Income Taxes and Accounting for Uncertainty in Income Taxes

12 Months Ended

Dec. 31, 2019

Income Taxes and Accounting for Uncertainty in Income Taxes

Income Taxes and Accounting for Uncertainty in Income Taxes

11.    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, 2019, we had $28 million net operating loss carryforwards (“NOLs”) for federal income tax purposes and $43 million of NOL carryforwards for state income tax purposes, which are partially offset by a valuation allowance. In addition, there are $114 million of tax benefits related to credit and interest carryforwards which are partially offset by a valuation allowance. Portions of the state NOL and credit carryforwards will expire in 2020.

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 January 1, 2018 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,
	2019		2018		2017
	(In thousands)
Current (benefit) provision:
Federal	$	173,326	$	44,451	$	(71,141)
State		43,579		29,918		38,058
Foreign		6,203		4,616		3,736
Total current (benefit) provision		223,108		78,985		(29,347)
Deferred (benefit) provision:
Federal		204,403		383,096		(547,575)
State		21,732		64,000		69,076
Increase (decrease) in valuation allowance		2,115		7,603		(7,474)
Total deferred (benefit) provision		228,250		454,699		(485,973)
Total (benefit) provision	$	451,358	$	533,684	$	(515,320)

Our $1.944 billion of “Income (loss) before income taxes” on our Consolidated Statements of Operations and Comprehensive Income (Loss) included income of $13 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,
	2019	2018	2017
	% of pre-tax income/(loss)
Statutory rate	21.0	21.0	35.0
State income taxes, net of federal benefit	3.2	4.6	3.0
Tax Reform Act (1)	—	—	(72.6)
Nondeductible/Nontaxable items (2)	—	—	5.9
Other, net	(1.0)	(1.2)	(2.5)
Total (benefit) provision for income taxes	23.2	24.4	(31.2)

(1) 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.

(2) 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 15 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,
	2019		2018
	(In thousands)
Deferred tax assets:
NOL, interest, credit and other carryforwards	$	368,545	$	114,227
Accrued and prepaid expenses		8,488		—
Stock-based compensation		19,821		21,323
Unrealized (gains) losses on available for sale and other investments		4,137		4,918
Deferred revenue		17,238		18,361
Total deferred tax assets		418,229		158,829
Valuation allowance		(28,359)		(26,244)
Deferred tax asset after valuation allowance		389,870		132,585
Deferred tax liabilities:
Depreciation		(583,374)		(443,128)
Accrued and prepaid expenses		—		(8,662)
FCC authorizations and other intangible amortization		(2,040,885)		(1,635,385)
Bases difference in partnerships and cost method investments (1)		(573,548)		(447,585)
Discount on convertible notes and convertible note hedge transaction, net		(62,718)		(72,732)
Total deferred tax liabilities		(3,260,525)		(2,607,492)
Net deferred tax asset (liability)	$	(2,870,655)	$	(2,474,907)

(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 2008 due to the carryover of previously incurred NOLs. We are currently under a federal income tax examination for fiscal years 2008 through 2016.

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

	For the Years Ended December 31,
Unrecognized tax benefit	2019		2018		2017
	(In thousands)
Balance as of beginning of period	$	385,394	$	393,916	$	358,023
Additions based on tax positions related to the current year		244,257		10,350		12,798
Additions based on tax positions related to prior years		61,909		1,670		30,596
Reductions based on tax positions related to prior years		(13,028)		(6,291)		(2,754)
Reductions based on tax positions related to settlements with taxing authorities		(2,362)		(8,328)		(1,634)
Reductions based on tax positions related to the lapse of the statute of limitations		(1,963)		(5,923)		(3,113)
Balance as of end of period	$	674,207	$	385,394	$	393,916

We have $370 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. During the year ended December 31, 2019, we recorded $274 million of additional uncertain tax benefits related to a tax position for certain provisions of the Tax Reform Act. Federal Tax Regulations expected to be released in 2020 are expected to resolve these uncertainties. The position relates to a timing difference and any resolution with respect to the position would not impact our effective tax rate. 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 years ended December 31, 2019, 2018 and 2017, we recorded $22 million, $13 million and $13 million in net interest and penalty expense to earnings, respectively. Accrued interest and penalties were $75 million and $53 million at December 31, 2019 and 2018, respectively. The above table excludes these amounts.