INCOME TAXES

Prior period amounts in the tables below have been revised to correct previously reported amounts. These prior period revisions have also been reflected in the consolidated financial statements. See Note 16 for a more detailed description of the revisions.

The components of income tax expense (benefit) for the years ended December 31, were as follows:



	2016			2015			2014
	(in thousands)
Current tax expense (benefit):
U.S. Federal	$	(99,443	)	$	105,992		$	112,742
State and local	49			129			0
Total	(99,394		)	106,121			112,742
Deferred tax expense (benefit):
U.S. Federal	25,525			(116,762		)	24,327
Total	25,525			(116,762		)	24,327
Total income tax expense (benefit) from operations	(73,869		)	(10,641		)	137,069
Total income tax expense (benefit) reported in equity related to:
Other comprehensive income (loss)	3,322			(61,322		)	65,717
Additional paid-in capital	587			(6,560		)	(6,507		)
Total income tax expense (benefit)	$	(69,960	)	$	(78,523	)	$	196,279

In July 2014, the IRS issued guidance relating to the hedging of variable annuity guaranteed minimum benefits (“Hedging IDD”). The Hedging IDD provides an elective safe harbor tax accounting method for certain contracts which permits the current deduction of losses and the deferral of gains for hedging activities that can be applied to open years under IRS examination beginning with the earliest open year. The Company applies this tax accounting method for hedging gains and losses covered by the Hedging IDD beginning with 2013. As a result of applying such accounting method in 2014, the Company's 2014 U.S. current tax expense includes a tax benefit of $15 million and a corresponding reduction of deferred tax assets.

The Company’s actual income tax expense (benefit) for the years ended December 31, differs from the expected amount computed by applying the statutory federal income tax rate of 35% to income from operations before income taxes for the following reasons:



	2016			2015			2014
	(in thousands)
Expected federal income tax expense	$	112,472		$	174,077		$	320,866
Non-taxable investment income	(146,324		)	(161,407		)	(152,844		)
Tax credits	(30,916		)	(24,232		)	(32,881		)
Domestic production activities deduction, net	(9,488		)	0			0
Other	387			921			1,928
Total income tax expense (benefit) from operations	$	(73,869	)	$	(10,641	)	$	137,069

The dividends received deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and accounts for most of the non-taxable investment income shown in the table above, and as a result, is a major reason for the difference between the Company’s effective tax rate and the federal statutory tax rate of 35%. The DRD for the current period was estimated using information from 2015 and current year results, and was adjusted to take into account the current year’s equity market performance. The actual current year DRD can vary from the estimate based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD. Additionally, there remains the possibility that the IRS and the U.S. Treasury will address, through subsequent guidance, the issues related to the calculation of the DRD. For the last several years, the revenue proposals included in the Obama Administration’s budgets included a proposal that would change the method used to determine the amount of the DRD. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through guidance or legislation, could increase actual tax expense and reduce the Company’s consolidated net income.

Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table:



	2016			2015
	(in thousands)
Deferred tax assets
Insurance reserves	$	148,115		$	1,668,038
Other	1,966			1,442
Deferred tax assets	150,081			1,669,480
Deferred tax liabilities
Deferred policy acquisition costs	45,405			1,398,775
Deferred sales inducements	0			239,695
Net unrealized gains on securities	24,949			23,991
Investments	171,303			69,163
Deferred tax liabilities	241,657			1,731,624
Net deferred tax asset (liability)	$	(91,576	)	$	(62,144	)

The application of U.S. GAAP requires the Company to evaluate the recoverability of deferred tax assets and establish a valuation allowance if necessary to reduce the deferred tax asset to an amount that is more likely than not expected to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance the Company considers many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) in which tax jurisdictions they were generated and the timing of their reversal; (4) taxable income in prior carryback years as well as projected taxable earnings exclusive of reversing temporary differences and carryforwards; (5) the length of time that carryovers can be utilized in the various taxing jurisdictions; (6) any unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, net of valuation allowances, will be realized. The Company had no valuation allowance as of December 31, 2016 and 2015. Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount of deferred tax asset that is realizable.

The Company’s income (loss) from operations before income taxes includes income (loss) from domestic operations of $321 million, $497 million and $917 million for the years ended December 31, 2016, 2015 and 2014, respectively.

The Company’s liability for income taxes includes the liability for unrecognized tax benefits and interest that relate to tax years still subject to review by the IRS or other taxing authorities. The completion of review or the expiration of the Federal statute of limitations for a given audit period could result in an adjustment to the liability for income taxes.

The Company’s unrecognized tax benefits for the years ended December 31 are as follows:



	2016		2015		2014
	(in thousands)
Balance at January 1,	$	0	$	0	$	0
Increases in unrecognized tax benefits-prior years	4,744		0		0
(Decreases) in unrecognized tax benefits-prior years	0		0		0
Increases in unrecognized tax benefits-current year	4,744		0		0
(Decreases) in unrecognized tax benefits-current year	0		0		0
Settlements with taxing authorities	0		0		0
Balance at December 31,	$	9,488	$	0	$	0
Unrecognized tax benefits that, if recognized, would favorably impact the effective rate	$	9,488	$	0	$	0

The Company does not anticipate any significant changes within the next twelve months to its total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.

The Company classifies all interest and penalties related to tax uncertainties as income tax expense (benefit).

At December 31, 2016, the Company remains subject to examination in the U.S. for tax years 2009 through 2015.

The Company is participating in the IRS’s Compliance Assurance Program. Under this program, the IRS assigns an examination team to review completed transactions as they occur in order to reach agreement with the Company on how they should be reported in the relevant tax returns. If disagreements arise, accelerated resolution programs are available to resolve the disagreements in a timely manner before the tax returns are filed.