7. Federal Income Taxes

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



	For the Years Ended December 31,
	2016		2015		2014
Current	$	88	$	212	$	220
Deferred		178		64		263
Federal income tax expense (benefit)	$	266	$	276	$	483

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



	For the Years Ended December 31,
	2016			2015			2014
Tax rate times pre-tax income	$	510		$	501		$	700
Effect of:
Tax-preferred investment income		(196	)		(197	)		(185	)
Tax credits		(28	)		(26	)		(27	)
Change in uncertain tax positions		(14	)		(2	)		(16	)
Excess tax benefits from share-based
compensation		(8	)		-			-
Other items		2			-			11
Federal income tax expense (benefit)	$	266		$	276		$	483
Effective tax rate		18%			19%			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 $182 million, $192 million and $163 million for the years ended December 31, 2016, 2015 and 2014. Tax benefits for uncertain tax positions for the year ended December 31, 2016, were primarily attributable to the release of reserves associated with prior tax years that closed during 2016. A tax benefit was also recorded for the year ended December 31, 2016, in association with the early adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. For more information, see Note 2.

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



	As of December 31,
	2016			2015
Current	$	4		$	(136	)
Deferred		(2,463	)		(1,867	)
Total federal income tax asset (liability)	$	(2,459	)	$	(2,003	)

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



	As of December 31,
	2016			2015
Deferred Tax Assets
Future contract benefits and other contract holder funds	$	1,286		$	1,494
Deferred gain on business sold through reinsurance		8			35
Reinsurance related embedded derivative asset		19			31
Compensation and benefit plans		309			265
Net operating loss carryforwards		-			12
Tax credits		85			33
Other		133			205
Total deferred tax assets	$	1,840		$	2,075
Deferred Tax Liabilities
DAC	$	1,986		$	2,064
VOBA		312			313
Net unrealized gain on AFS securities		1,646			1,116
Net unrealized gain on trading securities		68			70
Intangibles		20			117
Investment activity		108			105
Other		163			157
Total deferred tax liabilities	$	4,303		$	3,942
Net deferred tax asset (liability)	$	(2,463	)	$	(1,867	)

As of December 31, 2016, we had $85 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, 2016 and 2015, $1 million and $13 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,
	2016			2015
Balance as of beginning-of-year	$	13		$	15
Increases for prior year tax positions		-			-
Decreases for prior year tax positions		-			(2	)
Increases for current year tax positions		1			-
Decreases for settlements with taxing authorities		(1	)		-
Decreases for expiring statutes		(12	)		-
Balance as of end-of-year	$	1		$	13

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, 2016, 2015 and 2014, we recognized interest and penalty expense (benefit) related to uncertain tax positions of $(3) million, zero and $(10) million, respectively. We had accrued interest and penalty expense related to the unrecognized tax benefits of zero and $3 million as of December 31, 2016 and 2015, respectively.

We are subject to examination by U.S. federal, state, local and non-U.S. income authorities. We are currently not under examination by the Internal Revenue Service; however, tax years 2013 and forward remain open. We are currently under examination by several state and local taxing jurisdictions; however, we do not expect these examinations will materially impact us.