Note 6. Income Taxes

The effective tax rate was not meaningful for the three months ended March 31, 2017 or 2016. Differences between the effective rate and the U.S. statutory rate of 35% principally were the result of dividend received deductions (“DRD”) on the Separate Accounts, the valuation allowance on net operating loss (“NOL”) carryforwards and unrecognized tax benefits.

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 the three months ended March 31, 2017 and 2016 was $575 and $0.

The income tax asset (liability) consists of the following at March 31, 2017 and December 31, 2016:

	March 31,		December 31,
	2017		2016
Current federal income tax asset (liability)	$	-	$	-
Current state income tax asset (liability)		1		1
Deferred federal income tax asset (liability)		-		-
Deferred state income tax asset (liability)		-		575
Net income tax asset (liability)	$	1	$	576

At March 31, 2017 and December 31, 2016, the Company had a tax valuation allowance for deferred tax assets of $145,235 and $154,440, 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 $4,391 (gross $12,547), that should not be recognized at March 31, 2017 and December 31, 2016, which primarily relate to uncertainty regarding the sustainability of certain deductions taken on the 2008-2015 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.

During the fourth quarter of 2016, the Company modified its calculation of dividends that are eligible for the DRD. This resulted in recording a permanent tax benefit of $7,391 in the Company’s 2016 financial statements for years 2011-2015. This has been treated as a change in estimate.

The components of the change in the unrecognized tax benefits were as follows at March 31, 2017 and December 31, 2016:

	March 31,		December 31,
	2017		2016
Balance at beginning of period	$	4,391	$	3,404
Additions for tax positions of prior years		-		987
Balance at end of period	$	4,391	$	4,391

At March 31, 2017 and December 31, 2016, the Company had a NOL carry forward for federal income tax purposes of $583,013 (net of the ASC 740 reduction of $12,547) and $627,860 (net of the ASC 740 reduction of $12,547), respectively, with a carry forward period of fifteen years that expires at various dates between 2023 and 2031. At both March 31, 2017 and December 31, 2016, the Company had a capital loss carry forward of $84 for federal income tax purposes with a carry forward period of five years that will expire in 2018. At March 31, 2017 and December 31, 2016, the Company had a foreign tax credit carry forward of $9,943 and $9,776, respectively, with a carry forward period of ten years that will expire at various dates up to 2027. Also, the Company has an Alternative Minimum Tax credit carry forward for federal income tax purposes of $4,216 at both March 31, 2017 and December 31, 2016, 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 for the three months ended March 31, 2017 and 2016. The Company recognized interest expense (income) of $37 and $45 for the three months ended March 31, 2017 and 2016, respectively. The total interest payable balance at March 31, 2017 and December 31, 2016 was $199 and $161, respectively.

The Company records taxes on a separate company basis. For federal income tax purposes, the Company joins in a consolidated income tax return filing with its direct parent, TA Corp, 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 TA Corp 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 TA Corp. For the three months ended March 31, 2017 and year ended December 31, 2016, the Company recognized capital contributions from (distributions to) TA Corp in connection with the tax allocation agreement in the amount of ($13,400) and ($13,381), 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 through 2015. 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.