INCOME TAXES

The benefit from income taxes consists of the following:

	2018			2017			2016
Current:
Federal	$	(209,000	)	$	(2,570,000	)	$	(268,000	)
State		(90,000	)		(6,000	)		(30,000	)
		(299,000	)		(2,576,000	)		(298,000	)
Deferred:
Federal		(18,577,000	)		(3,854,000	)		(1,369,000	)
State		(664,000	)		(720,000	)		(268,000	)
		(19,241,000	)		(4,574,000	)		(1,637,000	)
	$	(19,540,000	)	$	(7,150,000	)	$	(1,935,000	)

The difference between the statutory federal income tax rate and the Company’s effective rate is summarized below:

	2018			2017			2016

Statutory federal income tax rate		24.3	%		34.0	%		34.0	%
State franchise taxes (net of federal tax benefit)		5.7			6.2			5.2
Revalue of deferred taxes due to federal rate change		176.0			---			---
Effect of federal rate change on beginning net deferred tax liabilities		(34.0	)		---			---
Business meals/gifts/other permanent differences		(0.4	)		(0.8	)		(2.3	)
Domestic production activity deduction and deferred revenue		(0.9	)		---			---
Dividends received deduction		5.8			10.0			24.5
Reversal of uncertain and unrecognized tax position		---			37.6			---
Penalties for uncertain and unrecognized tax benefits		---			2.0			---
Prior year true-up		(1.8	)		1.0			(2.0	)
Foreign tax credits		---			2.0			4.0
Effect of state rate change on beginning balance of deferred tax liabilities		(0.7	)		(0.3	)		1.4
Others		(1.7	)		(3.0	)		0.2
Effective tax rate		172.3	%		88.7	%		65.0	%

The Company’s deferred income tax assets and liabilities were comprised of the following:

	2018			2017
Deferred tax assets attributable to:
Accrued liabilities, including supplemental compensation and vacation pay accrual	$	(106,000	)	$	(69,000	)
Impairment losses on investments		2,215,000			1,376,000
Bad debt reserves not yet deductible		42,000			62,000
Depreciation and amortization		4,446,000			5,977,000
Deferred revenues		745,000			1,431,000
Net operating losses		4,643,000			3,100,000
Credits and other		455,000			1,303,000
Total deferred tax assets		12,440,000			13,180,000

Deferred tax liabilities attributable to:
Unrealized gains on investments		(42,151,000	)		(64,550,000	)
Goodwill		(290,000	)		(311,000	)
Total deferred tax liabilities		(42,441,000	)		(64,861,000	)
Net deferred income taxes	$	(30,001,000	)	$	(51,681,000	)

The Tax Act reduced the maximum corporate income tax rate from

35%

21%,

effective

January 1, 2018.

The Company has completed its review of the Tax Act. The impact to its financial statements is as follows: (i) current income tax expense or benefit is calculated using a blended rate of

24.28%

pursuant to IRC Section

15,

(ii) deferred tax expense includes a discrete net tax benefit of approximately

$16

million resulting from a revaluation of deferred tax assets and liabilities to the expected tax rate that will be applied when temporary differences are expected to reverse, (iii) items that were expected to reverse during fiscal

2018

were valued at the blended rate of

24.28%

while temporary differences that will reverse after fiscal

2018

were valued at the

21%

rate, and (iv) approximately

$20

million of the revaluation of deferred taxes relates to items that were initially recorded as accumulated other comprehensive income (“AOCI”). This revaluation of approximately

$20

million was recorded as a component of income tax expense or benefit in continuing operations.

During fiscal

2018,

the Company recorded an income tax benefit of

$19,540,000

on a pretax loss of

$11,339,000.

The effective tax rate (before the discrete Tax Act item discussed above) was greater than the statutory rate primarily due to the dividends received deduction which increases the loss for tax purposes.

On a pretax loss of

$8,068,000

for fiscal

2017,

the Company recorded an income tax benefit of

$7,150,000

which included a reversal of an accrued liability of approximately

$2,665,000

for uncertain and unrecognized tax benefits relating to an acquisition in fiscal

2013.

The Internal Revenue Service (“IRS”) concluded its examination of the Company’s fiscal

2014

income tax return with

proposed changes to the tax position that gave rise to this liability. As a result, this liability was reversed along with the related accrued interest and penalty expense of

$743,000.

In addition, a deferred tax liability, in the amount of

$352,000,

relating to temporary differences that would only exist if the uncertain tax position was never recognized, was reversed. The effective tax rate (before the discrete IRS item) was greater than the statutory rate mainly resulting from the dividends received deduction.

On a pretax loss of

$2,978,000

for fiscal

2016,

the Company recorded an income tax benefit of

$1,935,000.

The effective tax rate was greater than the statutory rate mainly resulting from the dividends received deduction. The Company’s effective tax rate was

172%,

89%

and

65%

for fiscal

2018,

2017

and

2016,

respectively.

The Company files consolidated federal income tax returns in the United States and with various state jurisdictions and is

longer subject to examinations for fiscal years before fiscal

2015

with regard to federal income taxes and fiscal

2013

for state income taxes.

The Company has federal and state income tax net operating losses (“NOLs”). A portion of the fiscal

2017

federal and state NOLs were carried back to previous years. As of

September 30, 2018,

the Company had federal, California and other state NOL carryforwards of

$18.5

million,

$6.2

million and

4.3

million, respectively. These NOLs will expire at various dates from fiscal

2036

through

2038,

as follows:

Fiscal year ended	Federal NOL		California NOL		Other State NOL
	(in millions)
September 30, 2036	$	.8	$	---	$	---
September 30, 2037		6.5		.7		1.5
September 30, 2038		11.2		5.5		2.8

The Company believes it is more likely than

not

that the benefit of these NOLs will be realized in the future. Consequently, the Company has

not

provided a valuation allowance.