Income Taxes

6 Months Ended

Jun. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

The Company’s effective tax rate was nil and 0.9% for the three months ended June 30, 2020 and 2019, respectively. The Company’s effective tax rate was 14.2% and 2.5% for the six months ended June 30, 2020 and 2019, respectively.

The Company had a nil tax rate for the three months ended June 30, 2020. This nil tax rate is a result of an immaterial income tax expense applied to a pretax loss for the current quarter. The income tax expense is primarily due to the reversal of the net operating loss (“NOL”) benefit recorded in the quarter ended March 31, 2020. The Company is no longer forecasting a 2020 NOL due to strong equity market appreciation in the second quarter, which was a reversal of the equity market dislocation experienced in March. The NOL benefit reversal is partially offset by tax preferred items including low income housing tax credits and dividends received deduction for the three months ended June 30, 2020. The effective tax rate for the six months ended June 30, 2020 is lower than the statutory rate as a result of tax preferred items including low income housing tax credits and the dividends received deduction.

The effective tax rate for the three months ended June 30, 2019 is lower than the statutory rate as a result of lower income in the quarter relative to income expected for the full year. The effective tax rate for the six months ended June 30, 2019 is lower than the statutory rate as a result of low income housing tax credits, lower income in the quarter relative to income expected for the full year, and the dividends received deduction.

The decrease in the effective tax rate for the three months ended June 30, 2020 compared to the prior year period is primarily the result of the NOL benefit reversal, a decrease in foreign tax credits and the pretax loss. The increase in the effective tax rate for the six months ended June 30, 2020 compared to the prior year period is the result of a higher pretax income and a decrease in tax preferred items including foreign tax credits and dividends received deduction.

Included in the Company’s deferred income tax assets are tax benefits related to state net operating losses of $13 million, net of federal benefit, which will expire beginning December 31, 2020.

The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Significant judgment is required in determining if a valuation allowance should be established, and the amount of such allowance if required. Factors used in making this determination include estimates relating to the performance of the business. Consideration is given to, among other things in making this determination, (i) future taxable income exclusive of reversing temporary differences and carryforwards, (ii) future reversals of existing taxable temporary differences, (iii) taxable income in prior carryback years, and (iv) tax planning strategies. Based on analysis of the Company’s tax position, management believes it is more likely than not that the results of future operations and implementation of tax planning strategies will not allow the Company to realize certain state deferred tax assets of $2 million and state net operating losses of $9 million; therefore, a valuation allowance of $11 million has been established as of both June 30, 2020 and December 31, 2019.

As of June 30, 2020 and December 31, 2019, the Company had $38 million and $39 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $20 million and $17 million, net of federal tax benefits, of unrecognized tax benefits as of June 30, 2020 and December 31, 2019, respectively, would affect the effective tax rate.

It is reasonably possible that the total amount of unrecognized tax benefits will change in the next 12 months. The Company estimates that the total amount of gross unrecognized tax benefits will not decrease in the next 12 months.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized nil in interest and penalties for both the three months and six months ended June 30, 2020 and 2019. As of both June 30, 2020 and December 31, 2019, the Company had a payable of $2 million, related to accrued interest and penalties.

The Company files income tax returns as part of its inclusion in the consolidated federal income tax returns of Ameriprise Financial in the U.S. federal jurisdiction and various state jurisdictions. The federal statute of limitations are closed on years through 2015, except for one issue for 2014 and 2015 which was claimed on amended returns. The Internal Revenue Service (“IRS”) is currently auditing Ameriprise Financial’s U.S. income tax returns for 2016, 2017 and 2018. Ameriprise Financial’s or the Company’s state income tax returns are currently under examination by various jurisdictions for years ranging from 2010 through 2018.