This note provides details about our income taxes applicable to continuing operations:


•	earnings before income taxes,


•	provision for income taxes,


•	effective income tax rate,


•	deferred tax assets and liabilities and


•	unrecognized tax benefits.

Income taxes related to discontinued operations are discussed in Note 3: Discontinued Operations.

The Income Taxes section of Note 1: Summary of Significant Accounting Policies provides details about how we account for our income taxes.

Following the merger with Plum Creek in first quarter 2016, our income tax receivables and deferred income tax balances for our TRSs have been adjusted to include Plum Creek’s TRSs. The Plum Creek TRS balances as of the merger date were $11 million in income tax receivables and $67 million in deferred income tax assets arising from temporary differences between the tax bases and book bases of assets acquired and liabilities assumed in the merger. See Note 4: Merger with Plum Creek for additional details.

EARNINGS BEFORE INCOME TAXES

Domestic and Foreign Earnings From Continuing Operations Before Income Taxes



DOLLAR AMOUNTS IN MILLIONS
	2016		2015		2014
Domestic earnings	$	353	$	326	$	679
Foreign earnings	151		27		8
Total earnings before income taxes	$	504	$	353	$	687

PROVISION FOR INCOME TAXES

Provision (Benefit) for Income Taxes From Continuing Operations



DOLLAR AMOUNTS IN MILLIONS
	2016			2015			2014
Current:
Federal	$	1		$	7		$	(49	)
State	1			(2		)	7
Foreign	11			(5		)	3
Total current	13			—			(39		)
Deferred:
Federal	37			(69		)	107
State	(3		)	(3		)	—
Foreign	42			14			3
Total deferred	76			(58		)	110
Total income tax provision (benefit)	$	89		$	(58	)	$	71

EFFECTIVE INCOME TAX RATE

Effective Income Tax Rate Applicable to Continuing Operations



DOLLAR AMOUNTS IN MILLIONS
	2016			2015			2014
U.S. federal statutory income tax	$	177		$	123		$	240
State income taxes, net of federal tax benefit	(3		)	(5		)	5
REIT income not subject to federal income tax	(99		)	(158		)	(161		)
REIT benefit from change to tax law	—			(13		)	—
Foreign taxes	(4		)	4			2
Provision for unrecognized tax benefits	—			(7		)	(4		)
Repatriation of Canadian earnings	24			—			—
Other, net	(6		)	(2		)	(11		)
Total income tax provision (benefit)	$	89		$	(58	)	$	71
Effective income tax rate	17.6		%	(16.4		)%	10.3		%

DEFERRED TAX ASSETS AND LIABILITIES

Deferred tax assets and liabilities reflect the future tax impact created by differences between the timing of when income or deductions are recognized for pretax financial book reporting purposes versus income tax purposes. Deferred tax assets represent a future tax benefit (or reduction to income taxes in a future period), while deferred tax liabilities represent a future tax obligation (or increase to income taxes in a future period).

Balance Sheet Classification of Deferred Income Tax Assets (Liabilities) Related to Continuing Operations



DOLLAR AMOUNTS IN MILLIONS
	DECEMBER 31, 2016		DECEMBER 31, 2015
Net noncurrent deferred tax asset	$	293	$	254
Net noncurrent deferred tax liability	—		—
Net deferred tax asset (liability)	$	293	$	254

Items Included in Our Deferred Income Tax Assets (Liabilities)



DOLLAR AMOUNTS IN MILLIONS
	DECEMBER 31, 2016			DECEMBER 31, 2015
Postretirement benefits	$	76		$	80
Pension	395			260
State tax credits	46			49
Net operating loss carryforwards	25			64
Cellulosic biofuel producers credit	—			78
Other	232			178
Gross deferred tax assets	774			709
Valuation allowance	(56		)	(65		)
Net deferred tax assets	718			644
Property, plant and equipment	(214		)	(169		)
Timber installment notes	(180		)	(180		)
Other	(31		)	(41		)
Deferred tax liabilities	(425		)	(390		)
Net deferred tax asset (liability)	$	293		$	254

OTHER INFORMATION ABOUT OUR DEFERRED INCOME TAX ASSETS (LIABILITIES)

Other information about our deferred income tax assets (liabilities) include:


•	net operating loss and credit carryforwards,


•	valuation allowances and


•	reinvestment of undistributed earnings.

