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Income Taxes | 12 Months Ended
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Dec. 31, 2016
Income Tax Disclosure [Abstract] |
Income Taxes | 15. Income Taxes The provisions (benefits) for income taxes for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):
|  | Years Ended December 31,
|  | 2016 |  | 2015 |  | 2014
Current: Federal |  | $ | 20,937 |  |  | $ | 361 |  |  | $ | 5,527 |
State |  | 2,103 |  |  | 1,215 |  |  | 1,600 |
Foreign |  | 1,462 |  |  | 644 |  |  | 227 |
Subtotal Current |  | 24,502 |  |  | 2,220 |  |  | 7,354 |
Deferred: Federal |  | 26,735 |  |  | (12,604 | ) |  | (28,092 | )
State |  | 444 |  |  | (99 | ) |  | (2,131 | )
Foreign |  | (43 | ) |  | (399 | ) |  | — |
Subtotal Deferred |  | 27,136 |  |  | (13,102 | ) |  | (30,223 | )
Income tax (benefit) expense |  | $ | 51,638 |  |  | $ | (10,882 | ) |  | $ | (22,869 | )
The US and foreign components of income (loss) from continuing operations before income taxes for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):
|  | Years Ended December 31,
|  | 2016 |  | 2015 |  | 2014
US |  | $ | (71,626 | ) |  | $ | (66,038 | ) |  | $ | (41,351 | )
Foreign |  | 25,833 |  |  | 19,415 |  |  | 6,796 |
Loss from continuing operations before income taxes |  | $ | (45,793 | ) |  | $ | (46,623 | ) |  | $ | (34,555 | )
The provision for (benefit from) income taxes differed from the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes due to the following items for the years ended December 31, 2016, 2015 and 2014 (in thousands).
|  | Years Ended December 31,
|  | 2016 |  | 2015 |  | 2014
Tax provision (benefit) at federal statutory rate |  | $ | (16,027 | ) |  | $ | (16,318 | ) |  | $ | (13,027 | )
Permanent differences |  | 1,635 |  |  | (272 | ) |  | 335 |
State tax (net of federal benefit) |  | 1,843 |  |  | 1,068 |  |  | 1,170 |
Foreign rate differential |  | 1,504 |  |  | 287 |  |  | (838 | )
Foreign withholding taxes (net of federal) |  | — |  |  | 1,229 |  |  | 231 |
Executive and stock compensation |  | 1,439 |  |  | 1,044 |  |  | 2,701 |
Adjustment to net operating losses |  | — |  |  | (1,104 | ) |  | — |
Increase (decrease) in valuation allowance |  | 57,830 |  |  | 2,949 |  |  | (17,520 | )
Transaction costs |  | 1,189 |  |  | 473 |  |  | 2,106 |
Tax credits generated/utilized |  | (386 | ) |  | (185 | ) |  | — |
199 Manufacturing deduction |  | — |  |  | — |  |  | (594 | )
Bargain purchase gain |  | — |  |  | — |  |  | (496 | )
Officer life insurance proceeds |  | — |  |  | — |  |  | (392 | )
Foreign E&P |  | — |  |  | — |  |  | 3,395 |
Outside basis difference |  | 2,655 |  |  | — |  |  | — |
Other |  | (44 | ) |  | (53 | ) |  | 60 |
Income tax (benefit) expense |  | $ | 51,638 |  |  | $ | (10,882 | ) |  | $ | (22,869 | )
For the year ended December 31, 2016, the Company’s effective tax rate was unfavorably impacted by the establishment of valuation allowances totaling $57.8 million, primarily attributed to management’s conclusion that it was more-likely-than-not that the deferred tax assets of our HC2 U.S. consolidated group and the Insurance Company would not be realized. For the year ended December 31, 2014, the Company’s effective tax rate was favorably impacted by the release of valuation allowances totaling $17.5 million attributed to management’s conclusion that it is more-likely-than-not that the deferred tax assets of our U.S. consolidated group would be realized. Deferred income taxes reflect the net income tax effect of temporary differences between the basis of assets and liabilities for financial reporting purposes and for income tax purposes. Net deferred tax balances are comprised of the following as of December 31, 2016 and 2015 (in thousands):
|  | December 31,
|  | 2016 |  | 2015
Deferred tax assets |  | $ | 257,231 |  |  | $ | 230,838 |
Valuation allowance |  | (138,044 | ) |  | (68,104 | )
Deferred tax liabilities |  | (133,383 | ) |  | (114,504 | )
Net deferred taxes |  | $ | (14,196 | ) |  | $ | 48,230 |
|  | December 31,
|  | 2016 |  | 2015
Allowance for bad debt |  | $ | 151 |  |  | $ | 234 |
Basis difference in intangibles |  | (11,924 | ) |  | (8,402 | )
Equity investments |  | 6,877 |  |  | 6,158 |
Net operating loss carryforwards |  | 43,080 |  |  | 34,484 |
Basis difference in fixed assets |  | (8,616 | ) |  | 854 |
Deferred compensation |  | 11,375 |  |  | 6,765 |
Foreign tax credit |  | 1,190 |  |  | 1,190 |
Capital loss carryforwards |  | 1,381 |  |  | 1,241 |
