12. INCOME TAXES

We file a consolidated U.S. federal income tax return, unitary tax returns in certain states and separate income tax returns for certain of our subsidiary companies in other states, as well as in foreign jurisdictions. Included in our federal and state income tax returns is our proportionate share of the taxable income or loss of partnerships and limited liability companies that are treated as partnerships for tax purposes (“pass-through entities”). Our consolidated financial statements do not include any significant provision for income taxes on the income of pass-through entities attributed to the non-controlling interests.

Food Network and Cooking Channel are operated under the Partnership.

Income (loss) from operations before income taxes consisted of the following:

	Year ended December 31,
(in thousands)	2017		2016			2015
United States	$	1,234,680	$	1,393,410		$	1,187,353
Foreign		76,530		(115,632	)		(65,489	)
Total	$	1,311,210	$	1,277,778		$	1,121,864

The determination of US/non-US is primarily based on legal entity structure, which differs from our reportable segment structure.

The provision for income taxes consisted of the following:

	Year ended December 31,
(in thousands)		2017			2016			2015
Current:
Federal		$	334,758		$	334,744		$	345,204
State and local			56,723			107,550			32,393
Foreign			38,601			(1,553	)		(6,183	)
Total current income tax provision			430,082			440,741			371,414
Deferred:
Federal			51,798			(7,808	)		(31,731	)
State and local			(15,923	)		(586	)		5,611
Foreign			30,902			(2,017	)		(1,903	)
Total deferred income tax provision (benefit)			66,777			(10,411	)		(28,023	)
Provision for income taxes		$	496,859		$	430,330		$	343,391

For the year ended December 31, 2017, we had zero current tax expense allocated directly to shareholders’ equity for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes. For the years ended December 31, 2016 and December 31, 2015, $0.5 million of current tax expense and $1.2 million of benefit, respectively, was allocated directly to shareholders’ equity for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes.

Due to the adoption of the new employee share-based compensation accounting guidance during 2016, all excess tax benefits and deficiencies are recognized as income tax expense in the consolidated statements of operations.

On December 22, 2017, the 2017 Tax Act was signed into law, resulting in significant changes in the U.S. tax code. Changes included, but are not limited to:

•

a reduction in the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent, effective January 1, 2018;

•

imposition of a one-time transition tax on the accumulated unremitted earnings of foreign subsidiaries;

•

a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; and

•

a provision that requires a current inclusion for certain so called global intangible low-taxed income (“GILTI”).

Based on our initial analysis of the 2017 Tax Act, which is still in process, we recognized $79.6 million of tax expense related to the re-measurement of domestic deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. In addition, while certain of our foreign subsidiaries have unremitted earnings for U.S. GAAP purposes, we are in a net foreign deficit position for U.S. tax purposes due to losses incurred by certain of our other foreign subsidiaries. Consequently, we are not liable for the transition tax.

The 2017 Tax Act provisions regarding GILTI apply if a controlled foreign corporation earnings exceed an amount equal to a standard rate of return on its tangible assets. Under these circumstances, excess income must be included in the gross income of the company’s U.S. shareholder. Because of the complexity of the new GILTI tax rules, we are continuing to evaluate these provisions of the Tax Act and will further consider the accounting policy election within the measurement period as provided for under the SEC’s guidance.

The SEC has provided guidance regarding the accounting for the tax effects of the 2017 Tax Act. To the extent that a registrant’s accounting for certain income tax effects of the 2017 Tax Act is incomplete because it does not have the necessary information available, prepared, or analyzed to complete the related accounting, it may make a reasonable estimate of the tax effects. In accordance with this guidance, management has made a reasonable estimate of the 2017 Tax Act effects, as disclosed above, but will continue to assess its impact as more information and guidance becomes available.

The difference between the statutory rate for federal income tax and the effective income tax rate was as follows:

	Year ended December 31,
	2017			2016			2015
U.S. federal statutory income tax rate		35.0	%		35.0	%		35.0	%
Effect of:
U.S. state and local income taxes, net of federal income tax benefit		2.2			5.6			2.2
Income of pass-through entities allocated to non-controlling interests		(5.1	)		(4.8	)		(5.4	)
Section 199 - Domestic Production Activities deduction		(2.5	)		(2.4	)		(2.5	)
2017 Tax Act		6.1			-			-
Foreign tax law changes		2.3			-			-
Foreign earnings at other than U.S. rates		(2.0	)		(0.3	)		0.2
Other		1.9			0.6			1.1
Effective income tax rate		37.9	%		33.7	%		30.6	%

