of Starmount, we recorded a net operating loss carryforward of $2.5 million and an alternative minimum tax credit carryforward of $0.6 million. During 2016, we recognized a net operating loss benefit of $1.2 million. The alternative minimum tax credit carryforward does not expire, and the remaining net operating loss carryforward of $1.3 million will expire between 2023 and 2035; however, we expect to utilize both within the next two tax years. We have net operating loss carryforwards for state and local income tax of approximately $160 million which will expire between 2017 and 2036.

We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. Our valuation allowance was $17.2 million and $1.3 million at December 31, 2016 and 2015, respectively. During 2016, we recorded a cumulative deferred tax asset for future state income tax benefits of $18.7 million, net of federal tax benefit, and recorded a corresponding valuation allowance of $16.3 million to reduce the deferred tax asset to the amount that is more likely than not to be realized, $1.5 million of which was recorded in other comprehensive income. During 2015, we recorded a valuation allowance of $1.3 million related to unrealized tax losses on buildings which we own and occupy in the U.K.

Total income taxes paid net of refunds during 2016, 2015, and 2014 were $384.3 million, $189.1 million, and $155.7 million, respectively.