10. Income Taxes and Accounting for Uncertainty in Income Taxes

Income Taxes

Our income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported on our Consolidated Balance Sheets, as well as probable operating loss, tax credit and other carryforwards. Deferred tax assets are offset by valuation allowances when we believe it is more likely than not that net deferred tax assets will not be realized. We periodically evaluate our need for a valuation allowance. Determining necessary valuation allowances requires us to make assessments about historical financial information as well as the timing of future events, including the probability of expected future taxable income and available tax planning opportunities.

We file consolidated tax returns in the United States. The income taxes of domestic and foreign subsidiaries not included in the United States tax group are presented in our consolidated financial statements on a separate return basis for each tax paying entity.

As of December 31, 2017, we had no net operating loss carryforwards (“NOLs”) for federal income tax purposes and $32 million of NOL carryforwards for state income tax purposes, which are partially offset by a valuation allowance. In addition, there are $71 million of tax benefits related to credit carryforwards which are partially offset by a valuation allowance. Portions of the NOL and credit carryforwards will expire in 2018.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) was enacted making significant changes to the Internal Revenue Code. Such changes include, but are not limited to, a reduction in the corporate tax rate and certain limitations on corporate deductions (e.g., a limitation on the interest expense deduction available to companies). The Tax Reform Act, among other things, lowered the federal statutory corporate tax rate effective for us in future periods from 35% to 21%. Consequently, we remeasured our deferred tax assets and liabilities as of December 31, 2017 which positively impacted our “Income tax (provision) benefit, net” by approximately $1.2 billion.

The components of the (benefit from) provision for income taxes were as follows:


	For the Years Ended December 31,
	2017		2016		2015
	(In thousands)
Current (benefit) provision:
Federal	$	(71,141)	$	317,010	$	147,771
State		38,058		31,160		20,045
Foreign		3,736		10,840		(3,089)
Total current (benefit) provision		(29,347)		359,010		164,727

Deferred (benefit) provision:
Federal		(547,575)		469,927		197,441
State		69,076		35,418		19,963
Foreign		—		—		—
Increase (decrease) in valuation allowance		(7,474)		1,463		11,039
Total deferred (benefit) provision		(485,973)		506,808		228,443
Total (benefit) provision	$	(515,320)	$	865,818	$	393,170

Our $1.650 billion of “Income (loss) before income taxes” on our Consolidated Statements of Operations and Comprehensive Income (Loss) included a loss of $1 million related to our foreign operations.

The following table shows the principal reasons for the difference between the effective income tax rate and the statutory federal tax rate:


	For the Years Ended December 31,
	2017	2016	2015
	% of pre-tax income/(loss)
Statutory rate	35.0	35.0	35.0
State income taxes, net of federal benefit	3.0	2.5	3.5
Reversal of uncertain tax positions	—	(0.8)	(0.3)
Amounts reclassified from accumulated other comprehensive income (loss) (1)	—	—	(5.1)
Tax Reform Act (2)	(72.6)	—	—
Nondeductible/Nontaxable items (3)	5.9	—	—
Other, net	(2.5)	(0.9)	(1.3)
Total (benefit) provision for income taxes	(31.2)	35.8	31.8

(1)

Our effective tax rate for the year ended December 31, 2015 was favorably impacted by a $63 million credit that was previously recorded in “Accumulated other comprehensive income (loss)” and was released to our income tax provision during the year ended December 31, 2015. Prior to December 31, 2012, we had established a valuation allowance against all deferred tax assets that were capital in nature. At December 31, 2012, it was determined that these deferred tax assets were realizable and the valuation allowance was released, including the valuation allowance related to a specific portfolio of available-for-sale securities for which changes in fair value had historically been recognized as a separate component of “Accumulated other comprehensive income (loss).” Under the intra-period tax allocation rules, a credit of $63 million was recorded in “Accumulated other comprehensive income (loss)” on our Consolidated Balance Sheets related to the release of this valuation allowance. We elected to use the aggregate portfolio method to determine when the $63 million would be released from “Accumulated other comprehensive income (loss)” to “Income tax (provision) benefit, net” on our Consolidated Statements of Operations and Comprehensive Income (Loss). Under the aggregate portfolio approach, the intra-period tax allocation remaining in “Accumulated other comprehensive income (loss)” is not released to “Income tax (provision) benefit, net” until such time that the specific portfolio of available-for-sale securities that generated the original intra-period allocation is liquidated. During the first quarter 2015, this specific available-for-sale security portfolio was liquidated and the $63 million credit that was previously recorded in “Accumulated other comprehensive income (loss)” was released to “Income tax (provision) benefit, net.”

