(12) Income Taxes:

The following is a reconciliation of the provision for income taxes computed at the federal statutory rate to income taxes computed at the effective rates for the years ended December 31, 2017, 2016 and 2015:



	2017		2016		2015

Consolidated tax provision at federal statutory rate	35.0	%	35.0	%	35.0	%
State income tax provisions, net of federal income
tax benefit	1.7		(0.1)		8.7
Tax reserve adjustment	0.1		0.6		(0.3)
Domestic production activities deduction	-		(1.9)		-
Changes in certain deferred tax balances	(0.4)		5.8		0.8
Goodwill impairment	(19.1)		-		-
Federal research and development credit	0.1		1.0		1.5
Non-deductible transaction costs	-		-		0.4
Deferred Tax Remeasurement - 2017 Tax Reform	26.1		-		-
All other, net	(0.1)		(0.2)		(0.3)
Effective tax rate	43.4	%	40.2	%	45.8	%

Income taxes for the year ended December 31, 2017 includes the tax impact of $608 million related to the goodwill impairment recorded during the year.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the Tax Cut and Jobs Act (the TCJA). The TCJA, makes broad and complex changes to the U.S. tax code. The TCJA reduces the corporate tax rate to 21%, effective January 1, 2018. Under ASC 740, the effects of new legislation are recognized upon enactment. Accordingly, recognition of the tax effects of the TCJA is required in the interim and annual periods that include December 22, 2017.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

As a result of the reduction of the federal corporate income tax rate, we revalued our net deferred tax liability, as of December 31, 2017. We have recorded a net tax benefit of $830 million to value the liability using the new, lower federal tax rate. Our effective tax rate increased to 43.4% primarily as a result of the revaluation of our net deferred tax liability, partially offset by the 19.1% detriment related to the goodwill impairments. The components of the provisional net tax expense recorded in 2017 are based on currently available information and additional information needs to be prepared, obtained and/or analyzed to determine the final amounts. The provisional tax benefit for the re-measurement of deferred taxes will require additional information necessary for the preparation of our U.S. federal tax return, and further analysis and interpretation of certain provisions of the TCJA impacting deferred taxes, for example, 100% expensing of qualified assets as well as deferred tax items arising from items of income or loss recorded in other comprehensive income, could impact our tax balances as of December 31, 2017.

Income taxes for 2016 include the impact of $36 million of tax benefits resulting primarily from the adjustment of deferred tax balances due to the CTF Acquisition, the impact of $6 million in benefits from the Federal research and development credits, along with a $12 million reversal of benefits related to the domestic production activities deduction.

Income taxes for 2015 include the impact of a $3 million benefit arising from the adjustment of deferred tax balances and a $5 million benefit from the federal research and development credit.

Amounts pertaining to income tax related accounts of $0 and $55 million are included in “Income taxes and other current assets” in the consolidated balance sheets as of December 31, 2017 and 2016, respectively.

In 2017 and 2016, we received federal and state income tax refunds totaling $51 million and $120 million, respectively.

The components of the net deferred income tax liability (asset) at December 31 are as follows:



($ in millions)	2017		2016

Deferred income tax liabilities:
Property, plant and equipment basis differences	$	2,022	$	2,751
Intangibles		140		878
Deferred revenue/expense		8		14
Other, net		4		12
	$	2,174	$	3,655

Deferred income tax assets:
Pension liability		176		273
Tax operating loss carryforward		960		687
Employee benefits		192		255
Accrued expenses		23		44
Lease obligations		39		75
Tax credit		43		30
Allowance for doubtful accounts		7		44
Other, net		2		2
		1,442		1,410
Less: Valuation allowance		(407)		(271)
Net deferred income tax asset		1,035		1,139
Net deferred income tax liability	$	1,139	$	2,516

Our federal net operating loss carryforward as of December 31, 2017 is estimated at $2.1 billion. The federal loss carryforward will begin to expire after 2036, unless otherwise used.

Our state tax operating loss carryforward as of December 31, 2017 is estimated at $9.3 billion. A portion of our state loss carryforward will continue to expire annually through 2037, unless otherwise used.

Our federal research and development credit and alternative minimum tax credit as of December 31, 2017 is estimated at $18 million and $3 million, respectively. The federal research and development credit will expire between 2034 and 2037, unless otherwise used.

Our various state credits as of December 31, 2017 are estimated at $27 million. The state credits will expire between 2018 and 2022, unless otherwise used.

As of December 31, 2017, Frontier has a valuation allowance of $407 million to reduce deferred tax assets to an amount more likely than not to be realized. This valuation allowance is related to state net operating losses and state tax credits. In evaluating Frontier’s ability to realize its deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. Management also considered the projected reversal of deferred tax liabilities and projected future taxable income in making this assessment. Based upon this assessment, management believes it is more likely than not Frontier will realize the benefits of these deductible differences, net of valuation allowance. There was a valuation allowance of $271 million recorded as of December 31, 2016.

The provision (benefit) for federal and state income taxes, as well as the taxes charged or credited to equity of Frontier, includes amounts both payable currently and deferred for payment in future periods as indicated below:




($ in millions)	2017		2016		2015

Income tax expense (benefit):
Current:
Federal	$	(4)	$	(52)	$	8
State		5		7		(6)
Total Current		1		(45)		2

Deferred:
Federal		(1,312)		(145)		(126)
State		(72)		(60)		(41)
Total Deferred		(1,384)		(205)		(167)
Total income tax expense (benefit)		(1,383)		(250)		(165)

Income taxes charged (credited) to equity of Frontier:
Utilization of the benefits arising from restricted stock		(1)		(5)		-
Deferred income taxes (benefits) arising from the recognition
of additional pension/OPEB liability		7		(21)		36

Total income taxes charged (credited) to equity of Frontier		6		(26)		36
Total income taxes	$	(1,377)	$	(276)	$	(129)

U.S. GAAP requires applying a “more likely than not” threshold to the recognition and derecognition of uncertain tax positions either taken or expected to be taken in Frontier’s income tax returns. The total amount of our gross tax liability for tax positions that may not be sustained under a “more likely than not” threshold amounts to $12 million as of December 31, 2017 including interest of $1 million. The amount of our uncertain tax positions, for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease during the next twelve months, and which would affect our effective tax rate, is $3 million as of December 31, 2017.

Frontier’s policy regarding the classification of interest and penalties is to include these amounts as a component of income tax expense. This treatment of interest and penalties is consistent with prior periods. We are subject to income tax examinations generally for the years 2013 forward for federal and 2008 forward for state filing jurisdictions. We also maintain uncertain tax positions in various state jurisdictions.

The following table sets forth the changes in Frontier’s balance of unrecognized tax benefits for the years ended December 31, 2017 and 2016:



($ in millions)	2017		2016

Unrecognized tax benefits - beginning of year	$	16	$	19
Gross increases - prior year tax positions		-		3
Gross increases - current year tax positions		3		3
Gross decreases - FIN 48 liability release		(7)		(9)
Gross decreases - expired statute of limitations		-		-
Unrecognized tax benefits - end of year	$	12	$	16

The amounts above exclude $1 million of accrued interest as of December 31, 2017 and 2016, respectively, that we have recorded and would be payable should Frontier’s tax positions not be sustained.