7. Federal Income Taxes

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



	For the Years Ended December 31,
	2015		2014		2013
Current	$	212	$	220	$	169
Deferred		64		263		218
Federal income tax expense (benefit)	$	276	$	483	$	387

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



	For the Years Ended December 31,
	2015			2014			2013
Tax rate times pre-tax income	$	501		$	700		$	571
Effect of:
Tax-preferred investment income		(197	)		(185	)		(160	)
Tax credits		(26	)		(27	)		(35	)
Change in uncertain tax positions		(2	)		(16	)		7
Other items		-			11			4
Federal income tax expense (benefit)	$	276		$	483		$	387
Effective tax rate		19%			24%			24%

The effective tax rate is the ratio of tax expense (benefit) over pre-tax income (loss). The tax-preferred investment income relates primarily to the separate account dividends-received deduction. The separate account dividends-received deduction benefit was $192 million, $163 million and $145 million for the years ended December 31, 2015, 2014 and 2013.

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



	As of December 31,
	2015			2014
Current	$	(136	)	$	(134	)
Deferred		(1,867	)		(3,024	)
Total federal income tax asset (liability)	$	(2,003	)	$	(3,158	)

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



	As of December 31,
	2015			2014
Deferred Tax Assets
Future contract benefits and other contract holder funds	$	1,494		$	1,167
Deferred gain on business sold through reinsurance		35			15
Reinsurance related embedded derivative asset		31			52
Investment activity		-			138
Compensation and benefit plans		265			321
Net operating loss carryforwards		12			17
Tax credits		33			-
Other		205			143
Total deferred tax assets		2,075			1,853
Deferred Tax Liabilities
DAC		2,064			1,605
VOBA		313			219
Net unrealized gain on AFS securities		1,116			2,684
Net unrealized gain on trading securities		70			105
Intangibles		117			151
Investment activity		105			-
Other		157			113
Total deferred tax liabilities		3,942			4,877
Net deferred tax asset (liability)	$	(1,867	)	$	(3,024	)

As of December 31, 2015, we had $34 million of net operating loss carryforwards that begin to expire in 2031. In addition, we had $33 million of alternative minimum tax credits that are not subject to expiration. Although realization is not assured, management believes that it is more likely than not that we will realize the benefits of our deferred tax assets, and, accordingly, no valuation allowance has been recorded.

As of December 31, 2015 and 2014, $13 million and $15 million, respectively, of our unrecognized tax benefits presented below, if recognized, would have affected our income tax expense and our effective tax rate. We are 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,
	2015			2014
Balance as of beginning-of-year	$	15		$	82
Increases for prior year tax positions		-			34
Decreases for prior year tax positions		(2	)		(24	)
Increases for current year tax positions		-			-
Decreases for settlements with taxing authorities		-			(77	)
Balance as of end-of-year	$	13		$	15

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, 2015, 2014 and 2013, we recognized interest and penalty expense (benefit) related to uncertain tax positions of zero, $(10) million and $2 million, respectively. We had accrued interest and penalty expense related to the unrecognized tax benefits of $3 million as of December 31, 2015 and 2014.

We are subject to examination by U.S. federal, state, local and non-U.S. income authorities. The Internal Revenue Service (“IRS”) examination for tax years 2009 through 2011 was closed in 2015. We are currently not under examination by the IRS. However, LNC has filed a protest with the IRS Appeals division (“Appeals”). A protest for tax years 2005 through 2008 was previously filed with Appeals, and all tax years from 2005 through 2011 for the Company remain open. All protested items have been resolved for all open years but are subject to review by the U.S. Joint Committee on Taxation before a final settlement is reached. We do not expect any adjustments that would be material to our consolidated results of operations or financial condition.