Federal Income Taxes

12 Months Ended

Dec. 31, 2014

7. Federal Income Taxes

The federal income tax expense (benefit) on continuing operations (in millions) was as follows:



	For the Years Ended December 31,
	2014		2013		2012
Current	$	220	$	169	$	23
Deferred		263		218		259
Federal income tax expense (benefit)	$	483	$	387	$	282

A reconciliation of the effective tax rate differences (in millions) was as follows:



	For the Years Ended December 31,
	2014			2013			2012
Tax rate times pre-tax income	$	700		$	571		$	549
Effect of:
Tax-preferred investment income		(185	)		(160	)		(141	)
Tax credits		(27	)		(35	)		(34	)
Goodwill		-			-			(2	)
Change in uncertain tax positions		(16	)		7			(94	)
Other items		11			4			4
Federal income tax expense (benefit)	$	483		$	387		$	282
Effective tax rate		24%			24%			18%

The effective tax rate is the ratio of tax expense over pre-tax income (loss). The tax-preferred investment income relates primarily to separate account dividends-received deductions. The separate account dividends-received deduction benefit was $163 million, $145 million and $128 million for the years ended December 31, 2014, 2013 and 2012.

The federal income tax asset (liability) (in millions) was as follows:



	As of December 31,
	2014			2013
Current	$	(134	)	$	(186	)
Deferred		(3,024	)		(1,966	)
Total federal income tax asset (liability)	$	(3,158	)	$	(2,152	)

Significant components of our deferred tax assets and liabilities (in millions) were as follows:



	As of December 31,
	2014			2013
Deferred Tax Assets
Future contract benefits and other contract holder funds	$	1,167		$	1,225
Deferred gain on business sold through reinsurance		15			87
Reinsurance related embedded derivative asset		52			36
Investments		138			85
Compensation and benefit plans		321			319
Net operating loss		17			27
Tax credits		-			201
VIE		1			4
Other		142			79
Total deferred tax assets		1,853			2,063
Deferred Tax Liabilities
DAC		1,605			1,914
VOBA		219			409
Net unrealized gain on AFS securities		2,684			1,319
Net unrealized gain on trading securities		105			89
Intangibles		151			146
Other		113			152
Total deferred tax liabilities		4,877			4,029
Net deferred tax asset (liability)	$	(3,024	)	$	(1,966	)

As of December 31, 2014 and 2013, $15 million and $74 million, respectively, of our unrecognized tax benefits presented below, if recognized, would have affected our income tax expense and our effective tax rate. The Company is not aware of any events for which it is likely that unrecognized tax benefits will significantly increase or decrease within the next year. A reconciliation of the unrecognized tax benefits (in millions) was as follows:



	For the Years Ended
	December 31,
	2014			2013
Balance as of beginning-of-year	$	82		$	77
Increases for prior year tax positions		34			-
Decreases for prior year tax positions		(24	)		-
Increases for current year tax positions		-			5
Decreases for settlements with taxing authorities		(77	)		-
Balance as of end-of-year	$	15		$	82

We recognize interest and penalties accrued, if any, related to unrecognized tax benefits as a component of tax expense. For the years ended December 31, 2014, 2013 and 2012, we recognized interest and penalty expense (benefit) related to uncertain tax positions of $(10) million, $2 million and $(61) million, respectively. We had accrued interest and penalty expense related to the unrecognized tax benefits of $3 million and $13 million as of December 31, 2014 and 2013, respectively.

The Company is subject to examination by U.S. federal, state, local and non-U.S. income authorities. The Company is currently under examination by the Internal Revenue Service (“IRS”) for tax years 2009 through 2011. The Company anticipates closing the current exam cycle in 2015. Furthermore, LNC has filed a protest with the IRS Appeals division for tax years 2005 through 2008. These years remain open as the Company works with Appeals to finalize the tax computations in these years. All protested items have been resolved and we anticipate reaching a final settlement in 2015. The Company does not expect any adjustments that would be material to its consolidated results of operations or its financial condition.

- 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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