Income Taxes

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



	Years Ended December 31,
	2016		2015		2014
Domestic	$	466.2	$	456.3	$	(509.7	)
Foreign	361.2		395.9		423.4
Total pretax income (loss)	$	827.4	$	852.2	$	(86.3	)

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



	Years Ended December 31,
	2016			2015			2014
Current provision:
Federal	$	121.4		$	181.4		$	180.1
States	10.3			15.9			15.2
Foreign	46.0			43.3			33.7
Total current provision	177.7			240.6			229.0
Deferred provision (benefit):
Federal	57.2			(16.7		)	17.3
States	4.3			(0.4		)	1.2
Foreign	(4.5		)	(5.0		)	0.5
Total deferred provision (benefit)	57.0			(22.1		)	19.0
Total provision for income taxes	$	234.7		$	218.5		$	248.0

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



	Years Ended December 31,
	2016			2015			2014
Expected provision (benefit) at 35% rate	$	289.6		$	298.3		$	(30.2	)
State taxes, net of federal benefit	8.9			8.9			9.5
Foreign income at different tax rates	(53.4		)	(68.9		)	(90.2		)
R&D tax credits	(16.8		)	(12.7		)	(17.1		)
Share-based compensation	10.5			13.2			25.3
Non-deductible goodwill impairment	—			—			297.5
Gain on sale of Junos Pulse	—			—			75.6
Release of valuation allowance	(0.7		)	—			(22.8		)
Domestic production activities	(9.5		)	(15.1		)	(6.8		)
Non-deductible compensation	2.4			3.7			3.2
Cost sharing adjustment^(*)	—			(13.2		)	—
Other	3.7			4.3			4.0
Total provision for income taxes	$	234.7		$	218.5		$	248.0

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^(*)	Represents cumulative impact through fiscal year 2014 for the change in treatment of share-based compensation as a result of the U.S. Tax Court decision in Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015).

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 its 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. In 2016, the IRS filed an appeal to the Altera decision rendered by the Court, which appeal is currently pending. The Company will continue to monitor ongoing developments and potential impacts to its financial statements.

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,
	2016			2015
Deferred tax assets:
Net operating loss carry-forwards	$	23.8		$	1.0
Research and other credit carry-forwards	137.5			128.7
Deferred revenue	125.6			109.3
Stock-based compensation	52.3			49.1
Cost sharing adjustment	69.9			70.1
Reserves and accruals not currently deductible	141.3			173.9
Other	12.8			19.2
Total deferred tax assets	563.2			551.3
Valuation allowance	(154.4		)	(146.2		)
Deferred tax assets, net of valuation allowance	408.8			405.1
Deferred tax liabilities:
Property and equipment basis differences	(58.1		)	(44.1		)
Purchased intangibles	(28.8		)	(3.1		)
Unremitted foreign earnings	(311.4		)	(290		)
Deferred compensation and other	(11.0		)	(12.0		)
Total deferred tax liabilities	(409.3		)	(349.2		)
Net deferred tax (liabilities) assets	$	(0.5	)	$	55.9

As of December 31, 2016 and 2015, the Company had a valuation allowance on its U.S. domestic deferred tax assets of approximately $154.4 million and $146.2 million, respectively. The balance at December 31, 2016 consisted of approximately $134.8 million and $11.9 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 of approximately $7.7 million related to losses that are capital in nature and may carry forward to offset future capital gains only. The valuation allowance increased in 2016 and 2015 by $8.2 million and $1.7 million, respectively, primarily related to the change in California and Massachusetts R&D tax credits.

As of December 31, 2016, the Company had federal and California net operating loss carry-forwards of approximately $55.9 million and $111.4 million, respectively. The California net operating loss carry-forwards of $111.4 million are expected to expire unused. The Company also had federal and California tax credit carry-forwards of approximately $2.7 million and $246.5 million, respectively. Approximately $20.8 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 2017. 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 $2.4 billion of cumulative undistributed earnings of certain foreign subsidiaries through December 31, 2016. 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, 2016, 2015, and 2014, the total amount of gross unrecognized tax benefits was $223.1 million, $216.1 million, and $199.2 million, respectively. As of December 31, 2016, approximately $194.7 million of the $223.1 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,
	2016			2015			2014
Balance at beginning of year	$	216.1		$	199.2		$	137.6
Tax positions related to current year:
Additions	27.2			18.1			62.5
Tax positions related to prior years:
Additions	1.0			5.3			0.6
Reductions	(4.1		)	(2.9		)	—
Settlements	(14.3		)	—			—
Lapses in statutes of limitations	(2.8		)	(3.6		)	(1.5		)
Balance at end of year	$	223.1		$	216.1		$	199.2

As of December 31, 2016, 2015, and 2014, the Company had accrued interest and penalties related to unrecognized tax benefits of $31.3 million, $24.1 million, and $22.3 million, respectively, to other long-term liabilities in the Consolidated Balance Sheets. The Company recognized an expense for net interest and penalties of $6.0 million, $2.5 million, and $2.8 million in its Consolidated Statements of Operations during the years ended December 31, 2016, 2015, and 2014, 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 $3.7 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.

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 2007.

The Company is currently under examination by the IRS for the 2007 through 2009 tax years. In March 2016, the IRS concluded its field audit and issued a final assessment. The Company is appealing this assessment. The Company regularly assesses the likelihood of an adverse outcome resulting from such examinations. As of December 31, 2016, the Company believes the resolution of the audits is unlikely to have a material effect on its consolidated financial condition or results of operations.

In June 2016, the California Franchise Tax Board (“FTB”) concluded its audit of the 2004 through 2006 tax years. As a result of the closure of the California FTB audit, the gross unrecognized tax benefits was reduced by approximately $14.3 million, which did not affect the Company’s effective tax rate. The Company is no longer subject to an audit of its California income taxes through the 2006 tax year.

The Company is also subject to separate ongoing examinations by the UK tax authorities for the 2013 through 2014 tax years, the French tax authorities for the 2014 through 2015 tax years, the German tax authorities for the 2010 through 2013 tax years, the Australia tax authorities for the 2016 tax year, and the India tax authorities for the 2003 tax year, the 2004 through 2008 tax years, and the 2009 through 2012 tax years. As of December 31, 2016, the Company is not aware of any other examinations by tax authorities in any other major jurisdictions in which it files income tax returns.

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.