7.	Income Taxes

Income Tax Expense (Benefit)

The following table presents Devon’s income tax components.

	Year Ended December 31,
	2016			2015			2014
	(Millions)
Current income tax expense (benefit):
U.S. federal	$	5		$	(243	)	$	152
Various states		(11	)		(8	)		18
Canada and various provinces		106			14			307
Total current tax expense (benefit)		100			(237	)		477
Deferred income tax expense (benefit):
U.S. federal		(3	)		(5,033	)		1,610
Various states		—			(336	)		93
Canada and various provinces		(270	)		(459	)		188
Total deferred tax expense (benefit)		(273	)		(5,828	)		1,891
Total income tax expense (benefit)	$	(173	)	$	(6,065	)	$	2,368

Total income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate to earnings before income taxes as a result of the following:

	Year Ended December 31,
	2016			2015			2014
	(Millions)
Total income tax expense (benefit)	$	(173	)	$	(6,065	)	$	2,368

U.S. statutory income tax rate		35	%		35	%		35	%
Deferred tax asset valuation allowance		(22	%)		(4	%)		0	%
Non-deductible goodwill and intangible impairment		(8	%)		(2	%)		23	%
Change in unrecognized tax benefits		(2	%)		0	%		1	%
Taxation on Canadian operations		(3	%)		(1	%)		(4	%)
State income taxes		1	%		1	%		2	%
Other		3	%		0	%		1	%
Effective income tax rate		4	%		29	%		58	%

Devon and its subsidiaries are subject to U.S. federal income tax as well as income or capital taxes in various state and foreign jurisdictions. Devon’s tax reserves are related to tax years that may be subject to examinations by the relevant taxing authority. Devon is under audit in the U.S. and various foreign jurisdictions as part of its normal course of business.

Devon assesses the realizability of its deferred tax assets. If Devon concludes that it is more likely than not that some portion or all of the deferred tax assets will not be realized, the asset is reduced by a valuation allowance. Numerous judgements and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws.

2016

During 2016, Devon’s U.S. segment recorded an additional $774 million valuation allowance against its deferred tax assets. The allowance results from continued financial losses resulting from additional full cost impairments in 2016. As of December 31, 2016, the allowance continues to represent a 100% valuation against the U.S. net deferred tax assets. Additionally, the Canadian segment recognized a $71 million partial valuation allowance resulting from continued financial losses. The valuation allowances impacted the effective tax rate and are discussed in the next section.

In the first quarter of 2016, EnLink recorded a goodwill impairment of approximately $873 million. Additionally, during the third quarter of 2016, Devon derecognized $197 million of goodwill related to its U.S. operations in conjunction with the divestiture of certain non-core U.S upstream oil and gas assets. These impairments are not deductible for purposes of calculating income tax and, therefore, impact the effective tax rate.

2015

In the third and fourth quarters of 2015, EnLink recorded goodwill and intangibles impairments of approximately $1.6 billion, which impacted the effective tax rate.

During 2015, Devon recorded approximately $18 billion of oil and gas impairments related to its U.S. operations. These impairments resulted in deferred tax assets against which Devon recognized a $967 million valuation allowance.

2014

In the second and fourth quarters of 2014, goodwill was removed in conjunction with the Canadian conventional asset divestitures, and Devon recorded a goodwill impairment in the Canadian reporting unit. These non-deductible goodwill reductions impacted the effective tax rate.

Additionally, during 2014, Devon repatriated to the U.S. $2.8 billion of cash relating to the Canadian asset divestiture. In conjunction with the repatriation, Devon recognized approximately $105 million of additional income tax expense for the full year. Prior to the repatriation, Devon had recognized a $143 million deferred income tax liability associated with the planned repatriation. When the repatriation was made, Devon retained a larger property basis in Canada than was previously estimated, resulting in the incremental tax. After the use of foreign tax credits, the current income tax on the repatriation was $67 million.

Furthermore, Devon completed its divestiture program of certain assets in the U.S. In conjunction with the divestitures, Devon recognized $294 million of current income tax expense. The current tax expense was entirely offset by the recognition of deferred tax benefits.

Devon also recorded a $46 million deferred tax liability in conjunction with the formation of EnLink in 2014.

Deferred Tax Assets and Liabilities

The following table presents the tax effects of temporary differences that gave rise to Devon’s deferred tax assets and liabilities.

