7. INCOME TAXES

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



In millions	2016		2015			2014
Income (loss) before income taxes
United States	$	35	$	(24	)	$	(235	)
Foreign	344		(71		)	372
Total income (loss) from continuing operations before income taxes	$	379	$	(95	)	$	137

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



In millions	2016			2015			2014
Income tax expense (benefit)
Current
Federal	$	18		$	(7	)	$	(4	)
State	4			1			2
Foreign	60			37			79
Deferred
Federal	12			23			(88		)
State	1			(6		)	(7		)
Foreign	(3		)	7			(30		)
Total income tax expense (benefit)	$	92		$	55		$	(48	)

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	2016			2015			2014
Income tax expense (benefit) at the U.S. federal tax rate of 35%	$	133		$	(33	)	$	48
Foreign income tax differential	(26		)	33			(72		)
U.S. permanent book/tax differences	—			(5		)	(2		)
Tax audit settlements	—			(10		)	(15		)
Change in liability for unrecognized tax benefits	(12		)	(7		)	—
Nondeductible transaction costs	—			(1		)	1
Goodwill impairment	—			5			—
U.S. valuation allowance	—			(3		)	(8		)
U.S. manufacturing deduction	(7		)	—			—
Settlement of UK London pension plan	—			77			—
Other, net	4			(1		)	—
Total income tax expense (benefit)	$	92		$	55		$	(48	)

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 2016, the tax rate was impacted by a less favorable mix of earnings, primarily driven by actuarial pension losses in foreign jurisdictions with valuation allowance against deferred tax assets. 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 9, “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.

We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on the evaluation of positive and negative evidence. This evidence includes historical taxable income/loss, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. Given current earnings and anticipated future earnings at certain subsidiaries, the Company believes that there is a reasonable possibility sufficient positive evidence may become available that would allow the release of a valuation allowance within the next twelve months.

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



In millions	2016			2015
Deferred income tax assets
Employee pensions and other benefits	$	301		$	276
Other balance sheet reserves and allowances	237			164
Tax loss and credit carryforwards	602			628
Capitalized research and development	99			97
Property, plant and equipment	8			12
Other	38			37
Total deferred income tax assets	1,285			1,214
Valuation allowance	(445		)	(346		)
Net deferred income tax assets	840			868
Deferred income tax liabilities
Intangibles	239			270
Capitalized software	43			36
Other	7			6
Total deferred income tax liabilities	289			312
Total net deferred income tax assets	$	551		$	556

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, 2016, our net deferred tax assets in the United States totaled approximately $451 million. For the three year period ended December 31, 2016, 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, 2016, 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 2017 through 2035. This includes U.S. tax credit carryforwards of $218 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, 2016 was $39 million. Upon adoption of the updated accounting standard for stock based compensation, the Company will recognize these windfall tax benefits as an adjustment to retained earnings. Refer to Note 1, “Basis of Presentation and Significant Accounting Policies” for additional discussion on the Company's adoption of the accounting standard update. Approximately $21 million of the credit carryforwards do not expire, and $197 million of the credit carryforwards expire in the years 2017 through 2036. 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	2016			2015			2014
Gross unrecognized tax benefits - January 1	$	209		$	248		$	277
Increases related to tax positions from prior years	3			17			34
Decreases related to tax positions from prior years	(34		)	(37		)	(50		)
Increases related to tax provisions taken during the current year	23			35			43
Settlements with tax authorities	(6		)	(33		)	(14		)
Lapses of statutes of limitation	(12		)	(21		)	(42		)
Total gross unrecognized tax benefits - December 31	$	183		$	209		$	248

Of the total amount of gross unrecognized tax benefits as of December 31, 2016, $94 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 zero, $4 million of benefit, and $1 million of expense for the years ended December 31, 2016, 2015, and 2014, respectively. The gross amount of interest and penalties accrued as of December 31, 2016 and 2015 was $41 million and $46 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 2017, the Company expects to resolve certain tax matters related to U.S. and foreign jurisdictions. As of December 31, 2016, we estimate that it is reasonably possible that unrecognized tax benefits may decrease by $35 million to $40 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 2016 on approximately $2.3 billion of undistributed earnings of its foreign subsidiaries as such earnings are intended to be reinvested indefinitely unless it is determined 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.