Income Taxes

The components of pretax (loss) income and noncontrolling interest are summarized as follows (in millions):



	Years Ended December 31,
	2015		2014			2013
Domestic	$	456.3	$	(509.7	)	$	248.7
Foreign	395.9		423.4			276.8
Total pretax (loss) income	$	852.2	$	(86.3	)	$	525.5

The provision for income taxes is summarized as follows (in millions):



	Years Ended December 31,
	2015			2014		2013
Current provision (benefit):
Federal	$	181.4		$	180.1	$	(12.9	)
States	15.9			15.2		(5.0		)
Foreign	43.3			33.7		32.5
Total current provision (benefit)	240.6			229.0		14.6
Deferred provision (benefit):
Federal	(16.7		)	17.3		51.2
States	(0.4		)	1.2		(2.7		)
Foreign	(5.0		)	0.5		22.6
Total deferred provision (benefit)	(22.1		)	19.0		71.1
Income tax benefits attributable to employee stock plan activity	—			—		—
Total provision (benefit) for income taxes	$	218.5		$	248.0	$	85.7

The provision for income taxes differs from the amount computed by applying the federal statutory rate to pretax (loss) income as follows (in millions):



	Years Ended December 31,
	2015			2014			2013
Expected (benefit) provision at 35% rate	$	298.3		$	(30.2	)	$	184.0
State taxes (benefit), net of federal benefit	8.9			9.5			(3.6		)
Foreign income at different tax rates	(68.9		)	(90.2		)	(37.7		)
R&D tax credits	(12.7		)	(17.1		)	(32.5		)
Share-based compensation	13.2			25.3			25.6
Non-deductible goodwill impairment	—			297.5			—
Gain on sale of Junos Pulse	—			75.6			—
Release of valuation allowance	—			(22.8		)	—
Settlement with tax authorities	—			—			(28.3		)
Domestic production activities	(15.1		)	(6.8		)	(26.3		)
Non-deductible compensation	3.7			3.2			1.5
Cost sharing adjustment	(13.2		)	—			—
Other	4.3			4.0			3.0
Total provision for income taxes	$	218.5		$	248.0		$	85.7

In 2015, the United States Tax Court (the “Court”) issued an opinion favorable to Altera Corporation (“Altera”) with respect to Altera’s litigation with the Internal Revenue Service (“IRS”). The litigation relates to the treatment of share-based compensation expense in an inter-company cost-sharing arrangement with Altera’s foreign subsidiary. In its opinion, the Court accepted Altera’s position of excluding share-based compensation from its inter-company cost-sharing arrangement. As a result, the Company has reversed the inclusion of share-based compensation in cost-sharing arrangement as a cumulative adjustment in the quarter ended September 30, 2015. Because this change to cost sharing increases the Company's cumulative foreign earnings, approximately $70.3 million of the gross income tax benefit associated with this change has been offset by an increase in income tax expense accrued upon the company’s foreign earnings. The Company will continue to monitor ongoing developments and potential impacts to its financial statements.

The passage of Protecting Americans from Tax Hike Act of 2015, on December 18, 2015, retroactively and permanently reinstated the U.S. federal R&D tax credit effective January 1, 2015.

In 2014, the Company provided tax on a pre-tax loss primarily due to the non-deductible goodwill charge. In 2013, the Company recorded $64.2 million of net income tax benefit related to items unique to the year. These amounts included $19.7 million for a multi-year claim related to the U.S. production activities deduction, $28.3 million for a tax settlement with the IRS, and $16.2 million of U.S. federal R&D tax credit resulting from the American Taxpayer Relief Act of 2012 signed on January 2, 2013, which retroactively reinstated the U.S. federal R&D tax credit from January 1, 2012 to December 31, 2013.

Deferred income taxes reflect the net tax effects of tax carry-forward items and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's long-term deferred tax assets and deferred tax liabilities are as follows (in millions):



	As of December 31,
	2015			2014
Deferred tax assets:
Net operating loss carry-forwards	$	1.0		$	1.3
Foreign tax credit carry-forwards	75.4			69.7
Research and other credit carry-forwards	128.7			122.5
Deferred revenue	109.3			104.9
Stock-based compensation	49.1			55.8
Cost sharing adjustment	70.1			—
Reserves and accruals not currently deductible	173.9			129.8
Other	19.2			19.8
Total deferred tax assets	626.7			503.8
Valuation allowance	(146.2		)	(144.5		)
Deferred tax assets, net of valuation allowance	480.5			359.3
Deferred tax liabilities:
Property and equipment basis differences	(44.1		)	(35.6		)
Purchased intangibles	(3.1		)	(16.7		)
Unremitted foreign earnings	(365.4		)	(260.6		)
Deferred compensation and other	(12.0		)	(5.1		)
Other	—			—
Total deferred tax liabilities	(424.6		)	(318.0		)
Net deferred tax assets⁽¹⁾	$	55.9		$	41.3

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⁽¹⁾

During the year ended December 31, 2015, the Company early adopted ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, requiring all deferred tax assets and liabilities, and any related valuation allowance, to be classified as non-current on the Consolidated Balance Sheets. Certain amounts in the prior-year Consolidated Financial Statements were retrospectively adjusted to conform to the current-year presentation.

