8. INCOME TAXES

For the years ended December 31, (loss) income from continuing operations before income taxes consisted of the following:



In millions	2015			2014			2013
(Loss) income before income taxes
United States	$	(24	)	$	(235	)	$	29
Foreign	(71		)	372			525
Total (loss) income from continuing operations before income taxes	$	(95	)	$	137		$	554

For the years ended December 31, income tax expense (benefit) consisted of the following:



In millions	2015			2014			2013
Income tax expense (benefit)
Current
Federal	$	(7	)	$	(4	)	$	(13	)
State	1			2			3
Foreign	37			79			105
Deferred
Federal	23			(88		)	19
State	(6		)	(7		)	(4		)
Foreign	7			(30		)	(12		)
Total income tax expense (benefit)	$	55		$	(48	)	$	98

The following table presents the principal components of the difference between the effective tax rate and the U.S. federal statutory income tax rate for the years ended December 31:



In millions	2015			2014			2013
Income tax expense (benefit) at the U.S. federal tax rate of 35%	$	(33	)	$	48		$	194
Foreign income tax differential	33			(72		)	(86		)
U.S. permanent book/tax differences	(5		)	(2		)	3
Tax audit settlements	(10		)	(15		)	—
Change in liability for unrecognized tax benefits	(7		)	—			29
Nondeductible transaction costs	(1		)	1			1
Goodwill impairment	5			—			—
U.S. valuation allowance	(3		)	(8		)	—
Valuation allowance releases	—			—			(25		)
Settlement of UK London pension plan	77			—			—
Tax extenders legislation	—			—			(16		)
Other, net	(1		)	—			(2		)
Total income tax expense (benefit)	$	55		$	(48	)	$	98

NCR's tax provisions include a provision for income taxes in certain tax jurisdictions where its subsidiaries are profitable, but reflect only a portion of the tax benefits related to certain foreign subsidiaries' tax losses due to the uncertainty of the ultimate realization of future benefits from these losses. During 2015, there was no tax benefit recorded on the $427 million charge related to the settlement of the UK London pension plan due to a valuation allowance against deferred tax assets in the United Kingdom. Refer to Note 10, “Employee Benefit Plans,” for additional discussion on the settlement of the UK London pension plan. Additionally, we favorably settled examinations with Canada for tax years 2002 through 2006 that resulted in a tax benefit of $10 million. During 2014, we favorably settled examinations with the IRS for the 2009 and 2010 tax years that resulted in a tax benefit of $13 million. In addition, the 2014 tax rate was favorably impacted by a $9 million reduction in the U.S. valuation allowance and a favorable mix of earnings by country, primarily driven by actuarial pension losses due to a change in the U.S. mortality table. During 2013, we recorded a one-time benefit of approximately $16 million in connection with the American Taxpayer Relief Act of 2012 that was signed into law in January 2013 and the related retroactive tax relief for certain law provisions that expired in 2012. The 2013 tax provision was also favorably impacted by the release of a $10 million valuation allowance due to the implementation of a tax planning strategy to access certain deferred tax assets, a $15 million reduction in a valuation allowance related to a subsidiary in Japan, and a favorable mix of earnings by country, primarily related to lower pension benefit.

Deferred income tax assets and liabilities included in the Consolidated Balance Sheets as of December 31 were as follows:



In millions	2015			2014
Deferred income tax assets
Employee pensions and other benefits	$	276		$	207
Other balance sheet reserves and allowances	164			170
Tax loss and credit carryforwards	628			739
Capitalized research and development	97			107
Property, plant and equipment	12			8
Other	37			32
Total deferred income tax assets	1,214			1,263
Valuation allowance	(346		)	(294		)
Net deferred income tax assets	868			969
Deferred income tax liabilities
Intangibles	270			302
Taxable distribution	—			55
Capitalized software	36			32
Other	6			4
Total deferred income tax liabilities	312			393
Total net deferred income tax assets	$	556		$	576

