Income Taxes

Sprint Corporation is the parent corporation of an affiliated group of corporations which join in the filing of a U.S. federal consolidated income tax return. Additionally, we file income tax returns in 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. Cash paid or received for income tax purposes was insignificant for all Successor and Predecessor periods presented.

Income tax expense consists of the following:



	Successor															Predecessor
	Year Ended March 31,			Three Months Ended March 31,						Year Ended December 31,			87 Days Ended December 31,			191 Days Ended July 10,			Three Months Ended March 31,			Year Ended December 31,
	2015			2014			2013 (Unaudited)			2013			2012			2013			2013 (Unaudited)			2012
				(in millions)
Current income tax (expense) benefit
Federal	$	5		$	—		$	(2	)	$	1		$	(3	)	$	2		$	(8	)	$	34
State	(39		)	(10		)	—			(13		)	—			(17		)	(6		)	22
Total current income tax (expense) benefit	(34		)	(10		)	(2		)	(12		)	(3		)	(15		)	(14		)	56
Deferred income tax benefit (expense)
Federal	491			(48		)	1			(46		)	(1		)	(1,402		)	(19		)	(199		)
State	118			2			—			14			—			(184		)	(5		)	(10		)
Total deferred income tax benefit (expense)	609			(46		)	1			(32		)	(1		)	(1,586		)	(24		)	(209		)
Foreign income tax expense	(1		)	—						(1		)	—			—			—			(1		)
Total income tax benefit (expense)	$	574		$	(56	)	$	(1	)	$	(45	)	$	(4	)	$	(1,601	)	$	(38	)	$	(154	)

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



	Successor															Predecessor
	Year Ended March 31,			Three Months Ended March 31,						Year Ended December 31,			87 Days Ended December 31,			191 Days Ended July 10,			Three Months Ended March 31,			Year Ended December 31,
	2015			2014			2013 (Unaudited)			2013			2012			2013			2013 (Unaudited)			2012
				(in millions)
Income tax benefit (expense) at the federal statutory rate	$	1,372		$	33		$	3		$	635		$	8		$	(155	)	$	212		$	1,460
Effect of:
State income taxes, net of federal income tax effect	124			(4		)	—			47			—			(18		)	16			137
State law changes, net of federal income tax effect	4			5			—			10			—			—			—			(5		)
Reduction (increase) in liability for unrecognized tax benefits	1			—			—			2			—			(7		)	—			38
Change in valuation allowance	(911		)	(82		)	—			(708		)	(4		)	(1,410		)	(265		)	(1,756		)
Other, net	(16		)	(8		)	(4		)	(31		)	(8		)	(11		)	(1		)	(28		)
Income tax benefit (expense)	$	574		$	(56	)	$	(1	)	$	(45	)	$	(4	)	$	(1,601	)	$	(38	)	$	(154	)
Effective income tax rate	14.6		%	(58.9		)%	(12.5		)%	(2.5		)%	(17.4		)%	361.4		%	(6.3		)%	(3.7		)%

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



	Successor								Predecessor
	Year Ended March 31,		Three Months Ended March 31,			Year Ended December 31,			191 Days Ended July 10,			Three Months Ended March 31,			Year Ended December 31,
	2015		2014			2013			2013			2013 (Unaudited)			2012
			(in millions)
Unrecognized net periodic pension and other postretirement benefit cost⁽¹⁾	$	—	$	—		$	(58	)	$	(18	)	$	(10	)	$	—
Unrealized holding gains/losses on securities⁽¹⁾	$	—	$	(1	)	$	(3	)	$	—		$	(1	)	$	—

_______________


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

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 March 31, 2015 and 2014, along with the income tax effect of each, were as follows:



	Successor
	March 31, 2015						March 31, 2014
	Current			Long-Term			Current			Long-Term
	(in millions)
Deferred tax assets
Net operating loss carryforwards	$	—		$	8,155		$	—		$	7,264
Tax credit carryforwards	—			381			—			374
Capital loss carryforwards	—			84			—			82
Property, plant and equipment	—			261			—			500
Debt obligations	—			419			—			598
Deferred rent	—			470			—			474
Pension and other postretirement benefits	—			385			—			252
Accruals and other liabilities	637			561			738			601
	637			10,716			738			10,145
Valuation allowance	(509		)	(8,371		)	(522		)	(7,175		)
	128			2,345			216			2,970
Deferred tax liabilities
FCC licenses	—			12,558			—			12,158
Trademarks	—			1,725			—			2,461
Intangibles	—			1,658			—			2,248
Other	66			302			88			310
	66			16,243			88			17,177
Current deferred tax asset	$	62					$	128
Long-term deferred tax liability				$	13,898					$	14,207