Insurance company investments |  | (86,811 | ) |  | (99,645 | )
Foreign earnings |  | (11,748 | ) |  | (6,458 | )
UK trading loss carryforward |  | 50,151 |  |  | 54,642 |
Unrealized gain/loss in OCI |  | 3,930 |  |  | 1,177 |
Insurance claims and reserves |  | 95,883 |  |  | 99,945 |
Value of insurance business acquired ("VOBA") |  | 16,712 |  |  | 17,837 |
Start-up cost |  | 1,778 |  |  | 1,924 |
Deferred acquisition cost |  | 5,248 |  |  | — |
Other |  | 5,191 |  |  | 4,388 |
Valuation allowance |  | (138,044 | ) |  | (68,104 | )
Total deferred taxes |  | $ | (14,196 | ) |  | $ | 48,230 |
Deferred tax assets refer to assets that are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets in essence represent future savings of taxes that would otherwise be paid in cash. The realization of the deferred tax assets is dependent upon the generation of sufficient future taxable income, including capital gains. If it is determined that the deferred tax assets cannot be realized, a valuation allowance must be established, with a corresponding charge to net income. In accordance with ASC Topic 740, the Company establishes valuation allowances for deferred tax assets that, in its judgment are not more likely-than-not realizable. These judgments are based on projections of future income or loss and other positive and negative evidence by individual tax jurisdiction. Changes in industry and economic conditions and the competitive environment may impact these projections. In accordance with ASC Topic 740, during each reporting period the Company assesses the likelihood that its deferred tax assets will be realized and determines if adjustments to its valuation allowances are appropriate. As a result of this assessment for the year ended December 31, 2016, the Company had an establishment of a valuation allowance to earnings of $57.8 million. Management evaluated the need for a valuation allowance against the deferred tax assets of the HC2 U.S. consolidated tax group (“the group”) for each of the reporting periods based on the available positive and negative evidence available. An important aspect of objective negative evidence evaluated was the group’s historical operating results over the prior three-year period. The group is in a cumulative three year loss and during the fiscal quarter ended December 31, 2016, the Company made downward adjustments to its near term financial projections. The revised forecasts, coupled with a less favorable financial result for 2016 (as compared to previous forecasts) created a greater level of negative evidence during the fiscal quarter ended December 31, 2016 as compared to prior periods. The objective evidence presented by the cumulative losses in recent years and less favorable 2016 results coupled with the recent downward adjustments to the projections is difficult to overcome and would require a substantial amount of objectively verifiable positive evidence of future income to support the realizability of the group’s deferred tax assets. While positive evidence exists by way of unrealized gains in the Company’s investments and the repatriation of foreign earnings, management concluded that the negative evidence now outweighs the positive evidence. Thus, it is more likely than not that the group’s US deferred tax assets will not be realized. Management evaluated the need for a valuation allowance against the deferred taxes of the Insurance Companies for each of the reporting periods. Included in this assessment was the Insurance Companies’ historical operating results over the prior three-year period. Additional positive and negative evidence was considered including the timing of the reversal of the deferred tax assets and liabilities, and projections of future income from the runoff of the insurance business. Based on the weight of the positive and negative evidence, Management concluded that it is more likely than not that the insurance companies’ net deferred tax assets will not be realized. Valuation allowances have been maintained against deferred tax assets of the European entities, including GMSL’s UK non-tonnage tax trading losses, and losses generated by certain businesses that do not qualify to be included in the HC2 U.S. consolidated income tax return. On December 24, 2015, the Company completed its acquisition of the long-term care and life insurance businesses, United Teacher Associates Insurance Company ("UTA") and Continental General Insurance Company ("CGI"), pursuant to an agreement ("Stock Purchase Agreement") with subsidiaries