Income Taxes

9 Months Ended

Sep. 30, 2017

We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when temporary differences reverse. The effect of a change in tax rates on deferred taxes is recognized in the period that the change is enacted. A valuation allowance is recorded to reduce the Company's deferred tax assets to the amount that is more likely than not to be realized. We had no recorded valuation allowance at September 30, 2017 and December 31, 2016. Our effective tax rate was 39.4% and 37.5% for the three months ended and 32.8% and 33.4% for the nine months ended September 30, 2017 and 2016, respectively. The changes in effective tax rate are driven by the timing of the reversal of previously recorded accruals for penalties and interest related to uncertain tax positions where the applicable statute of limitations have now lapsed.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense.

At September 30, 2017 and December 31, 2016, we had a total of $5.8 million and $8.8 million in gross unrecognized tax benefits, respectively included in long-term income taxes payable in the consolidated balance sheet. Of this amount, $3.9 million and

$5.7 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate as of September 30, 2017 and December 31, 2016. The net decrease in unrecognized tax benefits was $0.1 million and an increase of $0.1 million during the three months ended September 30, 2017 and 2016, respectively. The net decrease in unrecognized tax benefits was $2.9 million and $2.0 million during the nine months ended September 30, 2017 and 2016, respectively. The net decrease during the three month periods of 2017 and 2016 was mainly due to the expiration of certain statues of limitation net of additions and settlements with respective states. The increase in the three months ended September 30, 2106 was due to the unrecognized tax benefits resulting from current year tax positions. This had the effect of decreasing and increasing the effective state tax rate during these respective three month periods. The net decrease during the nine months ended September 30, 2017 and 2016 was mainly due to the expiration of certain statutes of limitations net of additions and settlements with respective states. This had the effect of decreasing the effective state tax rate during the respective nine month periods. The total net amount of accrued interest and penalties for such unrecognized tax benefits was $1.9 million and $3.2 million at September 30, 2017 and December 31, 2016 and is included in long-term income taxes payable in the consolidated balance sheets. Income tax expense is increased each period for the accrual of interest on outstanding positions and penalties when the uncertain tax position is initially recorded. Income tax expense is reduced in periods by the amount of accrued interest and penalties associated with reversed uncertain tax positions due to lapse of applicable statute of limitations, when applicable or when a position is settled.

Net interest and penalties included in income tax expense for the three month period ended September 30, 2017 and 2016 was a net expense of approximately $0.0 million and $0.1 million, respectively. Net interest and penalties included in income tax expense for the nine month period ended September 30, 2017 and 2016 was a net benefit of approximately $1.3 million and $1.6 million, respectively. Income tax expense increased during the three months ended September 30, 2017 and 2016 due to additions for interest and penalty accruals. Income tax expense was reduced during the nine months ended September 30, 2017 and 2016 due to reversals of interest and penalties due to lapse of applicable statute of limitations and settlements, net of additions for interest and penalty accruals during the same period. These unrecognized tax benefits relate to risks associated with state income tax filing positions for our corporate subsidiaries.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2017
	(in thousands)
Balance at January 1, 2017	$	8,751
Additions based on tax positions related to current year	188
Additions for tax positions of prior years	—
Reductions for tax positions of prior years	(415		)
Reductions due to lapse of applicable statute of limitations	(2,699		)
Settlements	(17		)
Balance at September 30, 2017	$	5,808

A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. These changes could result from the expiration of the statute of limitations, examinations or other unforeseen circumstances. We do not have any outstanding litigation related to tax matters. At this time, management’s best estimate of the reasonably possible change in the amount of gross unrecognized tax benefits to be a decrease of approximately $1.3 million to a decrease of $2.3 million during the next twelve months mainly due to the expiration of certain statute of limitations, net of additions. The federal statute of limitations remains open for the years 2014 and forward. Tax years 2007 and forward are subject to audit by state tax authorities depending on the tax code and administrative practice of each state.