Note 6. Income Taxes

The effective tax rate was not meaningful for the three months ended March 31, 2018 and 2017. Differences between the effective rate and the U.S. statutory rate of 21% at March 31, 2018 and 35% at March 31, 2017 principally were the result of dividend received deductions 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.

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) (HR 1, Pub. L. 115-97), was signed into law and reduced the federal tax rate to 21%. As a result of the TCJA, the Company’s tax reserve deductible difference decreased by an estimated $4,860 on December 31, 2017. This change results in an offsetting $4,860 deductible temporary difference that will be amortized into taxable income evenly over the next eight years. This transitional change amount was based on provisional estimates at December 31, 2017. As we complete the collection, preparation and analysis of data relevant to the TCJA, and interpret any additional guidance by the IRS, U.S. Department of the Treasury, or other standard-setting organizations, we make adjustments to these provisional amounts. Actual results may differ from the estimates and will be adjusted in future periods when the actuarial models and systems are updated for the policyholder tax reserve changes required by the TCJA. No adjustments to these estimates were made as of March 31, 2018. The estimates will be finalized prior to year-end in accordance with guidance provided in SAB 118.

The income tax expense (benefit) for the three months ended March 31, 2018 and 2017 was $527 and $575, respectively.

The income tax asset (liability) consists of the following at March 31, 2018 and December 31, 2017:

	March 31,			December 31,
	2018			2017
Current federal income tax asset (liability)	$	427		$	-
Current state income tax asset (liability)		(108	)		(108	)
Deferred federal income tax asset (liability)		(2,713	)		(1,759	)
Deferred state income tax asset (liability)		(67	)		(67	)
Net income tax asset (liability)	$	(2,461	)	$	(1,934	)

At March 31, 2018 and December 31, 2017, the Company had a tax valuation allowance for deferred tax assets of $87,716 and $78,697, respectively (this includes losses that are anticipated to be used in the consolidated group to reflect the income statement impact of the losses that would not 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 that there were tax benefits of $2,637 (gross $12,557), that should not be recognized at either March 31, 2018 or December 31, 2017. These unrecognized tax benefits primarily relate to uncertainty regarding the sustainability of certain deductions taken on the 2008-2016 U.S. Federal income tax returns. To the extent these unrecognized tax benefits are ultimately recognized, they will affect the effective tax rate in a future period. The Company does not anticipate 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 at March 31, 2018 and December 31, 2017:

	March 31,		December 31,
	2018		2017
Balance at beginning of period	$	2,637	$	4,391
Additions for tax positions of prior years		-		4
Change in federal tax rate		-		(1,758	)
Balance at end of period	$	2,637	$	2,637

At March 31, 2018 and December 31, 2017, the Company had a NOL carry forward for federal income tax purposes of $543,803 (net of the ASC 740 reduction of $12,557) and $554,553 (net of the ASC 740 reduction of $12,557), respectively, with a carry forward period of 15 years that expires at various dates between 2023 and 2031. At both March 31, 2018 and December 31, 2017, the Company had a capital loss carry forward of $0 for federal income tax purposes. At March 31, 2018 and December 31, 2017, the Company had a foreign tax credit carry forward of $9,916 and $9,831, respectively, with a carry forward period of 10 years that will expire at various dates up to 2028. Also, the Company has an Alternative Minimum Tax credit carry forward for federal income tax purposes of $3,195 and $4,216 at March 31, 2018 and December 31, 2017, respectively. The Company is expecting to be refunded for the remaining balance of a minimum tax credit carryforwards by the end of 2021 pursuant to the TCJA.

The Company classifies interest and penalties related to income taxes as interest expense and penalty expense, respectively. The Company did not recognize penalty expense in its financial statements for the quarters ended March 31, 2018 and 2017. The Company recognized interest expense (income) of ($7) and $37 for the three months ended March 31, 2018 and 2017, respectively. The Company recognized total interest payable balance at March 31, 2018 and December 31, 2017 of $470 and $477, 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. At March 31, 2018 and December 31, 2017, the Company recognized capital contributions from (distributions to) TA Corp in connection with the tax allocation agreement in the amount of $15,047 and ($47,465), 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 2016. 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. The 2017 return has not yet been filed.