Income Taxes

Sprint Corporation is the parent 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 file combined tax returns with certain other SoftBank affiliated entities. 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 is immaterial. Cash paid, net of refunds received, for income tax purposes for the years ended March 31, 2019, 2018 and 2017 was $40 million, $25 million and $22 million, respectively.

The U.S. federal statutory tax rates for the years ended March 31, 2019, 2018 and 2017 were 21%, 31.5% and 35%, respectively. The Tax Cuts and Jobs Act (the Tax Act) enacted in December 2017 reduced the corporate income tax rate effective January 1, 2018. The differences that caused our effective income tax rates to differ from the U.S. federal statutory rates for the years ended March 31, 2019, 2018 and 2017, respectively, were as follows:



	Year Ended March 31,
	2019			2018			2017
	(in millions)
Income tax benefit (expense) at the federal statutory rate	$	415		$	(95	)	$	270
Effect of:
State income taxes, net of federal income tax effect	(15		)	(43		)	24
State law changes, net of federal income tax effect	85			9			4
Increase liability for unrecognized tax benefits	(8		)	(29		)	(14		)
Increase deferred tax liability for business activity changes	—			(89		)	—
Credit for increasing research activities	17			15			15
Tax expense from organizational restructuring	(13		)	—			(118		)
Change in federal and state valuation allowance⁽¹⁾	(8		)	224			(615		)
Tax benefit from the Tax Act	—			7,088			—
Non-deductible penalties	(29		)	—			—
Goodwill impairment	(408		)	—			—
Other, net	(1		)	(6		)	(1		)
Income tax benefit (expense)	$	35		$	7,074		$	(435	)
Effective income tax rate	1.8		%	(2,334.7		)%	(56.4		)%

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(1)	Exclusive of $2.1 billion federal and state release included in Tax benefit from the Tax Act line for the year ended March 31, 2018.

Income tax benefit (expense) consists of the following:



	Year Ended March 31,
	2019			2018			2017
	(in millions)
Current income tax (expense) benefit
Federal	$	—		$	22		$	50
State	(45		)	(58		)	(50		)
Total current income tax expense	(45		)	(36		)	—
Deferred income tax (expense) benefit
Federal	(33		)	7,234			(284		)
State	118			(115		)	(149		)
Total deferred income tax benefit (expense)	85			7,119			(433		)
Foreign income tax expense	(5		)	(9		)	(2		)
Total income tax benefit (expense)	$	35		$	7,074		$	(435	)

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



	Year Ended March 31,
	2019		2018			2017
	(in millions)
Unrecognized net periodic pension and other postretirement benefit cost⁽¹⁾	$	12	$	9		$	(24	)
Unrealized holding gains (losses) on derivatives⁽¹⁾	$	6	$	(6	)	$	—
Unrealized holding gains on securities⁽¹⁾	$	7	$	—		$	—

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

Income tax benefit of $35 million for the year ended March 31, 2019 was primarily attributable to the impact of state law changes enacted during the period, partially offset by expense attributable to organizational restructuring. These adjustments were primarily driven by the change in carrying value of our deferred tax assets and liabilities on temporary differences. In addition, the effective tax rate was impacted by non-deductible penalties related to litigation with the State of New York that was settled during the period and $1.9 billion of the $2.0 billion non-cash impairment charge related to goodwill as substantially all of the charge is not separately deductible for tax purposes.

Income tax benefit of $7.1 billion for the year ended March 31, 2018 was primarily attributable to the impact of the Tax Act. We recognized a $7.1 billion non-cash tax benefit through net income (loss) for the re-measurement of deferred tax assets and liabilities due to changes in tax laws included in the Tax Act. This re-measurement of deferred taxes had no impact on cash flows.

The re-measurement was driven by two provisions in the Tax Act. First as a result of the corporate tax rate reduction from 35% to 21%, we recognized a $5.0 billion non-cash tax benefit through income from continuing operations for the re-measurement of our deferred tax assets and liabilities. Secondly, the Tax Act included a provision whereby net operating losses generated in tax years beginning after December 31, 2017 may be carried forward indefinitely. 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. The provision in the Tax Act, modifying the carryforward period of net operating losses, changed our assessment as to the ability to recognize deferred tax assets on certain deductible temporary differences projected to be realized in tax years with an indefinite-lived carryforward period. In assessing the ability to realize these deferred tax assets, we considered taxable temporary differences from indefinite-lived assets, such as FCC licenses, to be an available source of future taxable income. This source of income was not previously considered because it could not be scheduled to reverse in the same period as the definite-lived deductible temporary differences. As a result of this change in assessment, we recognized a $2.1 billion non-cash tax benefit through income from continuing operations to reduce our valuation allowance.