of American Financial Group, Inc. ("AFG”). The Company made a joint election with AFG under Section 338(h)(10) to treat the stock purchase as an asset purchase for U.S. Federal income tax purposes. The Company's resulting step-down in the tax basis of the invested assets of UTA and CGI (primarily fixed income securities) is reflected in the above deferred tax liability of $99.6 million for differences between the fair value and tax basis of the insurance company investments. The Company estimates that none of the goodwill that was recorded will be deductible for income tax purposes. As of December 31, 2016, the Company had foreign operating loss carryforwards of approximately $297.4 million and $1.1 million of foreign NOLs that expire between 2020 and 2025. Of the foreign NOLs $230.1 million were generated by GMSL’s historical non-tonnage tax operations. At December 31, 2016, the Company has U.S. net operating loss carryforwards available to reduce future taxable income in the amount of $95.3 million, of which $77.8 million is subject to an annual limitation under Section 382 of the Internal Revenue Code. Additionally, the Company has $21.6 million of U.S. net operating loss carryforwards from its subsidiaries that do not qualify to be included in the HC2 U.S. consolidated income tax return. Pursuant to the rules under Section 382, the Company believes that it underwent an ownership change on May 29, 2014. This conclusion is based on an analysis of Schedule 13D and Schedule 13G filings over the prior three years made with the SEC and the impact resulting from the May 29 preferred stock issuance. Due to the Section 382 limit resulting from the ownership change, approximately $146.2 million of the Company’s net operating losses will expire unused. The $146.2 million in expiring NOLs have been derecognized in the consolidated financial statements as of December 31, 2014. The remaining pre-change NOL’s of $46.1 million recorded in the consolidated financial statements are subject to an annual limitation under IRC Sec. 382 of approximately $2.3 million. On November 4, 2015, HC2 issued 8,452,500 shares of its stock in a primary offering which the Company believes resulted in a Section 382 ownership change resulting in an additional annual limitation to the cumulative NOL carryforward of the HC2 U.S. consolidated tax group. The amount of the annual limitation is based on a number of factors, including the value of HC2’s stock and the amount of unrealized gains on the date of the ownership change. The Company follows the provision of ASC No. 740-10, “Income Taxes” which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. The Company is subject to challenge from various taxing authorities relative to certain tax planning strategies, including certain intercompany transactions as well as regulatory taxes. Reconciliations of the period January 1, 2014 to December 31, 2014, January 1, 2015 to December 31, 2015 and January 1, 2016 to December 31, 2016 balances of unrecognized tax benefits are as follows (in thousands):
|  | Years Ended December 31,
|  | 2016 |  | 2015 |  | 2014
Balance at January 1, |  | $ | — |  |  | $ | — |  |  | $ | 35,196 |
Foreign currency adjustments |  | — |  |  | — |  |  | — |
Statute expiration |  | — |  |  | — |  |  | — |
Gross increases (decreases) of tax positions in prior period |  | — |  |  | — |  |  | (35,196 | )
Audit resolution |  | — |  |  | — |  |  | — |
Gross increases of tax positions in current period |  | — |  |  | — |  |  | — |
Balance at December 31, |  | $ | — |  |  | $ | — |  |  | $ | — |
The decrease in 2014 to unrecognized tax benefits is due to the permanent impairment and de-recognition of NOLs under the May 2014, Section 382 limitation that were created by the uncertain positions. The Company did not have any unrecognized tax benefits as of December 31, 2016, related to uncertain tax positions. The Company conducts business globally, and as a result, HC2 or one or more of its subsidiaries files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. Tax years 2002-2016 remain open for examination. The Company is currently under examination in various domestic and foreign tax jurisdictions. The open tax years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the applicability of income tax credits for the relevant tax period. Given the nature of tax audits there is a risk that disputes may arise.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 + Details
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