NCR recorded valuation allowances related to certain deferred income tax assets due to the uncertainty of the ultimate realization of the future benefits from those assets. The valuation allowances cover deferred tax assets, primarily tax loss carryforwards, in tax jurisdictions where there is uncertainty as to the ultimate realization of a benefit from those tax losses. At December 31, 2015, our net deferred tax assets in the United States totaled approximately $456 million. For the three year period ended December 31, 2015, we had a cumulative net loss from continuing operations before income taxes, which is generally considered a negative indicator of our ability to realize the benefits of those assets. We evaluated the realizability of the U.S. deferred tax assets by weighing positive and negative evidence, including our history of taxable income in the U.S., and the substantial length of time over which our deferred tax assets relating to net operating losses and employee pensions may be realized. Through this assessment, realization of the related benefits was determined to be more likely than not. If we are unable to generate sufficient future taxable income in the time period within which the temporary differences underlying our deferred tax assets become deductible, or before the expiration of our loss and credit carryforwards, additional valuation allowance could be required.

As of December 31, 2015, NCR had U.S. federal and foreign tax attribute carryforwards of approximately $1.3 billion. The net operating loss carryforwards that are subject to expiration will expire in the years 2016 through 2035. This includes U.S. tax credit carryforwards of $295 million. The amount of tax deductions in excess of previously recorded windfall tax benefits associated with stock-based compensation included in U.S. federal tax credit carryforwards but not reflected in deferred tax assets for the year ended December 31, 2015 was $38 million. Upon realization of the U.S. federal tax credit carryforwards, the Company will recognize a windfall tax benefit as an increase to additional paid-in capital. Approximately $21 million of the credit carryforwards do not expire, and $274 million of the credit carryforwards expire in the years 2016 through 2035. As a result of recent stock ownership changes our U.S. tax attributes could be subject to limitations under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, if further material stock ownership changes occur.

The aggregate changes in the balance of our gross unrecognized tax benefits were as follows for the years ended December 31:



In millions	2015			2014			2013
Gross unrecognized tax benefits - January 1	$	248		$	277		$	256
Increases related to tax positions from prior years	17			34			33
Decreases related to tax positions from prior years	(37		)	(50		)	(33		)
Increases related to tax provisions taken during the current year	35			43			40
Settlements with tax authorities	(33		)	(14		)	(2		)
Lapses of statutes of limitation	(21		)	(42		)	(17		)
Total gross unrecognized tax benefits - December 31	$	209		$	248		$	277

Of the total amount of gross unrecognized tax benefits as of December 31, 2015, $109 million would affect NCR’s effective tax rate if realized. The Company’s liability arising from uncertain tax positions is recorded in income tax accruals and other current liabilities in the Consolidated Balance Sheets.

We recognized interest and penalties associated with uncertain tax positions as part of the provision for income taxes in our Consolidated Statements of Operations of $4 million of benefit, $1 million of expense, and $8 million of expense for the years ended December 31, 2015, 2014, and 2013, respectively. The gross amount of interest and penalties accrued as of December 31, 2015 and 2014 was $46 million and $54 million, respectively.

In the U.S., NCR files consolidated federal and state income tax returns where statutes of limitations generally range from three to five years. The Company resolved examinations for the tax years of 2009 and 2010 with the IRS in 2014, and U.S. federal tax years remain open from 2011 forward. In 2014, the IRS commenced an examination of our 2011, 2012, and 2013 income tax returns, which is ongoing. Years beginning on or after 2001 are still open to examination by certain foreign taxing authorities, including India, Korea, and other major taxing jurisdictions.

During 2016, the Company expects to resolve certain tax matters related to U.S. and foreign jurisdictions. As of December 31, 2015, we estimate that it is reasonably possible that unrecognized tax benefits may decrease by $10 million to $15 million in the next 12 months due to the resolution of these tax matters.

NCR did not provide for U.S. federal income taxes or foreign withholding taxes in 2015 on approximately $2.4 billion of undistributed earnings of its foreign subsidiaries as such earnings are intended to be reinvested indefinitely unless it is determined that future repatriation would give rise to little or no net tax costs. Due to the complexities in the tax laws, the assumptions that we would have to make and the availability and calculation of associated foreign tax credits, it is not practicable to determine the amount of the related unrecognized deferred income tax liability associated with these undistributed earnings.