NOTE 18. INCOME TAXES

Income (loss) before income tax (benefit) expense was attributable to the following jurisdictions:


	For the fiscal years ended June 30,
	2016			2015		2014^(a)
	(in millions)
U.S.	$	(125	)	$	148	$	(602	)
Foreign		306			404		424

Income (loss) before income tax (benefit) expense	$	181		$	552	$	(178	)

^(a)	See Discussion of Foreign Tax Refund below.

The significant components of the Company’s income tax (benefit) expense were as follows:


	For the fiscal years ended June 30,
	2016			2015			2014^(a)
	(in millions)
Current:
U.S.
Federal	$	15		$	35		$	86
State & local		5			11			(19	)
Foreign		102			135			(734	)

Total current tax		122			181			(667	)

Deferred:
U.S.
Federal		(71	)		16			19
State & local		(106	)		1			12
Foreign		1			(13	)		22

Total deferred tax		(176	)		4			53

Total income tax (benefit) expense	$	(54	)^(b)	$	185		$	(614	)

^(a)	See Discussion of Foreign Tax Refund below.

^(b)

The Company recognized a tax benefit of approximately $144 million upon reclassification of the Digital Education segment to discontinued operations in Income (loss) from discontinued operations, net of tax, in the Statements of Operations in fiscal 2016. In addition, a tax benefit of $30 million related to the current year operations of the Digital Education segment was recorded to discontinued operations in Income (loss) from discontinued operations, net of tax, in the Statements of Operations in fiscal 2016. The tax (benefit) expense shown above excludes the tax benefit of the Company’s digital education business. The Company will not have a current federal tax expense after accounting for the current federal tax benefits attributed to discontinued operations.

Foreign Tax Refund

The Company filed refund claims for certain losses pertaining to periods prior to the Separation in a foreign jurisdiction that were subject to litigation. During fiscal 2014, the litigation was resolved in favor of the Company and as a result, the Company received approximately $794 million for the gross tax refund and interest owed to the Company by the foreign tax authority.

The Company recorded a tax benefit, net of applicable taxes on interest, of $721 million for the fiscal year ended June 30, 2014 to Income tax benefit (expense) in the Statements of Operations. Refunds received related to these matters were paid to 21st Century Fox, net of applicable taxes on interest, in accordance with the terms of the Tax Sharing and Indemnification Agreement. Accordingly, for the fiscal year ended June 30, 2014, the Company recorded an expense to Other, net of $721 million for the payment to 21st Century Fox in the Statements of Operations which is included in U.S. pre-tax book income in the table of jurisdictional earnings above.

Refer to the table below for the net impact of the tax refund and interest, net of tax, recorded in the Statements of Operations:


	For the fiscal year ended June 30, 2014
	(in millions)
Other, net	$	(721	)
Income tax benefit (expense)		721

Net impact to the Statement of Operations	$	—

The reconciliation between the Company’s actual effective tax rate and the statutory U.S. Federal income tax rate of 35% was:


	For the fiscal years ended June 30,
	2016			2015			2014
U.S. Federal income tax rate		35	%		35	%		35	%
State and local taxes, net		(8	)		1			3
Effect of foreign operations^(a)		(1	)		(2	)		38
Foreign tax refund received^(b)		—			—			405
Foreign tax refund paid to 21st Century Fox^(b)		—			—			(142	)
Change in valuation allowance^(c)		(62	)		—			—
Non-deductible compensation and benefits		3			1			—
R&D credits		(2	)		(1	)		2
Other, net		5			—			4

Effective tax rate^(d)		(30	)%		34	%		345	%

^(a)

The Company’s foreign operations are located primarily in Australia and the United Kingdom (“U.K.”) which have lower income tax rates than the U.S. For the fiscal years ended June 30, 2016 and June 30, 2015, the effect of foreign operations at lower tax rates decreased the Company’s effective tax rate 1% and 2%, respectively, as the Company recorded pre-tax book income on a consolidated basis. For the year ended June 30, 2014, the effect of foreign operations at lower tax rates increased the Company’s effective tax rate 38% as the Company recorded pre-tax book loss on a consolidated basis.

^(b)

The Company recorded a tax benefit, net of applicable taxes on interest, of $721 million for the fiscal year ended June 30, 2014 to Income tax benefit (expense) in the Statements of Operations related to certain foreign tax refunds received. See the discussion of Foreign Tax Refund above. The tax benefit related to these refunds increased our effective tax rate 405%. These foreign tax refunds received were paid to 21st Century Fox, net of applicable taxes on interest, in accordance with the terms of the Tax Sharing and Indemnification Agreement. Accordingly, for the fiscal year ended June 30, 2014, the Company recorded an expense to Other, net of approximately $721 million for the payment to 21st Century Fox in the Statements of Operations. This expense is a non-deductible item the tax effect of which is approximately $252 million and reflected as a decrease of approximately 142% in our effective tax rate.

