Note 6. Income Taxes

The effective tax rate was not meaningful for the six months ended June 30, 2016, and 2015, respectively. Differences between the effective rate and the U.S. statutory rate of 35% principally were the result of the Separate Accounts dividends-received deduction (“DRD”) and the valuation allowance on net operating loss (“NOL”) carryforwards.

The Company provides for deferred income taxes resulting from temporary differences that arise from recording certain transactions in different years for income tax reporting purposes than for financial reporting purposes. The asset and liability method requires that deferred taxes be adjusted to reflect the tax rates at which future taxable amounts will be settled or realized. The Company provides for federal income taxes based on amounts it believes it will ultimately owe. Inherent in the provision for federal income taxes are estimates regarding the realization of certain tax deductions and credits.

The income tax expense (benefit) for each of the three and six months ended June 30, 2016 and 2015 was $0.

The provision for income tax asset (liability) consists of the following for the periods ended June 30, 2016 and December 31, 2015:


	June 30, 2016			December 31, 2015
Current federal income tax liability	$	(179	)	$	(179	)
Current state income tax liability		(287	)		(287	)
Deferred federal income tax liability		(1,620	)		(1,620	)
Deferred state income tax assets		1,512			1,512

Net income tax liability	$	(574	)	$	(574	)

At June 30, 2016 and December 31, 2015, the Company had a tax valuation allowance for deferred tax assets of $108,363 and $130,946, respectively (this includes losses that are anticipated to be used in the consolidated group to reflect the income statement impact of the losses that wouldn’t be used if filing separately). In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.

The Company has analyzed all material tax positions under the guidance of ASC 740, Income Taxes, related to the accounting for uncertainty in income tax, and determined there were tax benefits of $3,404 (gross $9,727) and $3,404 (gross $9,727), respectively, that should not be recognized at June 30, 2016 and December 31, 2015, which primarily relate to uncertainty regarding the sustainability of certain deductions taken on the 2008-2014 U.S. Federal income tax returns. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate in a future period. It is not anticipated that the total amounts of unrecognized tax benefits will significantly increase within twelve months of the reporting date.

The components of the change in the unrecognized tax benefits were as follows:


	June 30, 2016		December 31, 2015
	June 30, 2016		December 31, 2015

Balance at beginning of period	$	3,404	$	3,041
Additions for tax positions of prior years		-		363
Additions for tax positions of current year		-		293
Reductions for tax positions of current year		-		(293	)

Balance at end of period	$	3,404	$	3,404

At June 30, 2016 and December 31, 2015 the Company had a net operating loss carry forward for federal income tax purposes of $623,721 (net of the ASC 740 reduction of $9,727) and $577,762 (net of the ASC 740 reduction of $9,727), respectively, with a carry forward period of fifteen years that expires at various dates between 2023 and 2031. At June 30, 2016 and December 31, 2015, the Company had a capital loss carry forward of $84 and $84, respectively, for federal income tax purposes with a carry forward period of five years that will expire in 2018. At June 30, 2016 and December 31, 2015, the Company had a foreign tax credit carry forward of $9,203 and $8,869, respectively, with a carry forward period of ten years that will expire at various dates up to 2026. Also, the Company has an Alternative Minimum Tax credit carry forward for federal income tax purposes of $4,216 at June 30, 2016 and December 31, 2015, with an indefinite carry forward period.

The Company classifies interest and penalties related to income taxes as interest expense and penalty expense, respectively. The Company did not recognize any penalties in its financial statements at June 30, 2016 December 31, 2015. The Company recognized interest (income)/expense of $63 and $86 at June 30, 2016 and December 31, 2015, respectively.

The Company records taxes on a separate company basis. Effective January 1, 2013 for federal income tax purposes the Company joined in a consolidated income tax return filing with its direct parent, Transamerica Corporation, and other affiliated companies. The method of allocation between the companies is subject to a written tax allocation agreement. Under the terms of the agreement, taxes are payable to or receivable from Transamerica Corporation in amounts that would result had the Company filed a separate tax return with taxing authorities. Any tax differences between the Company’s separately calculated provision and cash flows attributable to benefits from consolidation have been recognized as capital contributions from Transamerica Corporation. At June 30, 2016 and December 31, 2015, the Company recognized capital contributions from (distributions to) Transamerica Corporation and contributions from AUSA in connection with the tax allocation agreement in the amount of ($13,489) and $68,492, respectively. Intercompany income tax balances are settled within thirty days of payment to or filing with the Internal Revenue Service.

The Company filed a separate federal income tax return for the years 2008 through 2012. The Company was part of the consolidated tax return for 2013 and 2014. An examination by the Internal Revenue Service is in progress for the years 2011 through 2013. The Company believes that there are adequate defenses against or sufficient provisions established related to any open or contested tax positions. A consolidated tax return has not been filed for 2015.