
Note 10.	Income Taxes

Income tax (expense) benefit consists of the following:



	Year Ended December 31,
	2011			2010			2009
	(in millions)
Current income tax (expense) benefit
Federal	$	(1	)	$	48		$	279
State	(20		)	15			13
Total current income tax (expense) benefit	(21		)	63			292
Deferred income tax (expense) benefit
Federal	(136		)	(270		)	963
State	(95		)	40			(196		)
Total deferred income tax (expense) benefit	(231		)	(230		)	767
Foreign income tax (expense) benefit	(2		)	1			(1		)
Total income tax (expense) benefit	$	(254	)	$	(166	)	$	1,058

The differences that caused our effective income tax rates to vary from the 35% federal statutory rate for income taxes were as follows:



	Year Ended December 31,
	2011			2010			2009
	(in millions)
Income tax benefit at the federal statutory rate	$	923		$	1,155		$	1,223
Effect of:
State income taxes, net of federal income tax effect	80			118			93
State law changes, net of federal income tax effect	(38		)	—			(6		)
Reduction in liability for unrecognized tax benefits	(1		)	18			83
Tax expense related to equity awards	(13		)	(42		)	(33		)
Change in valuation allowance	(1,221		)	(1,418		)	(281		)
Other, net	16			3			(21		)
Income tax (expense) benefit	$	(254	)	$	(166	)	$	1,058
Effective income tax rate	(9.6		)%	(5.0		)%	30.3		%

Income tax (expense) benefit allocated to other items was as follows:



	Year Ended December 31,
	2011			2010		2009
	(in millions)
Unrecognized net periodic pension and other postretirement benefit cost⁽¹⁾	$	—		$	5	$	(87	)
Unrealized holding gains/losses on securities⁽¹⁾	(1		)	1		(9		)
Stock ownership, purchase and option arrangements⁽²⁾	—			—		(56		)

_______________


(1)	These amounts have been recognized in accumulated other comprehensive loss.


(2)	These amounts have been recorded directly to shareholders' equity-paid-in capital on the consolidated balance sheets.

Deferred income taxes are recognized for the temporary differences between the carrying amounts of our assets and liabilities for financial statement purposes and their tax bases. Deferred tax assets are also recorded for operating loss, capital loss and tax credit carryforwards. The sources of the differences that give rise to the deferred income tax assets and liabilities as of December 31, 2011 and 2010, along with the income tax effect of each, were as follows:



	December 31, 2011						December 31, 2010
	Current			Long-Term			Current			Long-Term
	(in millions)
Deferred tax assets
Net operating loss carryforwards	$	—		$	3,873		$	—		$	3,318
Capital loss carryforwards	—			52			—			51
Accruals and other liabilities	461			1,094			445			1,073
Tax credit carryforwards	—			471			—			473
Pension and other postretirement benefits	—			324			—			238
	461			5,814			445			5,153
Valuation allowance	(284		)	(3,580		)	(210		)	(2,355		)
	177			2,234			235			2,798
Deferred tax liabilities
Property, plant and equipment	—			1,527			—			1,792
Intangibles	—			6,720			—			6,611
Investments	—			855			—			1,065
Other	47			118			50			132
	47			9,220			50			9,600
Current deferred tax asset	$	130					$	185
Long-term deferred tax liability				$	6,986					$	6,802

The realization of deferred tax assets, including net operating loss carryforwards, is dependent on the generation of future taxable income sufficient to realize the tax deductions, carryforwards and credits. However, our recent history of consecutive annual losses, in addition to the uncertainty concerning the forecasted income beyond 2011, reduces our ability to rely on expectations of future income in evaluating the ability to realize our deferred tax assets. Valuation allowances on deferred tax assets are recognized if it is determined that it is more likely than not that the asset will not be realized. As a result, the Company recognized an increase in the valuation allowance of $1.3 billion and $1.6 billion for the years ended December 31, 2011 and 2010, respectively, on deferred tax assets primarily related to federal and state net operating loss carryforwards generated during the period. The increase in the carrying amount of Sprint's valuation allowance for the years ended December 31, 2011 and 2010 in excess of amounts recognized as a change in the valuation allowance in the current period income tax expense is primarily associated with the tax effect of items reflected in other comprehensive income, other accounts, and the expiration of net operating loss and tax credit carryforwards. We do not expect to record significant tax benefits on future net operating losses until our circumstances justify the recognition of such benefits.

We believe it is more likely than not that our remaining deferred income tax assets, net of the valuation allowance, will be realized based on current income tax laws and expectations of future taxable income stemming from the reversal of existing deferred tax liabilities. Uncertainties surrounding income tax law changes, shifts in operations between state taxing jurisdictions and future operating income levels may, however, affect the ultimate realization of all or some of these deferred income tax assets.

