Income Taxes

3 Months Ended

Mar. 31, 2019

8.	Income Taxes

Effective 2016, the parent holding company and subsidiaries files a consolidated federal income tax return. Tax years 2015 through 2018 are subject to examination by the IRS. Prior to 2016, consolidated federal income tax returns were filed under Federal Life as the ultimate parent.

Internal Revenue Code Section 382 (“Section 382”) limits how much of a loss carryforward can be used to offset taxable income when there is a change of ownership. The Company will be restricted in its ability to utilize loss carryforwards as a result of a 2018 change in ownership. The annual limit is estimated to be approximately $1.0 million and the total limit is estimated to be approximately $15.0 million.

The Company has recorded a net deferred tax liability of $0.1 million reflecting a deferred tax liability of $0.6 million from unrealized gains on securities offset by a $0.5 million deferred tax asset, the partial benefit of $15.0 million in loss carryforwards, of which $13.1 million expire in varying amounts between 2025 and 2032. Realization of this asset is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. A valuation allowance has been established to account for the Company’s assessment that the entire loss carryforward will likely not be recovered. Although realization of the net deferred tax asset is not assured, management believes it is more likely than not that all of the net deferred tax asset will be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

The Company had no liability for unrecognized tax benefits at March 31, 2019 or December 31, 2018 and believes it is reasonably possible that the liability will not significantly increase within the next twelve months. No amounts have been accrued for interest or penalties.

The Tax Act limits life reserves for tax purposes to the greater of net surrender value or 92.81% of required reserves. It is not estimated that this will have a meaningful impact to the net admitted assets on the Company’s balance sheet.

The federal income tax provisions differ from the amounts determined by multiplying pre-tax income attributable to the Company by the statutory federal income tax rate of 21% for March 31, 2019 and March 31, 2018, as shown below.

	Three Months Ended
	March 31,
	2019			2018
	(Dollars in thousands)
Income tax benefits at statutory rate	$	(29	)	$	(186	)
Other		27			189
Income tax (benefit) expense	$	(2	)	$	3
Effective tax rate		-1.4	%		0.3	%

Federal Life Group, Inc. 10-Q