Income Taxes

The significant components of income tax expense from continuing operations were as follows.



Year ended December 31, ($ in millions)	2016		2015		2014
Current income tax expense
U.S. federal	$	—	$	—	$	(3	)
Foreign	8		6		8
State and local	9		3		5
Total current expense	17		9		10
Deferred income tax expense
U.S. federal	423		454		270
Foreign	—		1		2
State and local	30		32		39
Total deferred expense	453		487		311
Total income tax expense from continuing operations	$	470	$	496	$	321

A reconciliation of income tax expense from continuing operations with the amounts at the statutory U.S. federal income tax rate is shown in the following table.



Year ended December 31, ($ in millions)	2016			2015			2014
Statutory U.S. federal tax expense	$	553		$	488		$	436
Change in tax resulting from
Changes in unrecognized tax benefits (a)	(161		)	(5		)	(63		)
Valuation allowance change, excluding expirations	51			(25		)	(47		)
State and local income taxes, net of federal income tax benefit	35			38			48
Tax credits, excluding expirations	(15		)	(13		)	(27		)
Nondeductible expenses	7			14			31
Tax law enactment	—			—			(39		)
Other, net	—			(1		)	(18		)
Total income tax expense from continuing operations	$	470		$	496		$	321


(a)	Primarily the result of a Q2 2016 U.S. tax reserve release related to a prior year federal return.

For the tax year ended December 31, 2016, consolidated income tax expense from continuing operations is largely driven by tax attributable to pretax earnings for the year and the establishment of a valuation allowance on capital loss carryforwards, offset by a reduction in the liability for unrecognized tax benefits that resulted from the completion of a U.S. federal audit related to a prior tax year. For the year ended December 31, 2015, consolidated income tax expense from continuing operations is largely driven by tax attributable to pretax earnings for the year, offset by tax benefits recognized from the release of our valuation allowance on capital loss carryforwards utilized against current year capital gains. For the year ended December 31, 2014, consolidated income tax expense from continuing operations was largely driven by tax attributable to pretax earnings for the year, offset by tax benefits recognized from the release of a portion of our valuation allowance on capital loss carryforwards utilized against 2014 capital gains, a reduction in the liability for unrecognized tax benefits that resulted from the completion of the U.S. federal audit related to our 2009 tax year, and the reinstatement of the active financing exception included in the Tax Increase Prevention Act of 2014.

As of each reporting date, we consider existing evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. We continue to believe it is more likely than not that the benefit for certain foreign tax credits, state net operating loss carryforwards, and state capital loss carryforwards will not be realized. In recognition of this risk, we continue to provide a partial valuation allowance on the deferred tax assets relating to these carryforwards. Finally, as a result of the U.S. tax reserve release, we recorded additional capital loss carryforward deferred tax assets. After assessing the positive and negative evidence surrounding our ability to realize these carryforwards before expiration, we established a full valuation allowance against these deferred tax assets.

The significant components of deferred tax assets and liabilities are reflected in the following table.



December 31, ($ in millions)	2016			2015
Deferred tax assets
Tax credit carryforwards	$	1,987		$	1,941
Tax loss carryforwards	936			950
Adjustments to loan value	546			311
State and local taxes	162			194
Unearned insurance premiums	141			141
Hedging transactions	123			99
Other	208			212
Gross deferred tax assets	4,103			3,848
Valuation allowance	(646		)	(582		)
Deferred tax assets, net of valuation allowance	3,457			3,266
Deferred tax liabilities
Lease transactions	1,789			1,273
Deferred acquisition costs	424			403
Debt transactions	161			162
Other	107			69
Gross deferred tax liabilities	2,481			1,907
Net deferred tax assets (a)	$	976		$	1,359

(a)

Total net deferred tax assets include $994 million and $1,369 million of net deferred tax assets included in other assets on our Consolidated Balance Sheet for tax jurisdictions in a total net deferred tax asset position and $18 million and $10 million included in accrued expenses and other liabilities on our Consolidated Balance Sheet for tax jurisdictions in a total net deferred tax liability position at December 31, 2016, and 2015, respectively.

The following table summarizes net deferred tax assets including related valuation allowances at December 31, 2016.



($ in millions)	Deferred tax asset/(liability)				Valuation allowance			Net deferred tax asset/(liability)			Years of expiration
Tax credit carryforwards
Foreign tax credits	$	1,771			$	(485	)	$	1,286		2017–2026
General business credits	191				—			191			2023–2036
Alternative minimum tax (AMT) credits	25				—			25			n/a
Total tax credit carryforwards	1,987				(485		)	1,502
Tax loss carryforwards
Net operating losses — federal	900				—			900			2027–2036
Net operating losses — state	193			(a)	(83		)	110			2017–2036
Capital losses — federal	36				(36		)	—			2017
Capital losses — state	9			(a)	(9		)	—			2017–2027
Total tax loss carryforwards	1,138				(128		)	1,010
Other deferred tax assets	978				(33		)	945			n/a
Deferred tax assets	4,103				(646		)	3,457
Deferred tax liabilities	(2,481		)		—			(2,481		)	n/a
Net deferred tax assets	$	1,622			$	(646	)	$	976


(a)	State net operating loss and capital loss carryforwards are included in the state and local taxes total disclosed in our deferred inventory table above.

As of December 31, 2016, we do not assert that foreign earnings are indefinitely reinvested outside of the United States. As a result, deferred tax liabilities for incremental U.S. tax that stem from temporary differences related to investments in foreign subsidiaries or foreign corporate joint ventures have been recognized as of December 31, 2016.

The following table provides a reconciliation of the beginning and ending amount of unrecognized tax benefits.



($ in millions)	2016			2015			2014
Balance at January 1,	$	185		$	191		$	262
Additions based on tax positions related to the current year	—			—			—
Additions for tax positions of prior years	12			7			9
Settlements	(182		)	(10		)	(79		)
Expiration of statute of limitations	(1		)	(3		)	(1		)
Balance at December 31,	$	14		$	185		$	191

Included in the unrecognized tax benefits balances are some items, the recognition of which would not affect the effective tax rate, such as the tax effect of certain temporary differences and the portion of gross state unrecognized tax benefits that would be offset by the tax benefit of the associated federal deduction. At December 31, 2016, 2015, and 2014, the balance of unrecognized tax benefits that, if recognized, would affect our effective tax rate is $9 million, $177 million, and $182 million, respectively.

We recognize accrued interest and penalties related to uncertain income tax positions in interest expense and other operating expenses, respectively. The cumulative accrued balance for interest and penalties is $1 million at December 31, 2016, $2 million at December 31, 2015, and $5 million at December 31, 2014. For each of the years ended December 31, 2016, 2015, and 2014, interest and penalties of $1 million or less were accrued.

It is reasonably possible that the unrecognized tax benefits will decrease by up to $3 million over the next twelve months if certain tax matters ultimately settle with the applicable taxing jurisdiction.

We file tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. Our most significant operations remaining following our divestitures of various international operations are the U.S. and Canada. The oldest tax years that remain subject to examination for those jurisdictions are 2012 and 2011, respectively.