Income tax expense of $254 million and $166 million for the years ended December 31, 2011 and 2010, respectively, is primarily attributable to taxable temporary differences from amortization of FCC licenses. FCC licenses are amortized over 15 years for income tax purposes but, because these licenses have an indefinite life, they are not amortized for financial statement reporting purposes. This difference results in net deferred income tax expense since the taxable temporary difference cannot be scheduled to reverse during the loss carryforward period. In addition, during 2011, a $59 million expense was recorded as a result of the effect of changes in corporate state income tax laws. Of the $59 million, $38 million was recognized within "State income taxes, net of federal income tax effect" and $21 million was recognized as "Change in valuation allowance" in the table above.

During 2011, 2010 and 2009, we incurred $194 million, $210 million, and $(3) million, respectively, of foreign income (loss), which is included in loss before income taxes. We have no material unremitted earnings of foreign subsidiaries. Cash was paid for income taxes, net, of $35 million and $31 million in 2011 and 2009, respectively. Cash refunds for income taxes were received, net, of $139 million in 2010.

In 1998, we acquired $229 million of potential tax benefits related to net operating loss carryforwards in the controlling interest acquisition of our wireless joint venture, which we call the PCS Restructuring. The benefits acquired in the PCS Restructuring are subject to certain realization restrictions under various tax laws. We are required to reimburse the former cable company partners of the joint venture for net operating loss and tax credit carryforward benefits generated before the PCS Restructuring if realization by us produces a cash benefit that would not otherwise have been realized. The reimbursement will equal 60% of the net cash benefit received by us and will be made to the former cable company partners in shares of our stock. As of December 31, 2011, the unexpired carryforward benefits subject to this requirement total $59 million and we maintained a valuation allowance on the entire amount of these tax benefits.

As of December 31, 2011, we had federal operating loss carryforwards of $9.5 billion and state operating loss carryforwards of $14.4 billion. Related to these loss carryforwards, we have recorded federal tax benefits of $3.2 billion and net state tax benefits of $650 million before consideration of the valuation allowances. Approximately $545 million of the federal net operating loss carryforwards expire between 2016 and 2019. The remaining $9.0 billion expire in varying amounts between 2020 and 2031. The state operating loss carryforwards expire in varying amounts through 2031.

In addition, we had available, for income tax purposes, federal alternative minimum tax net operating loss carryforwards of $9.7 billion and state alternative minimum tax net operating loss carryforwards of $2.4 billion. The loss carryforwards expire in varying amounts through 2031. We also had available capital loss carryforwards of $144 million. Related to these capital loss carryforwards are tax benefits of $52 million. Capital loss carryforwards of $109 million expire in 2013 and the remaining $35 million expire in 2014 and 2015.

We also had available $471 million of federal and state income tax credit carryforwards as of December 31, 2011. Included in this amount are $23 million of income tax credits which expire prior to 2015 and $296 million which expire in varying amounts between 2015 and 2031. The remaining $152 million do not expire.

Unrecognized tax benefits are established for uncertain tax positions based upon estimates regarding potential future challenges to those positions at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. These estimates are updated at each reporting date based on the facts, circumstances and information available. Interest related to these unrecognized tax benefits is recognized in interest expense. Penalties are recognized as additional income tax expense. The total unrecognized tax benefits attributable to uncertain tax positions as of December 31, 2011 and 2010 were $225 million and $228 million, respectively. At December 31, 2011, the total unrecognized tax benefits included items that would favorably affect the income tax provision by $187 million, if recognized without an offsetting valuation allowance adjustment. As of December 31, 2011 and 2010, the accrued liability for income tax related interest and penalties was $26 million and $28 million, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2011			2010
	(in millions)
Balance at January 1	$	228		$	284
Additions based on current year tax positions	4			1
Additions based on prior year tax positions	4			13
Reductions for prior year tax positions	(1		)	(21		)
Reductions for settlements	(2		)	(38		)
Reductions for lapse of statute of limitations	(8		)	(11		)
Balance at December 31	$	225		$	228

We file income tax returns in the U.S. federal jurisdiction and each state jurisdiction which imposes an income tax. We also file income tax returns in a number of foreign jurisdictions. However, our foreign income tax activity has been immaterial.

The Internal Revenue Service (IRS) is currently conducting an examination of our 2007, 2008 and 2009 consolidated income tax returns. Settlement agreements were reached with the Appeals division of the IRS for examination issues in dispute for years prior to 2007. The issues were immaterial to our consolidated financial position and results of operations.

We are involved in multiple state income tax examinations related to various years beginning with 1996, which are in various stages of the examination, administrative review or appellate process. Based on our current knowledge of the examinations, administrative reviews and appellate processes, we believe it is reasonably possible a number of our uncertain tax positions may be resolved during the next twelve months which could result in a reduction of up to $85 million in our unrecognized tax benefits.