As of December 31, 2015 and 2014, the Company had a valuation allowance on its U.S. domestic deferred tax assets of approximately $146.2 million and $144.5 million, respectively. The balance at December 31, 2015 consisted of approximately $128.1 million and $9.7 million against the Company's California and Massachusetts deferred tax assets, respectively, which the Company believes are not more likely than not to be utilized in future years. The remaining deferred tax assets on which the Company recorded a valuation allowance are approximately $8.4 million related to losses that are capital in nature and may carry forward to offset future capital gains only. The valuation allowance increased in 2015 by $1.7 million related to an increase in the California R&D tax credit and decreased $11.2 million in 2014 related to utilization of losses that are capital in nature offset by the increase in the California R&D tax credit.

As of December 31, 2015, the Company had California net operating loss carry-forwards of approximately $49.5 million of which $48.0 million is expected to expire unused. The Company also had California tax credit carry-forwards of approximately $237.1 million. Approximately $19.5 million of the benefit from the California tax credit carry-forwards will be credited to additional paid-in capital when realized on the Company's income tax returns. Unused net operating loss carry-forwards will expire at various dates beginning in the year 2016. The California tax credit carry-forwards will carry forward indefinitely.

The Company provides U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are considered indefinitely reinvested outside of the United States. The Company has made no provision for U.S. income taxes on approximately $2.2 billion of cumulative undistributed earnings of certain foreign subsidiaries through December 31, 2015. These earnings are considered indefinitely invested in operations outside of the U.S., as the Company intends to utilize these amounts to fund future expansion of its international operations. If these earnings were distributed to the United States in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

As of December 31, 2015, 2014, and 2013, the total amount of gross unrecognized tax benefits was $216.1 million, $199.2 million, and $137.6 million, respectively. As of December 31, 2015, approximately $181.8 million of the $216.1 million gross unrecognized tax benefits, if recognized, would affect the effective tax rate.

A reconciliation of the beginning and ending amount of the Company's total gross unrecognized tax benefits was as follows (in millions):



	Years Ended December 31,
	2015			2014			2013
Balance at beginning of year	$	199.2		$	137.6		$	136.1
Tax positions related to current year:
Additions	18.1			62.5			15.8
Tax positions related to prior years:
Additions	5.3			0.6			22.6
Reductions	(2.9		)	—			(2.2		)
Settlements	—			—			(31.1		)
Lapses in statutes of limitations	(3.6		)	(1.5		)	(3.6		)
Balance at end of year	$	216.1		$	199.2		$	137.6

As of December 31, 2015, 2014, and 2013, the Company had accrued interest and penalties related to unrecognized tax benefits of $24.1 million, $22.3 million, and $18.4 million, respectively, to other long-term liabilities in the Consolidated Balance Sheets. The Company recognized an expense for net interest and penalties of $2.5 million, $2.8 million, and $0.6 million in its Consolidated Statements of Operations during the years ended December 31, 2015, 2014, and 2013, respectively.

The Company engages in continuous discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. There is a greater than remote likelihood that the balance of the gross unrecognized tax benefits will decrease by approximately $18.6 million within the next twelve months due to lapses of applicable statutes of limitation and the completion of tax review cycles in various tax jurisdictions.

In 2013, the Company executed a closing agreement with the Appeals Division of the IRS related to its intercompany R&D cost sharing arrangement for the license of intangibles acquired in 2004, 2005, and 2006. The Company reached a final resolution with the IRS on all proposed adjustments for all tax years through 2006, which resulted in a settlement of approximately $19.6 million, including interest.

The Company conducts business globally and, as a result, Juniper Networks or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the Netherlands, U.K., France, Germany, Japan, China, Australia, India, and the U.S. With few exceptions, the Company is no longer subject to U.S. federal, state and local, and non-U.S. income tax examinations for years before 2004.

The Company is currently under examination by the IRS for the 2007 through 2009 tax years and the California Franchise Tax Board for the 2004 through 2006 tax years. In 2015, the IRS issued “Notices of Proposed Adjustments” related to the examination. The Company regularly assesses the likelihood of an adverse outcome resulting from such examinations. As of December 31, 2015, the Company believes the resolution of the audits will not have a material adverse impact on the financial statements.

The Company is also subject to separate ongoing examinations by the India tax authorities for the 2003 tax year, 2004 through 2008 tax years, and the 2009 through 2010 tax years. The Company is not aware of any other examinations by tax authorities in any other major jurisdictions in which it files income tax returns as of December 31, 2015.

In 2008, the Company received a proposed adjustment from the India tax authorities related to the 2004 tax year. In 2009, the India tax authorities commenced a separate investigation of the Company's 2004 through 2008 tax returns and are disputing the Company's determination of taxable income due to the cost basis of certain fixed assets. The Company accrued $4.6 million in penalties and interest in 2009 related to this matter. The Company understands that in accordance with the administrative and judicial process in India, the Company may be required to make payments that are substantially higher than the amount accrued in order to ultimately settle this issue. The Company strongly believes that any assessment it may receive in excess of the amount accrued would be inconsistent with applicable India tax laws and intends to defend this position vigorously.

The Company is pursuing all available administrative remedies relative to these matters. The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to these proposed adjustments and the ultimate resolution of these matters is unlikely to have a material effect on its consolidated financial condition or results of operations; however, there is still a possibility that an adverse outcome of these matters could have a material effect on its consolidated financial condition and results of operations.