Net Operating Loss and Credit Carryforwards

Our gross federal, state and foreign net operating loss carryforwards as of the end of 2016 totaled $1.1 billion as follows:


•	U.S. REIT - $742 million, which expire from 2027 through 2036;


•	State - $335 million, which expire from 2017 through 2036; and


•	Foreign - $40 million, which expire from 2017 through 2021.

Our gross state credit carryforwards at the end of 2016 totaled $71 million, which includes $24 million that expire from 2017 through 2030 and $47 million that do not expire. We have no federal or foreign credit carryforwards.

Valuation Allowances

With the exception of the valuation allowance discussed below, we believe it is more likely than not that we will have sufficient future taxable income to realize our deferred tax assets.

Our valuation allowance on our deferred tax assets was $56 million at the end of 2016, primarily related to state credits and state and foreign net operating losses.

Reinvestment of Undistributed Earnings

The balance of our foreign undistributed earnings was approximately $35 million at the end of 2016, all of which is permanently reinvested; therefore, it is not subject to U.S. income tax. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in our foreign subsidiaries.

UNRECOGNIZED TAX BENEFITS

Unrecognized tax benefits represent potential future obligations to taxing authorities if uncertain tax positions we have taken on previously filed tax returns are not sustained. The total amount of unrecognized tax benefits as of December 31, 2016 and 2015, is $6 million, which does not include related interest of $1 million. This amount represents the gross amount of exposure in individual jurisdictions and does not reflect any additional benefits expected to be realized if such positions are not sustained, such as the federal deduction that could be realized if an unrecognized state deduction is not sustained.

Reconciliation of the Beginning and Ending Amount of Unrecognized Tax Benefits



DOLLAR AMOUNTS IN MILLIONS
	DECEMBER 31, 2016		DECEMBER 31, 2015
Balance at beginning of year	$	6	$	11
Settlements	—		(4		)
Lapse of statute	—		(1		)
Balance at end of year	$	6	$	6

The net liability recorded in our Consolidated Balance Sheet related to unrecognized tax benefits is $5 million as of December 31, 2016, which includes interest of $1 million and is net of $2 million in loss carryforwards available to offset the liability. The net liability as of December 31, 2015, was $4 million, which includes interest of $1 million and is net of $3 million in credits and loss carryovers available to offset the liability.

The net liability recorded for tax positions across all jurisdictions that, if sustained, would affect our effective tax rate is $5 million as of December 31, 2016 and 2015, which includes interest of $1 million.

In accordance with our accounting policy, we accrue interest and penalties related to unrecognized tax benefits as a component of income tax expense. See Note 1: Summary of Significant Accounting Policies.

As of December 31, 2016, none of our U.S. federal income tax returns are under examination, with years 2013 forward open to examination. The 2014 U.S. federal income tax return for NORPAC is currently under examination, and we held a 50 percent ownership interest in the entity that year. See Note 3: Discontinued Operations. We are undergoing examinations in state jurisdictions for tax years 2012 through 2014, with tax years 2009 forward open to examination. We are also undergoing examinations in foreign jurisdictions for tax years 2010-2011 and 2013-2014, with tax years 2010 forward open to examination. We expect that the outcome of any examination will not have a material effect on our consolidated financial statements; however, audit outcomes and the timing of audit settlements are subject to significant uncertainty.

In the next 12 months, we estimate a decrease of $2 million in unrecognized tax benefits due to the lapse of applicable statutes of limitation.

ONGOING IRS MATTER

We received a Notice of Final Partnership Administrative Adjustment (FPAA), dated July 20, 2016, from the Internal Revenue Service (IRS) in regard to Plum Creek REIT’s 2008 U.S. federal income tax treatment of the transaction forming the Timberland Venture. The IRS is asserting that the transfer of the timberlands to the Timberland Venture was a taxable transaction to the company at the time of the transfer rather than a nontaxable capital contribution. We have filed a petition in the U.S. Tax Court and will vigorously contest this adjustment.

In the event that we are unsuccessful in this tax litigation, we could be required to recognize and distribute gain to shareholders of approximately$600 million and pay built-in gains tax of approximately $100 million. We would also be required to pay interest on both of those amounts, which would be substantial. We expect that as much as 80 percent of any such distribution could be made with our common stock, and shareholders would be subject to tax on the distribution at the applicable capital gains tax rate. Alternatively, we could elect to retain the gain and pay corporate-level tax to minimize interest costs to the company.

Although the outcome of this process cannot be predicted with certainty, we are confident in our position based on U.S. tax law and believe we will be successful in defending it. Accordingly, no reserve has been recorded related to this matter.