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Income Taxes
9 Months Ended
Sep. 30, 2015
Income Tax Disclosure [Abstract]  
Income Taxes
In the three and nine months ended September 30, 2015, the Company recorded income tax expense related to continuing operations of $11 million and $33 million, respectively. The effective tax rate on pretax income from continuing operations was 28.9% and 35.1% in the three and nine months ended September 30, 2015, respectively. These rates differ from the U.S. federal statutory rate of 35% due to state income taxes (net of federal benefit), the domestic production activities deduction and other non-deductible expenses. In addition, the three and nine months ended September 30, 2015 had favorable adjustments totaling $4 million related to the resolution of certain federal income tax matters and other adjustments.
In the three and nine months ended September 28, 2014, the Company recorded income tax expense related to continuing operations of $3 million and $63 million, respectively. The effective tax rate on pretax income from continuing operations was 4.8% and 29.7% for the three and nine months ended September 28, 2014, respectively. These rates differ from the U.S. federal statutory rate of 35% due to state income taxes (net of federal benefit), the domestic production activities deduction, certain transaction costs not fully deductible for tax purposes and other non-deductible expenses. In addition, the three and nine months ended September 28, 2014 had favorable adjustments totaling $4 million related to the resolution of certain federal income tax matters, an $11 million one-time benefit due to the decrease in the Company’s net deferred tax liabilities as a result of the Publishing Spin-off and its impact on the Company’s corporate structure as well as less than $1 million of other adjustments.
Newsday and Chicago Cubs Transactions—As further described in Note 8 to the Company’s audited consolidated financial statements for the fiscal year ended December 28, 2014, the Company consummated the closing of the Newsday Transactions on July 29, 2008. As a result of these transactions, CSC, through NMG Holdings, Inc., owned approximately 97% and the Company owned approximately 3% of NHLLC. The fair market value of the contributed NMG net assets exceeded their tax basis and did not result in an immediate taxable gain because the transaction was structured to comply with the partnership provisions of the IRC and related regulations. In March 2013, the IRS issued its audit report on the Company’s federal income tax return for 2008 which concluded that the gain should have been included in the Company’s 2008 taxable income. Accordingly, the IRS has proposed a $190 million tax and a $38 million accuracy-related penalty. After-tax interest on the proposed tax through September 30, 2015 would be approximately $36 million. The Company disagrees with the IRS’s position and has timely filed its protest in response to the IRS’s proposed tax adjustments. The Company is contesting the IRS’s position in the IRS administrative appeals division. If the IRS position prevails, the Company would also be subject to approximately $32 million, net of tax benefits, of state income taxes and related interest through September 30, 2015. The Company does not maintain any tax reserves relating to the Newsday Transactions. In accordance with ASC Topic 740, “Income Taxes,” the Company’s unaudited condensed consolidated balance sheet at December 28, 2014 included a deferred tax liability of $110 million related to the future recognition of taxable income related to the Newsday Transactions. As further described in Note 6, on September 2, 2015, the Company sold its remaining interest in the Newsday partnership. The Company’s remaining deferred tax liability of $101 million became payable upon the consummation of the sale. The sale of its partnership interest does not impact the ongoing IRS audit, nor does it change the Company’s view on the tax position(s) taken on the original transaction. If the IRS prevails, any tax and interest due will be adjusted to reflect any tax payments made subsequent to 2008.
As further described in Note 8 to the Company’s audited consolidated financial statements for the fiscal year ended December 28, 2014, the Company consummated the closing of the Chicago Cubs Transactions on October 27, 2009. As a result of these transactions, Ricketts Acquisition LLC owns 95% and the Company owns 5% of the membership interests in New Cubs LLC. The fair market value of the contributed assets exceeded the tax basis and did not result in an immediate taxable gain because the transaction was structured to comply with the partnership provisions of the IRC and related regulations. The IRS is currently auditing the Company’s 2009 federal income tax return which includes the Chicago Cubs Transactions. The Company expects the IRS audit to be concluded during 2016. If the gain on the Chicago Cubs Transactions is deemed by the IRS to be taxable in 2009, the federal and state income taxes would be approximately $225 million before interest and penalties. The Company does not maintain any tax reserves relating to the Chicago Cubs Transactions. In accordance with ASC Topic 740, the Company’s unaudited condensed consolidated balance sheet at September 30, 2015 includes a deferred tax liability of $167 million related to the future recognition of taxable income related to the Chicago Cubs Transactions.
Other—Although management believes its estimates and judgments are reasonable, the resolutions of the Company’s tax issues are unpredictable and could result in tax liabilities that are significantly higher or lower than that which has been provided by the Company. The Company accounts for uncertain tax positions in accordance with ASC Topic 740, which addresses the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company’s liability for unrecognized tax benefits totaled $17 million at September 30, 2015 and $19 million at December 28, 2014. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by approximately $10 million within the next twelve months due to the resolution of tax examination issues and statute of limitations expirations.