The approximate effect of the temporary differences giving rise to deferred income tax (assets) liabilities were as follows:

	December 31,
(in thousands)		2017			2016
Deferred tax assets:
Accrued expenses		$	(27,862	)	$	(32,120	)
Deferred compensation			(59,815	)		(85,524	)
Net operating loss carry-forwards			(197,396	)		(145,414	)
Investments			(91,828	)		(129,113	)
State taxes and interest			(31,101	)		(52,999	)
Property and equipment			(27,034	)		(34,267	)
Other			(13,915	)		(32,310	)
Total deferred tax assets:			(448,951	)		(511,747	)
Deferred tax liabilities:
Intangible assets			179,764			157,675
Programs and program licenses			1,823			54,908
Other			6,992			5,544
Total deferred tax liabilities:			188,579			218,127
Valuation allowance for deferred tax assets			155,513			118,329
Net deferred tax asset		$	(104,859	)	$	(175,291	)

As of December 31, 2017, there were $0.9 million of net operating loss (“NOL”) carry-forwards for federal income tax purposes with expiration beginning in 2032, $23.0 million of NOL carry-forwards in various state jurisdictions with expiration dates between 2029 and 2034 and $901.2 million of NOL carry-forwards in various foreign jurisdictions. Some of the foreign losses have an indefinite carry-forward period, and certain of the foreign losses expire beginning in 2018. A large portion of the deferred tax assets for the foreign and state loss carry-forwards has been reduced by a $149.4 million valuation allowance, as it is more likely than not that those NOL carry-forwards will not be realized.

The Company has recorded a valuation allowance against deferred tax assets totaling $155.5 million and $118.3 million as of December 31, 2017 and December 31, 2016, respectively, as management believes it is more likely than not that certain deferred tax assets will not be realized in future tax periods. Future reductions in the valuation allowance associated with a change in management’s determination of the Company’s ability to realize these deferred tax assets may result in a decrease in the provision for income taxes. The valuation allowance increase is primarily related to certain prior year foreign NOLs that management has concluded will not be utilized in the future, partially offset by the expiration of prior year foreign NOLs that occurred during the year ended December 31, 2017. The valuation allowance was further impacted by currency fluctuations and changes in various foreign tax rates that occurred during the year ended December 31, 2017 and by management’s determination that it is more likely than not that certain foreign NOLs incurred during the year ended December 31, 2017 will not be realized.

No provision has been made for U.S. federal and state income taxes or international income taxes that may result from future remittances of the undistributed earnings of foreign subsidiaries that are determined to be indefinitely reinvested, which were approximately $125.7 million at December 31, 2017. Determination of the amount of any unrecognized deferred income tax liability on these is not practicable.

The activity related to gross unrecognized tax benefits was as follows:

	Year ended December 31,
(in thousands)	2017			2016			2015
Gross unrecognized tax benefits - beginning of year	$	129,319		$	109,693		$	96,166
Increases in tax positions for prior years		45,927			9,567			19,679
Decreases in tax positions for prior years		(1,566	)		(19,243	)		-
Increases in tax positions for current year		13,772			30,142			17,712
Settlements with taxing authorities		(56,246	)		(782	)		495
Lapse in statute of limitations		(872	)		(58	)		(24,359	)
Gross unrecognized tax benefits - end of year	$	130,334		$	129,319		$	109,693

The total net unrecognized tax benefits that would affect the effective tax rate, if recognized were $103.2 million at December 31, 2017, $84.2 million at December 31, 2016 and $78.3 million at December 31, 2015. We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. We recognized $(0.4) million, $7.4 million and $0.1 million of interest expense and penalties in 2017, 2016 and 2015, respectively. We have accrued $18.2 million, $22.5 million and $11.5 million gross interest and penalties as of the year ended December 31, 2017, December 31, 2016 and December 31, 2015, respectively.

We file income tax returns in the U.S. and in various state, local and foreign jurisdictions. We are routinely examined by tax authorities in these jurisdictions. As of December 31, 2017, the Company is no longer subject to U.S. federal examinations for years before 2014. It is possible that examinations by tax authorities in state and foreign jurisdictions may be resolved within 12 months. Exclusive of interest and penalties, it is reasonably possible that our gross unrecognized tax benefits may decrease within the next 12 months by a range of zero to $21.9 million, primarily due to settlement of tax examinations and expiration of the statute of limitations.

With a few exceptions, the Company is no longer subject to examinations by state, local or foreign tax authorities for years prior to 2013.