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 history of annual losses 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 income tax expense to increase the valuation allowance of $911 million, $82 million and $708 million for the Successor year ended March 31, 2015, three-month transition period ended March 31, 2014 and year ended December 31, 2013, respectively, and $1.4 billion, $265 million, and $1.8 billion for the Predecessor 191-day period ended July 10, 2013, unaudited three-month period ended March 31, 2013, and year ended December 31, 2012, respectively, on deferred tax assets primarily related to losses incurred during the period that are not currently realizable and expenses recorded during the period that are not currently deductible for income tax purposes. The remaining increase of $272 million in the carrying amount of the valuation allowance for the Successor year ended March 31, 2015 is primarily related to amounts recorded to other comprehensive (loss) income related to the pension net actuarial loss and net impacts of acquisition accounting for the SoftBank Merger and Clearwire Acquisition. The remaining decrease in the carrying amount of the valuation allowance for the Successor year ended December 31, 2013 is primarily related to the net impact of acquisition accounting for the SoftBank Merger and Clearwire Acquisition. For the Predecessor year ended December 31, 2012 the remaining increase in the carrying amount of the valuation allowance is primarily associated with the tax effect of items reflected in other comprehensive loss and other accounts. 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 benefit of $574 million for the Successor year ended March 31, 2015 is primarily attributable to recognition of a tax benefit on the $1.9 billion Sprint trade name impairment loss partially offset by tax expense on taxable temporary differences from the amortization of FCC licenses during the period. Income tax expense of $56 million and $45 million for the Successor three-month transition period ended March 31, 2014, and year ended December 31, 2013, respectively, and $38 million and $154 million for the Predecessor unaudited three-month period ended March 31, 2013 and year ended December 31, 2012, respectively, is primarily attributable to taxable temporary differences from amortization of FCC licenses. Income tax expense of $1.6 billion for the Predecessor 191-day period ended July 10, 2013, is primarily attributable to taxable temporary differences from the $2.9 billion gain on the previously-held equity interests in Clearwire. The gain on the previously-held equity interests in Clearwire was principally attributable to the increase in the fair value of FCC licenses held by Clearwire. 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. These temporary differences result in net deferred income tax expense since they cannot be scheduled to reverse during the loss carryforward period. In addition, during the year ended December 31, 2012, a $69 million tax benefit was recorded as a result of the successful resolution of various state income tax uncertainties.

During the Successor year ended March 31, 2015, three-month transition period ended March 31, 2014 and year ended December 31, 2013, and Predecessor 191-day period ended July 10, 2013, unaudited three-month period ended March 31, 2013, and year ended December 31, 2012, we generated $398 million, $110 million, $263 million, $238 million, $96 million, and $319 million, respectively, of foreign income, which is included in (loss) income before income taxes on the consolidated statements of operations. We have no material unremitted earnings of foreign subsidiaries.

As of March 31, 2015, we had federal operating loss carryforwards of $19.9 billion, state operating loss carryforwards of $20.6 billion and foreign net operating loss carryforwards of $797 million. Related to these loss carryforwards, we have recorded federal tax benefits of $7.0 billion, net state tax benefits of $951 million and foreign tax benefits of $266 million before consideration of the valuation allowances. Approximately $1.4 billion of the federal net operating loss carryforwards expire between 2017 and 2021. The remaining $18.5 billion expire in varying amounts between 2022 and 2035. The state operating loss carryforwards expire in varying amounts through 2035. Foreign operating loss carryforwards of $426 million do not expire. The remaining foreign operating loss carryforwards expire in varying amounts starting in 2016.

In addition, we had available, for income tax purposes, federal alternative minimum tax net operating loss carryforwards of $20.9 billion and state alternative minimum tax net operating loss carryforwards of $4.9 billion. The loss carryforwards expire in varying amounts through 2035. We also had available capital loss carryforwards of $220 million. Related to these capital loss carryforwards are tax benefits of $84 million. The capital loss carryforwards expire between 2016 and 2019.

We also had available $451 million of federal and state income tax credit carryforwards as of March 31, 2015. Included in this amount are $3 million of income tax credits which expire prior to 2017 and $320 million which expire in varying amounts between 2017 and 2035. The remaining $128 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 were $163 million and $160 million, as of the March 31, 2015 and 2014, respectively. As of March 31, 2015, the total unrecognized tax benefits included items that would favorably affect the income tax provision by $152 million, if recognized without an offsetting valuation allowance adjustment. The accrued liability for income tax related interest and penalties was insignificant for all periods presented.

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



	Successor
	Year Ended March 31,			Three Months Ended March 31,
	2015			2014
				(in millions)
Balance at beginning of period	$	160		$	166
Additions based on current year tax positions	5			—
Additions based on prior year tax positions	3			1
Reductions for prior year tax positions	(3		)	(1		)
Reductions for settlements	(1		)	—
Reductions for lapse of statute of limitations	(1		)	(6		)
Balance at end of period	$	163		$	160

Settlement agreements were reached with the Appeals or Exam division of the Internal Revenue Service (IRS) for examination issues in dispute for years prior to 2010. The issues were immaterial to our consolidated financial statements. As of March 31, 2015, there are no federal income tax examinations being handled by the IRS Exam division nor are there any issues being handled by the IRS Appeals division.

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 $20 million in our unrecognized tax benefits.

The federal and state statutes of limitations for assessment of tax liability generally lapse three and four years, respectively, after the date the tax returns are filed. However, income tax attributes that are carried forward, such as net operating loss carryforwards, may be challenged and adjusted by taxing authorities at any time prior to the expiration of the statute of limitations for the tax year in which they are utilized.