

NOTE 12		Income Taxes

Net deferred tax assets and liabilities as of December 31, 2018 and 2017 are as follows:



Deferred tax assets and liabilities
Table	12.1
(In thousands)		2018			2017
Total deferred tax assets		$	83,082		$	258,663
Total deferred tax liabilities		(13,898		)	(24,282		)
Net deferred tax asset		$	69,184		$	234,381

Table 12.2 includes the components of the net deferred tax asset as of December 31, 2018 and 2017.



Deferred tax components
Table	12.2
(In thousands)		2018			2017
Unearned premium reserves		$	31,808		$	29,196
Benefit plans		(5,047		)	(7,162		)
Federal net operating loss		—			155,839
Loss reserves		3,113			4,994
Unrealized depreciation (appreciation) in investments		9,407			(7,782		)
Mortgage investments		8,307			8,963
Deferred compensation		8,662			7,265
AMT credit carryforward		17,521			37,017
Other, net		(4,587		)	6,051
Net deferred tax asset		$	69,184		$	234,381

We used the remaining balance of our Federal net operating loss carryforward to offset taxable income during 2018. We believe that all gross deferred tax assets at December 31, 2018 are fully realizable and no valuation allowance has been established.

Table 12.3 summarizes the components of the provision for (benefit from) income taxes:



Provision for (benefit from) income taxes
Table	12.3
(In thousands)		2018			2017		2016
Current Federal		$	(16,272	)	$	73,348	$	9,470
Deferred Federal		185,598			351,677		160,657
Other		4,727			3,710		2,070
Provision for income taxes		$	174,053		$	428,735	$	172,197

Our income tax expense for 2017 reflects the remeasurement of our net deferred tax assets to reflect the lower corporate tax rate of 21% under the Tax Act. As a result of the lower tax rate, we recorded a decrease to our net deferred tax assets of $133 million with a corresponding increase to our deferred income tax expense for the year ended December 31, 2017.

Current federal income tax payments were $12.2 million, $22.0 million, and $4.5 million in 2018, 2017 and 2016, respectively.

Table 12.6 reconciles the federal statutory income tax rate to our effective tax provision rate.



Effective tax rate reconciliation
Table	12.6
		2018		2017		2016
Federal statutory income tax rate		21.0	%	35.0	%	35.0	%
Additional income tax provision related to the rate decrease included in the Tax Act		—	%	17.0	%	—	%
Additional income tax provision related to IRS litigation		(0.3	)%	3.7	%	0.1	%
Tax exempt municipal bond interest		(0.7	)%	(1.4	)%	(1.9	)%
Other, net		0.6	%	0.4	%	0.3	%
Effective tax rate		20.6	%	54.7	%	33.5	%

As previously disclosed, the Internal Revenue Service ("IRS") completed examinations of our federal income tax returns for the years 2000 through 2007 and issued proposed assessments for taxes, interest and penalties related to our treatment of the flow-through income and loss from an investment in a portfolio of residual interests of Real Estate Mortgage Investment Conduits ("REMICs").

In 2014, we received Notices of Deficiency (commonly referred to as "90 day letters") from the IRS. We filed a petition with the U.S. Tax Court contesting most of the IRS' proposed adjustments reflected in the Notices of Deficiency. In July 2018, we finalized an agreement with the IRS to settle all issues in the examinations and related U.S. Tax Court case; the settlement was approved by the U.S. Tax Court on July 26, 2018. As a result of our settlement, we made federal tax and interest payments of $14.8 million during 2018. We also made state tax and interest payments of $36.8 million during 2018. The impact of the agreed upon settlement was previously reflected in our consolidated statements of operations.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is shown in table 12.7.



Unrecognized tax benefits reconciliation
Table	12.7
(In thousands)		2018			2017			2016
Balance at beginning of year		$	142,821		$	108,245		$	107,120
Additions for tax positions of prior years		—			35,003			1,125
Reductions for tax positions of prior years		(3,070		)	(427		)	—
Settlements		(139,751		)	—			—
Balance at end of year		$	—		$	142,821		$	108,245

With the approval of our settlement by the U.S. Tax Court, we have no unrecognized tax benefits at December 31, 2018. We recognize interest accrued and penalties related to unrecognized tax benefits in income taxes. During 2018, we recognized an interest benefit of $3.1 million. As of December 31, 2017, we had $52.0 million of accrued interest related to uncertain tax positions. The statute of limitations related to the consolidated federal income tax return is closed for all years prior to 2015.