Income Taxes



	Years Ended December 31,
	2015		2014		2013
	(Dollars in millions)
Income tax expense was as follows:
Federal
Current	$	28	18		1
Deferred	329		305		403
State
Current	40		26		62
Deferred	21		(14	)	(8	)
Foreign
Current	16		3		9
Deferred	4		—		(4	)
Total income tax expense	$	438	338		463



	Years Ended December 31,
	2015			2014		2013
	(Dollars in millions)
Income tax expense was allocated as follows:
Income tax expense in the consolidated statements of operations:
Attributable to income	$	438		338		463
Stockholders' equity:
Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes	(5		)	(5	)	(14	)
Tax effect of the change in accumulated other comprehensive loss	59			(744	)	554

The following is a reconciliation from the statutory federal income tax rate to our effective income tax rate:



	Years Ended December 31,
	2015		2014		2013
	(Percentage of pre-tax income)
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	2.6	%	2.7	%	2.8	%
Impairment of goodwill	—	%	—	%	188.5	%
Change in liability for unrecognized tax position	0.4	%	0.4	%	(24.5	)%
Foreign income taxes	0.7	%	0.4	%	2.7	%
Nondeductible accounting adjustment for life insurance	—	%	—	%	3.1	%
Affiliate debt rationalization	(2.6	)%	—	%	—	%
Release state valuation allowance	—	%	—	%	(2.3	)%
Research and development credits	(2.1	)%	—	%	—	%
Loss on worthless investment in foreign subsidiary	—	%	(5.4	)%	—	%
Other, net	(0.7	)%	(2.6	)%	1.4	%
Effective income tax rate	33.3	%	30.5	%	206.7	%

The 2015 effective tax rate is 33.3% compared to 30.5% for 2014. The 2015 rate reflects a tax benefit of approximately $34 million related to affiliate debt rationalization, research and development tax credits of $28 million for 2011 through 2015 and a $16 million tax decrease due to changes in state taxes caused by apportionment changes, state tax rate changes and the changes in the expected utilization of net operating losses ("NOLs"). The 2014 rate reflects a $60 million tax benefit associated with a deduction for tax basis for worthless stock in a wholly-owned foreign subsidiary as a result of developments in bankruptcy proceedings involving its sole asset and a $13 million tax decrease due to changes in the state taxes caused by apportionment changes, state tax rate changes and the changes in the expected utilization of NOLs. The 2013 rate reflects the tax effect of a $1.092 billion non-deductible goodwill impairment charge, a favorable settlement with the Internal Revenue Service of $33 million, a $22 million reduction due to the reversal of an uncertain tax position and the tax effect of a $17 million unfavorable accounting adjustment for non-deductible life insurance costs. Also in 2013, the tax rate was decreased by a $5 million reduction to the valuation allowance due to the estimated ability to utilize more state NOLs than previously expected.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:



	As of December 31,
	2015			2014
	(Dollars in millions)
Deferred tax assets
Post-retirement and pension benefit costs	$	2,154		2,276
Net operating loss carryforwards	487			1,091
Other employee benefits	182			214
Other	458			602
Gross deferred tax assets	3,281			4,183
Less valuation allowance	(380		)	(409	)
Net deferred tax assets	2,901			3,774
Deferred tax liabilities
Property, plant and equipment, primarily due to depreciation differences	(3,841		)	(3,869	)
Goodwill and other intangible assets	(2,588		)	(2,908	)
Other	(38		)	(147	)
Gross deferred tax liabilities	(6,467		)	(6,924	)
Net deferred tax liability	$	(3,566	)	(3,150	)

Of the $3.566 billion and $3.150 billion net deferred tax liability at December 31, 2015 and 2014, respectively, $3.569 billion and $3.154 billion is reflected as a long-term liability and $3 million and $4 million is reflected as a net noncurrent deferred tax asset at December 31, 2015 and 2014, respectively.

At December 31, 2015, we had federal NOLs of $72 million and state NOLs of $13 billion. If unused, the NOLs will expire between 2016 and 2032; however, no significant amounts expire until 2021. At December 31, 2015, we had federal tax credits of $28 million. Additionally, we had $36 million ($23 million net of federal income tax) of state investment tax credit carryforwards that will expire between 2016 and 2025 if not utilized. In addition, at December 31, 2015, we had $79 million of federal alternative minimum tax, or AMT, credits. Our acquisitions of Qwest and SAVVIS, Inc. ("Savvis") caused "ownership changes" within the meaning of Section 382 of the Internal Revenue Code ("Section 382"). As a result, our ability to use these NOLs and AMT credits are subject to annual limits imposed by Section 382. Despite this, we expect to use substantially all of these tax attributes to reduce our future federal tax liabilities, although the timing of that use will depend upon our future earnings and future tax circumstances.

We establish valuation allowances when necessary to reduce the deferred tax assets to amounts we expect to realize. As of December 31, 2015, a valuation allowance of $380 million was established as it is more likely than not that this amount of net operating loss and tax credit carryforwards will not be utilized prior to expiration. Our valuation allowance at December 31, 2015 and 2014 is primarily related to state NOL carryforwards. This valuation allowance decreased by $29 million during 2015.

A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 to December 31 for 2015 and 2014 is as follows:



	2015			2014
	(Dollars in millions)
Unrecognized tax benefits at beginning of year	$	17		14
Increase in tax positions taken in the current year	1			—
Increase in tax positions taken in the prior year	7			9
Decrease due to the reversal of tax positions taken in a prior year	(9		)	(2	)
Decrease from the lapse of statute of limitations	(1		)	(1	)
Settlements	—			(3	)
Unrecognized tax benefits at end of year	$	15		17

The total amount of unrecognized tax benefits that, if recognized, would impact the effective income tax rate was $32 million at both December 31, 2015 and 2014.

Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented before related tax benefits) of approximately $33 million and $30 million at December 31, 2015 and 2014, respectively.

We file income tax returns, including returns for our subsidiaries, with federal, state and local jurisdictions. Our uncertain income tax positions are related to tax years that are currently under or remain subject to examination by the relevant taxing authorities.

In 2013, Qwest filed an amended 2009 federal income tax return primarily to report the carryforward impact of prior year settlements. The refund for the 2009 amended return filed in 2013 was received in 2014. In 2014, Qwest filed an amended federal income tax return for 2010. The refund claim filed for 2010 was accepted by the IRS, and the refund was received in 2015. The 2010 amended return released certain general business credits that were required to be carried back to 2009. As a result, a subsequent 2009 federal amended return was filed by Qwest in 2014 to reflect the carrybacks from 2010. The 2009 refund claim filed in 2014 was accepted by the IRS and the refund was received in 2015.

Beginning with the 2012 tax year, our federal consolidated returns are subject to annual examination by the IRS.

Our open income tax years by major jurisdiction are as follows at December 31, 2015:



Jurisdiction		Open Tax Years
Federal		2012—current
State
Arizona		2010—current
Florida		2010—current
Other states		2011—current

Since the period for assessing additional liability typically begins upon the filing of a return, it is possible that certain jurisdictions could assess tax for years prior to the open tax years disclosed above. Additionally, it is possible that certain jurisdictions in which we do not believe we have an income tax filing responsibility, and accordingly did not file a return, may attempt to assess a liability, or that other jurisdictions to which we pay taxes may attempt to assert that we owe additional taxes.

Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may decrease by up to $11 million within the next 12 months. The actual amount of such decrease, if any, will depend on several future developments and events, many of which are outside our control.