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. In certain state jurisdictions, Sprint and its subsidiaries intend to file combined state tax returns with certain other SoftBank affiliates beginning with the year ended March 31, 2016. State tax expense or benefit has been determined utilizing the separate return approach as if Sprint and its subsidiaries file on a stand-alone basis. 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,			Year Ended March 31,			Three Months Ended March 31,						Year Ended December 31,			191 Days Ended July 10,			Three Months Ended March 31,
	2016			2015			2014			2013 (Unaudited)			2013			2013			2013 (Unaudited)
	(in millions)
Current income tax (expense) benefit
Federal	$	13		$	5		$	—		$	(2	)	$	1		$	2		$	(8	)
State	(30		)	(39		)	(10		)	—			(13		)	(17		)	(6		)
Total current income tax (expense) benefit	(17		)	(34		)	(10		)	(2		)	(12		)	(15		)	(14		)
Deferred income tax (expense) benefit
Federal	(206		)	491			(48		)	1			(46		)	(1,402		)	(19		)
State	83			118			2			—			14			(184		)	(5		)
Total deferred income tax (expense) benefit	(123		)	609			(46		)	1			(32		)	(1,586		)	(24		)
Foreign income tax expense	(1		)	(1		)	—			—			(1		)	—			—
Total income tax (expense) benefit	$	(141	)	$	574		$	(56	)	$	(1	)	$	(45	)	$	(1,601	)	$	(38	)

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,			Year Ended March 31,			Three Months Ended March 31,						Year Ended December 31,			191 Days Ended July 10,			Three Months Ended March 31,
	2016			2015			2014			2013 (Unaudited)			2013			2013			2013 (Unaudited)
	(in millions)
Income tax (expense) benefit at the federal statutory rate	$	649		$	1,372		$	33		$	3		$	635		$	(155	)	$	212
Effect of:
State income taxes, net of federal income tax effect	38			124			(4		)	—			47			(18		)	16
State law changes, net of federal income tax effect	20			4			5			—			10			—			—
(Increase) reduction in liability for unrecognized tax benefits	(4		)	1			—			—			2			(7		)	—
Tax benefit from organizational restructuring	90			—			—			—			—			—			—
Change in valuation allowance	(939		)	(911		)	(82		)	—			(708		)	(1,410		)	(265		)
Other, net	5			(16		)	(8		)	(4		)	(31		)	(11		)	(1		)
Income tax (expense) benefit	$	(141	)	$	574		$	(56	)	$	(1	)	$	(45	)	$	(1,601	)	$	(38	)
Effective income tax rate	(7.6		)%	14.6		%	(58.9		)%	(12.5		)%	(2.5		)%	361.4		%	(6.3		)%

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



	Successor										Predecessor
	Year Ended March 31,		Year Ended March 31,		Three Months Ended March 31,			Year Ended December 31,			191 Days Ended July 10,			Three Months Ended March 31,
	2016		2015		2014			2013			2013			2013 (Unaudited)
	(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, 2016 and 2015, along with the income tax effect of each, were as follows:



	March 31, 2016			March 31, 2015
	Long-Term ⁽¹⁾			Current			Long-Term
	(in millions)
Deferred tax assets
Net operating loss carryforwards	$	8,057		$	—		$	8,155
Tax credit carryforwards	384			—			381
Capital loss carryforwards	83			—			84
Property, plant and equipment	1,230			—			261
Debt obligations	—			—			419
Deferred rent	438			—			470
Pension and other postretirement benefits	378			—			385
Accruals and other liabilities	1,376			637			561
	11,946			637			10,716
Valuation allowance	(9,793		)	(509		)	(8,371		)
	2,153			128			2,345
Deferred tax liabilities
FCC licenses	12,738			—			12,558
Trademarks	1,718			—			1,725
Intangibles	1,166			—			1,658
Debt obligations	58			—			—
Other	432			66			302
	16,112			66			16,243
Current deferred tax asset				$	62
Long-term deferred tax liability	$	13,959					$	13,898

_______________


(1)	See Note 2. Summary of Significant Accounting Policies and Other Information for early adoption of guidance regarding Balance Sheet Classification of Deferred Taxes.

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 $939 million, $911 million, $82 million and $708 million for the Successor years ended March 31, 2016 and 2015, three-month transition period ended March 31, 2014 and year ended December 31, 2013, respectively, and $1.4 billion and $265 million for the Predecessor 191-day period ended July 10, 2013 and unaudited three-month period ended March 31, 2013, 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. 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 $141 million for the Successor year ended March 31, 2016 was primarily attributable to tax expense resulting from taxable temporary differences from amortization of FCC licenses, partially offset by tax benefits from the reversal of state income tax valuation allowance on deferred tax assets and changes in state income tax laws enacted during the year. As a result of organizational restructuring, which drove a sustained increase in the profitability of specific legal entities, we revised our estimate regarding the realizability of the involved entities' deferred state tax assets and recorded a state tax benefit of $90 million. Income tax benefit of $574 million for the Successor year ended March 31, 2015 was 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 for the Predecessor unaudited three-month period ended March 31, 2013 was 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, was 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.

During the Successor years ended March 31, 2016 and 2015, three-month transition period ended March 31, 2014 and year ended December 31, 2013, and Predecessor 191-day period ended July 10, 2013 and unaudited three-month period ended March 31, 2013, we generated $343 million, $398 million, $110 million, $263 million, $238 million, and $96 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, 2016, we had federal operating loss carryforwards of $19.6 billion, state operating loss carryforwards of $20.8 billion and foreign net operating loss carryforwards of $821 million. Related to these loss carryforwards, we have recorded federal tax benefits of $6.9 billion, net state tax benefits of $969 million and foreign tax benefits of $273 million before consideration of the valuation allowances. Approximately $1.1 billion of the federal net operating loss carryforwards expire between fiscal years 2016 and 2020. The remaining $18.5 billion expire in varying amounts between fiscal years 2021 and 2034. The state operating loss carryforwards expire in varying amounts through fiscal year 2035. Foreign operating loss carryforwards of $427 million do not expire. The remaining foreign operating loss carryforwards expire in varying amounts starting in fiscal year 2016.

In addition, we had available, for income tax purposes, federal alternative minimum tax net operating loss carryforwards of $20.6 billion and state alternative minimum tax net operating loss carryforwards of $4.8 billion. The loss carryforwards expire in varying amounts through fiscal year 2034. We also had available capital loss carryforwards of $217 million. Related to these capital loss carryforwards are tax benefits of $83 million. Approximately $213 million of the capital loss carryforwards expire prior to fiscal year 2017. The remaining $4 million expire in varying amounts between fiscal years 2017 and 2018.

We also had available $459 million of federal and state income tax credit carryforwards as of March 31, 2016. Included in this amount are $3 million of income tax credits which expire prior to fiscal year 2017 and $354 million which expire in varying amounts between fiscal years 2017 and 2035. The remaining $102 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 unrecognized tax benefits attributable to uncertain tax positions were $166 million and $163 million, as of the March 31, 2016 and 2015, respectively. As of March 31, 2016, the unrecognized tax benefits included items that would favorably affect the income tax provision by $155 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 was as follows:



	Years Ended March 31,
	2016			2015
	(in millions)
Balance at beginning of period	$	163		$	160
Additions based on current year tax positions	—			5
Additions based on prior year tax positions	5			3
Reductions for prior year tax positions	—			(3		)
Reductions for settlements	—			(1		)
Reductions for lapse of statute of limitations	(2		)	(1		)
Balance at end of period	$	166		$	163

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, 2016, 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.