^(c)

Included in the change in valuation allowance is a tax benefit of $106 million related to the release of previously established valuation allowances related to certain U.S. Federal net operating losses and state deferred tax assets. This benefit was recognized in conjunction with management’s plan to dispose of the Company’s digital education business during fiscal 2016, as the Company now expects to generate sufficient U.S. taxable income to utilize these deferred tax assets prior to expiration. Total tax benefits related to the release of valuation allowances decreased our effective tax rate by 62%.

^(d)

For the fiscal year ended June 30, 2016, the effective tax rate of (30%) represents income tax benefit when compared to consolidated pre-tax book income. For the fiscal year ended June 30, 2015, the effective tax rate of 34% represents an income tax expense when compared to consolidated pre-tax book income. For the fiscal year ended June 30, 2014, the effective tax rate of 345% represents an income tax benefit when compared to consolidated pre-tax book loss. As a result, certain reconciling items between the U.S. federal income tax rate and the Company’s effective tax rate may have the opposite impact.

The Company recognized current and deferred income taxes in the Balance Sheets at June 30, 2016 and 2015, respectively:


	As of June 30,
	2016			2015^(a)
	(in millions)
Other current assets	$	—		$	63
Deferred income tax assets		602			219
Other current liabilities		—			(1	)
Deferred income tax liabilities		(171	)		(166	)

Net deferred tax assets	$	431		$	115

^(a)

In fiscal 2016, the Company early-adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which requires that deferred income tax liabilities and assets be classified as non-current in the Consolidated Balance Sheet. As such, the requirement under prior guidance which required an entity to separate deferred tax liabilities and assets into a current and non-current amount in the Consolidated Balance Sheet has been eliminated. The prior periods have not been retroactively adjusted as a result of the adoption of ASU 2015-17.

The significant components of the Company’s deferred tax assets and liabilities were as follows:


	As of June 30,
	2016			2015
	(in millions)
Deferred tax assets:
Accrued liabilities	$	185		$	56
Capital loss carryforwards		803			892
Retirement benefit obligations		112			85
Net operating loss carryforwards		580			540
Business credits		38			46
Other		234			310

Total deferred tax assets		1,952			1,929

Deferred tax liabilities:
Asset basis difference and amortization		(442	)		(465	)
Other		(65	)		(41	)

Total deferred tax liabilities		(507	)		(506	)

Net deferred tax asset before valuation allowance		1,445			1,423
Less: valuation allowance (See Note 21 - Valuation and Qualifying Accounts)		(1,014	)		(1,308	)

Net deferred tax assets	$	431		$	115

As of June 30, 2016, the Company had income tax Net Operating Loss Carryforwards (NOLs) (gross, net of uncertain tax benefits), in various jurisdictions as follows:


Jurisdiction	Expiration	Amount (in millions)
U.S. Federal	2021 to 2036	$	858
U.S. States	Various		581
Australia	Indefinite		452
U.K.	Indefinite		134
Other Foreign	Various		346

Utilization of the NOLs is dependent on generating sufficient taxable income from our operations in each of the respective jurisdictions to which the NOLs relate, while taking into account limitations and/or restrictions on our ability to use them. Certain of our U.S. Federal NOLs were acquired as part of the acquisitions of Move and Harlequin and are subject to limitations as promulgated under Section 382 of the Code. Section 382 of the Code limits the amount of acquired NOLs that we can use on an annual basis to offset future U.S. consolidated taxable income. The NOLs are also subject to review by relevant tax authorities in the jurisdictions to which they relate.

The Company recorded a deferred tax asset of $580 million and $540 million (net of approximately $53 million and $95 million, respectively, of unrecognized tax benefits) associated with its NOLs as of June 30, 2016 and 2015, respectively. Significant judgment is applied in assessing our ability to realize our NOLs and other tax assets. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize existing deferred tax assets within the applicable expiration period. On the basis of this evaluation, valuation allowances of $97 million and $304 million have been established to reduce the deferred tax asset associated with the Company’s NOLs to an amount that will more likely than not be realized as of June 30, 2016 and 2015, respectively. The amount of the NOL deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or if objective negative evidence in the form of cumulative losses occurs.

As of June 30, 2016, the Company had approximately $1.6 billion and $1.7 billion of capital loss carryforwards in Australia and the U.K., respectively, which may be carried forward indefinitely and which are subject to tax authority review. Realization of our capital losses is dependent on generating capital gain taxable income and satisfying certain continuity of business requirements. The Company recorded a deferred tax asset of $803 million and $892 million as of June 30, 2016 and 2015, respectively for these capital loss carryforwards, however, it is more likely than not that the Company will not generate capital gain income in the normal course of business in these jurisdictions. Accordingly, valuation allowances of $803 million and $892 million have been established to reduce the capital loss carryforward deferred tax asset to an amount that will more likely than not be realized as of June 30, 2016 and 2015, respectively.

As of June 30, 2016, the Company had approximately $26 million of U.S. Federal tax credit carryforward which includes $22 million of foreign tax credits and $4 million of research & development credits which begin to expire in 2025 and 2036, respectively.