	December 31,
	2016			2015
	(Millions)
Deferred tax assets:
Property and equipment	$	685		$	490
Asset retirement obligations		488			485
Accrued liabilities		130			160
Net operating loss carryforwards		777			175
Pension benefit obligations		98			106
Other		203			162
Total deferred tax assets before valuation allowance		2,381			1,578
Less: valuation allowance		(1,666	)		(967	)
Net deferred tax assets		715			611
Deferred tax liabilities:
Property and equipment		(884	)		(1,187	)
Long-term debt		(53	)		(36	)
Other		(426	)		(271	)
Total deferred tax liabilities		(1,363	)		(1,494	)
Net deferred tax liability	$	(648	)	$	(883	)

At December 31, 2016, Devon has recognized $777 million of deferred tax assets related to various net operating loss carryforwards available to offset future income taxes. The net operating loss carryforwards consist of $536 million of Canadian carryforwards that expire between 2029 and 2037, $1.5 billion of U.S. federal carryforward that expires in 2036, $689 million of U.S. state carryforwards that expire between 2018 and 2036 and $293 million of carryforwards related to EnLink’s operations that expire between 2028 and 2036. In the current environment, Devon expects tax benefits from the Canadian carryforwards to be utilized in 2017 and beyond and EnLink carryforwards to be utilized in 2018 and beyond. Devon currently does not anticipate utilizing the U.S. federal or state net operating loss carryforwards, as indicated by the full valuation allowance position in the U.S. segment. EnLink also has $1 million of deferred tax assets related to alternative minimum tax credits, which have no expiration date and will be available for use against tax on future taxable income.

As a result of Devon’s continued financial losses incurred largely by the additional full cost impairments, Devon recorded an additional $630 million of valuation allowance against the U.S. deferred tax assets in 2016 and remains in a full valuation allowance position. Also during 2016, Devon’s Canadian segment recorded a $69 million partial valuation allowance due to its continued financial losses. In the event Devon were to determine that it would be able to realize the deferred income tax assets in the future, Devon would adjust the valuation allowance, reducing the provision for income taxes in the period of such adjustment.

As of December 31, 2016, Devon’s unremitted foreign earnings from its international operations totaled approximately $1.0 billion. All but $47 million of the $1.0 billion was deemed to be indefinitely reinvested into the development and growth of Devon’s Canadian business. Therefore, Devon has not recognized a deferred tax liability for U.S. income taxes associated with such earnings. If such earnings were to be repatriated to the U.S., Devon may be subject to U.S. income taxes and foreign withholding taxes. However, it is not practical to estimate the amount of such additional taxes that may be payable due to the inter-relationship of the various factors involved in making such an estimate.

For the remaining $47 million of unremitted earnings deemed not to be indefinitely reinvested, Devon has recognized a $13 million deferred tax liability associated with such unremitted earnings as of December 31, 2016.

Unrecognized Tax Benefits

The following table presents changes in Devon’s unrecognized tax benefits.

	December 31,
	2016			2015
	(Millions)
Balance at beginning of year	$	131		$	241
Tax positions taken in prior periods		36			(19	)
Tax positions taken in current year		—			31
Accrual of interest related to tax positions taken		39			(5	)
Settlements		—			(108	)
Lapse of statute of limitations		(5	)		—
Foreign currency translation		1			(9	)
Balance at end of year	$	202		$	131

Devon’s unrecognized tax benefit balance at December 31, 2016 and 2015 included $68 million and $29 million, respectively, of interest and penalties. If recognized, $202 million of Devon’s unrecognized tax benefits as of December 31, 2016 would affect Devon’s effective income tax rate. Further, Devon believes that within the next 12 months, it is reasonably possible that certain tax examinations will be resolved by settlement with the taxing authorities. During 2016, Devon recognized $88 million of unrecognized tax benefits, including $36 million of interest, associated with such tax examinations. Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities.

Jurisdiction		Tax Years Open
U.S. Federal		2012-2016
Various U.S. states		2010-2016
Canada Federal		2003-2016
Various Canadian provinces		2003-2016

Certain statute of limitation expirations are scheduled to occur in the next twelve months. However, Devon is currently in various stages of the administrative review process for certain open tax years. In addition, Devon is currently subject to various income tax audits that have not reached the administrative review process.