(2)

On December 22, 2017, the Tax Reform Act was enacted, which, among other things, lowered the federal statutory corporate tax rate effective for us in future periods from 35% to 21%. Consequently, we remeasured our deferred tax assets and liabilities as of December 31, 2017 which positively impacted our “Income tax (provision) benefit, net” by approximately $1.2 billion.

(3)

During the year ended December 31, 2017, we recorded $255 million of “Litigation expense” related to the FTC Action on our Consolidated Statements of Operations and Comprehensive Income (Loss). Any eventual payments made with respect to the FTC Action may not be deductible for tax purposes, which had a negative impact on our effective tax rate for the year ended December 31, 2017. The tax deductibility of any eventual payments made with respect to the FTC Action may change, based upon, among other things, further developments in the FTC Action, including final adjudication of the FTC Action. See Note 14 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information.

Deferred taxes arise because of the differences in the book and tax bases of certain assets and liabilities. Significant components of deferred tax assets and liabilities were as follows:


	As of December 31,
	2017		2016
		(In thousands)
Deferred tax assets:
NOL, credit and other carryforwards	$	55,505	$	60,840
Accrued expenses		41,439		58,701
Stock-based compensation		14,904		17,705
Unrealized (gains) losses on available for sale and other investments		5,001		10,827
Deferred revenue		15,236		19,064
Total deferred tax assets		132,085		167,137
Valuation allowance		(18,642)		(26,116)
Deferred tax asset after valuation allowance		113,443		141,021

Deferred tax liabilities:
Depreciation		(496,873)		(854,317)
FCC authorizations and other intangible amortization		(1,220,421)		(1,361,742)
Bases difference in partnerships and cost method investments (1)		(328,735)		(241,193)
Discount on convertible notes and convertible note hedge transaction, net		(81,346)		(47,908)
Other liabilities		(5,606)		(21,386)
Total deferred tax liabilities		(2,132,981)		(2,526,546)
Net deferred tax asset (liability)	$	(2,019,538)	$	(2,385,525)

(1)

Included in this line item are deferred taxes related to, among other things, our non-controlling investments in Northstar Spectrum and SNR HoldCo, including deferred taxes created by the tax amortization of the Northstar Licenses and SNR Licenses.

Accounting for Uncertainty in Income Taxes

In addition to filing federal income tax returns, we and one or more of our subsidiaries file income tax returns in all states that impose an income tax and a small number of foreign jurisdictions where we have immaterial operations. We are subject to United States federal, state and local income tax examinations by tax authorities for the years beginning in 2005 due to the carryover of previously incurred NOLs. We are currently under a federal income tax examination for fiscal years 2008 through 2012.

A reconciliation of the beginning and ending amount of unrecognized tax benefits included in “Long-term deferred revenue, distribution and carriage payments and other long-term liabilities” on our Consolidated Balance Sheets was as follows:


	For the Years Ended December 31,
Unrecognized tax benefit	2017		2016		2015
		(In thousands)
Balance as of beginning of period	$	358,023	$	336,586	$	208,328
Additions based on tax positions related to the current year		12,798		40,492		135,937
Additions based on tax positions related to prior years		30,596		21,797		22,483
Reductions based on tax positions related to prior years		(2,754)		(34,106)		(22,697)
Reductions based on tax positions related to settlements with taxing authorities		(1,634)		(3,628)		(2,648)
Reductions based on tax positions related to the lapse of the statute of limitations		(3,113)		(3,118)		(4,817)
Balance as of end of period	$	393,916	$	358,023	$	336,586

We have $394 million in unrecognized tax benefits that, if recognized, could favorably affect our effective tax rate. We do not expect any material portion of this amount to be paid or settled within the next twelve months.

Accrued interest and penalties on uncertain tax positions are recorded as a component of “Interest expense, net of amounts capitalized” and “Other, net,” respectively, on our Consolidated Statements of Operations and Comprehensive Income (Loss). During the year ended December 31, 2017, 2016 and 2015, we recorded $13 million, $11 million and $3 million in net interest and penalty expense to earnings, respectively. Accrued interest and penalties were $40 million and $27 million at December 31, 2017 and 2016, respectively. The above table excludes these amounts.