As of June 30, 2016, the Company had approximately $5 million of non-U.S. tax credit carryforwards which expire in various amounts beginning in 2025 and $8 million of state tax credit carryforwards (net of U.S. federal benefit), of which the balance can be carried forward indefinitely. In accordance with the Company’s accounting policy, a valuation allowance of $5 million has been established to reduce the deferred tax asset associated with the Company’s non-U.S. and state credit carryforwards to an amount that will more likely than not be realized as of June 30, 2016.

Tax Sharing and Indemnification Agreement

The Company entered into a Tax Sharing and Indemnification Agreement with 21st Century Fox that governs the Company’s and 21st Century Fox’s respective rights, responsibilities, and obligations with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, non-income taxes and related tax returns. Among other matters, as subsidiaries of 21st Century Fox prior to the Separation, the Company and each of its domestic subsidiaries have joint and several liability with 21st Century Fox for the consolidated U.S. federal income taxes of the 21st Century Fox consolidated group relating to any taxable periods during which the Company or any of such subsidiaries were a member of the 21st Century Fox consolidated group. Under the Tax Sharing and Indemnification Agreement, 21st Century Fox will indemnify the Company for any such liability.

The Tax Sharing and Indemnification Agreement provides that the Company will generally indemnify 21st Century Fox against taxes attributable to the Company’s assets or operations for all tax periods or portions thereof after the Separation. For taxable periods or portions thereof prior to the Separation, 21st Century Fox will generally indemnify the Company against U.S. consolidated taxes attributable to such periods, and the Company will indemnify 21st Century Fox against the Company’s separately filed U.S., state, and foreign taxes and foreign consolidated taxes for such periods.

Uncertain Tax Positions

The following table sets forth the change in the Company’s unrecognized tax benefits, excluding interest and penalties:


	For the fiscal years ended June 30,
	2016			2015			2014
	(in millions)
Balance, beginning of period	$	129		$	58		$	127
Additions for prior year tax positions		6			79			39
Additions for current year tax positions		4			4			5
Reduction for prior year tax positions		(40	)		(7	)		(114	)
Lapse of the statute of limitations		(2	)		—			—
Cash settlements		(2	)		—			—
Impact of currency translations		(9	)		(5	)		1

Balance, end of period	$	86		$	129		$	58

The Company recognizes interest and penalty charges related to unrecognized tax benefits as income tax expense, which is consistent with the recognition in prior reporting periods. The Company recognized a benefit related to interest of $1 million for the fiscal year ended June 30, 2016 and interest charges of $6 million and nil during the fiscal years ended June 30, 2015 and 2014, respectively. The Company recorded liabilities for accrued interest of approximately $6 million and $8 million as of June 30, 2016 and 2015, respectively.

The Company’s tax returns are subject to on-going review and examination by various tax authorities. Tax authorities may not agree with the treatment of items reported in our tax returns, and therefore the outcome of tax reviews and examinations can be unpredictable. The Company is currently undergoing tax examinations in several states and foreign jurisdictions where the tax authorities are reviewing a range of prior year transactions which are at various stages of development. The Company believes it has appropriately accrued for the expected outcome of uncertain tax matters and believes such liabilities represent a reasonable provision for taxes ultimately expected to be paid, however, the Company may need to accrue additional income tax expense and our liability may need to be adjusted as new information becomes known and as these tax examinations continue to progress, or as settlements or litigations occur.

The following is a summary of major tax jurisdictions for which tax authorities may assert additional taxes based upon tax years currently under audit and subsequent years that could be audited by the respective taxing authorities.


Jurisdiction		Fiscal Years Open to Examination
U.S. Federal		2009-2015
U.S. States		Various
Australia		2010-2015
U.K.		2011-2015

It is reasonably possible that uncertain tax positions may increase or decrease in the next fiscal year, however, actual developments in this area could differ from those currently expected. As of June 30, 2016, approximately $54 million would affect the Company’s effective income tax rate, if and when recognized in future fiscal years. It is reasonably possible the amount of uncertain tax liabilities which may be resolved within the next fiscal year is between the range of approximately nil and $35 million.

The Company has not provided for U.S. taxes on the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely. Calculation of the unrecognized deferred tax liability for temporary differences related to these earnings is not practicable. Undistributed earnings of foreign subsidiaries considered to be indefinitely reinvested amounted to approximately $2.7 billion as of June 30, 2016. The amount of undistributed earnings reflects adjustments related to the Separation from 21st Century Fox that were finalized with the filing of our income tax returns in periods after the Separation.

During the fiscal years ended June 30, 2016, 2015 and 2014, the Company paid gross income taxes of $103 million, $134 million and $116 million, respectively, and received income tax refunds of $10 million, $8 million and $837 million, respectively. The income tax refunds for the fiscal year ended June 30, 2014 included the $794 million related to amounts received from a foreign tax authority as discussed above.