Income tax expense of $435 million for the year ended March 31, 2017 was primarily attributable to taxable temporary differences from the tax amortization of FCC licenses and tax expense of $136 million on pre-tax gains from spectrum license exchanges which increased our deferred tax liability on FCC license temporary differences. In addition, we increased our state income tax valuation allowance by $89 million as a result of a shift in operations among wholly-owned subsidiaries and an organizational restructuring that occurred during the year.

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 net 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, 2019 and 2018, along with the income tax effect of each, were as follows:



	March 31,
	2019			2018
	(in millions)
Deferred tax assets
Net operating loss carryforwards	$	5,478		$	4,116
Tax credit carryforwards	241			244
Property, plant and equipment	900			2,192
Debt obligations	—			64
Deferred rent	247			231
Pension and other postretirement benefits	209			219
Accruals and other liabilities	791			913
	7,866			7,979
Valuation allowance	(4,504		)	(4,745		)
	3,362			3,234
Deferred tax liabilities
FCC licenses	8,968			8,877
Trademarks	1,129			1,131
Intangibles	147			298
Deferred commissions	401			—
Debt obligations	15			—
Other	258			222
	10,918			10,528

Long-term deferred tax liability	$	7,556		$	7,294

The Tax Act, enacted in December 2017, made broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (3) eliminating corporate alternative minimum tax; and (4) new tax rules related to foreign operations. In accordance with ASC Topic 740, Income Taxes and Staff Accounting Bulletin No. 118 (SAB 118), we made a reasonable estimate of the impacts of the Tax Act and recorded the estimate in the period ended December 31, 2017. SAB 118 allows for a measurement period not to extend beyond one year from the date of enactment to complete the accounting for the impacts of the Tax Act. As of December 31, 2018, our analysis under SAB 118 was completed, including, but not limited to, the re-measurement of deferred tax assets and liabilities. Our analysis resulted in no material adjustments to the provisional estimate recorded in the period ended December 31, 2017.

During the years ended March 31, 2019, 2018, and 2017, we generated $(61) million, $(109) million, and $204 million, respectively, of foreign (loss) income, which is included in "Income (loss) before income taxes" in the consolidated statements of operations. We have no material unremitted earnings of foreign subsidiaries.

As of March 31, 2019, we had federal net operating loss carryforwards of $21.3 billion, state net operating loss carryforwards of $16.3 billion and foreign net operating loss carryforwards of $392 million. Related to these loss carryforwards, we have recorded federal tax benefits of $4.5 billion, net state tax benefits of $937 million and foreign tax benefits of $145 million before consideration of the valuation allowances. Approximately $411 million of the federal net operating loss carryforwards expire between fiscal years 2019 and 2023, $13.6 billion expire between fiscal years 2024 and 2034 and $7.3 billion do not expire. Approximately $15.9 billion of state net operating loss carryforwards expire in varying amounts through fiscal year 2038 and approximately $402 million do not expire. Foreign net operating loss carryforwards of $22 million do not expire. The remaining foreign net operating loss carryforwards expire in varying amounts between fiscal years 2019 and 2037.

We also had available $356 million of federal and state income tax credit carryforwards as of March 31, 2019. Included in this amount are $22 million of income tax credits which expire prior to fiscal year 2020 and $296 million which expire in varying amounts between fiscal years 2020 and 2038. The remaining $38 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 $242 million and $239 million, as of the March 31, 2019 and 2018, respectively. As of March 31, 2019, the unrecognized tax benefits included items that would favorably affect the income tax provision by $221 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:



	Year Ended March 31,
	2019			2018
	(in millions)
Balance at beginning of period	$	239		$	190
Additions based on current year tax positions	17			21
Additions based on prior year tax positions	12			53
Reductions for prior year tax positions	(23		)	(24		)
Reductions for lapse of statute of limitations	(3		)	(1		)
Balance at end of period	$	242		$	239

We are not currently under examination by the U.S. Internal Revenue Service. 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/judicial review or appellate process. Based on our current knowledge of the examinations, administrative/judicial reviews and appellate processes, we believe it is reasonably possible uncertain tax positions may be resolved during the next twelve months which could result in a reduction of up to $18 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.