NOTE 13: INCOME TAXES

The following is a reconciliation of income taxes from continuing operations computed at the U.S. federal statutory rate of 35% to income tax expense from continuing operations reported in the Consolidated Statements of Operations (in thousands):



	2016			2015			2014
Income (loss) from continuing operations before income taxes	$	434,242		$	(289,419	)	$	760,885

Federal income taxes at 35%	151,985			(101,297		)	266,310
State and local income taxes, net of federal tax benefit	17,474			3,195			32,072
Domestic production activities deduction	(6,807		)	(6,554		)	(7,910		)
Non-deductible goodwill	—			133,350			—
Income tax settlements and other adjustments, net	179,558			(7,842		)	(1,801		)
Tax rate change due to Publishing Spin-off	—			—			(10,810		)
Other, net	4,992			5,066			6,405
Income tax expense from continuing operations	$	347,202		$	25,918		$	284,266

Effective tax rate	80.0%			(9.0)%			37.4%

In 2016, income tax expense amounted to $347 million, which reflects a $191 million charge related to the Newsday settlement, as described below. In addition, tax expense included favorable adjustments of $11 million related to the resolution of certain federal and state income tax matters and other adjustments.

In 2015, income tax expense amounted to $26 million, which reflects the tax impact of the reversal of $381 million of book loss related to an impairment of non-deductible goodwill. In addition, tax expense included favorable adjustments of $8 million related to the resolution of certain federal and state income tax matters and other adjustments.

In 2014, income tax expense amounted to $284 million, which included favorable adjustments of $2 million primarily related to the resolution of certain federal income tax matter and an $11 million one-time benefit due to the decrease in the Company’s net state deferred tax liabilities as a result of the change in the Company’s income tax rate immediately following the Publishing Spin-off.

Company has not recorded a provision for deferred U.S. income tax expense on the undistributed earnings of foreign subsidiaries since the Company intends to indefinitely reinvest the earnings of these foreign subsidiaries outside the U.S. The amount of undistributed foreign earnings was less than $1 million at December 31, 2016, December 31, 2015 and December 28, 2014. The determination of the amount of unrecognized U.S. deferred income tax liability with respect to these undistributed foreign earnings is not practicable.

Components of income tax expense from continuing operations were as follows (in thousands):



	2016		2015			2014
Current:
U.S. federal	$	273,205	$	138,871		$	381,884
State and local	35,057		16,677			77,783
Sub-total	308,262		155,548			459,667
Deferred:
U.S. federal	32,783		(110,390		)	(131,854		)
State and local	6,157		(19,240		)	(43,547		)
Sub-total	38,940		(129,630		)	(175,401		)
Total income tax expense from continuing operations	$	347,202	$	25,918		$	284,266

Significant components of the Company’s net deferred tax assets and liabilities were as follows (in thousands):



	December 31, 2016		December 31, 2015
Deferred tax assets:
Broadcast rights	$	78,531	$	86,451
Postretirement benefits other than pensions	3,467		3,933
Stock-based compensation and other employee benefits	20,261		16,011
Pensions	175,766		180,342
Other accrued liabilities	15,518		16,482
Other future deductible items	16,638		17,877
Net operating loss carryforwards	1,582		1,807
Accounts receivable	4,902		2,173
Total deferred tax assets	$	316,665	$	325,076

Deferred tax liabilities:
Net intangible assets	$	564,405	$	565,600
Investments	399,103		418,908
Deferred gain on partnership contributions	157,567		164,322
Net properties	112,864		60,048
Outside basis difference on Gracenote Companies	63,403		1,097
Other	3,571		5,807
Total deferred tax liabilities	1,300,913		1,215,782
Net deferred tax liabilities	$	984,248	$	890,706

Federal, State and Foreign Operating Loss Carryforwards—At December 31, 2016 and December 31, 2015, the Company had approximately $56 million and $64 million, respectively, of state operating loss carryforwards. The carryforwards will expire between 2019 and 2029. The Company has not recorded a valuation allowance on the basis of management’s assessment that the net operating losses are more likely than not to be realized. The federal, state and foreign operating loss carryforwards attributable to the divested entities have been classified as held for sale as further described in Note 2.

Newsday and Chicago Cubs Transactions—As further described in Note 8, 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. On September 2, 2015, the Company sold its 3% interest in Newsday, as further described in Note 8. Through December 31, 2015, the Company made approximately $136 million of federal and state tax payments through its regular tax reporting process, which included $101 million that became payable upon closing of the sale of the Newsday partnership interest.

In March 2013, the IRS issued its audit report on the Company’s federal income tax return for 2008 which concluded that the gain from the Newsday Transactions should have been included in the Company’s 2008 taxable income. Accordingly, the IRS proposed a $190 million tax and a $38 million accuracy-related penalty. The Company would also be subject to interest on the tax and penalty due. The Company disagreed with the IRS’s position and timely filed a protest in response to the IRS’s proposed tax adjustments. In addition, if the IRS prevailed, the Company also would have been subject to state income taxes, interest and penalties.

During the second quarter of 2016, as a result of extensive discussions with the IRS administrative appeals division, the Company reevaluated its tax litigation position related to the Newsday transaction and re-measured the cumulative most probable outcome of such proceedings. As a result, during the second quarter of 2016, the Company recorded a $102 million charge which was reflected as a $125 million current income tax reserve and a $23 million reduction in deferred income tax liabilities. The income tax reserve included federal and state taxes, interest and penalties while the deferred income tax benefit is primarily related to deductible interest expense. In connection with the potential resolution of the matter, the Company also recorded $91 million of income tax expense to increase the Company’s deferred income tax liability to reflect the reduction in the tax basis of the Company’s assets. The reduction in tax basis is required to reflect the reduction in the amount of the Company’s guarantee of the Newsday partnership debt which was included in the reported tax basis previously determined upon emergence from bankruptcy. During the third quarter of 2016, the Company reached an agreement with the IRS administrative appeals division regarding the Newsday transaction which applies for tax years 2008 through 2015. The terms of the agreement reached with the IRS appeals office were materially consistent with the Company’s reserves at June 30, 2016. During the fourth quarter of 2016, the Company recorded an additional $1 million of income tax expense primarily related to the additional accrual of interest. During the second half of 2016, the Company paid $122 million of federal taxes, state taxes (net of state refunds), interest and penalties. The tax payments were recorded as a reduction in the Company’s current income tax reserve described above. The remaining $4 million of state liabilities are included in the income taxes payable account on the Company’s Consolidated Balance Sheet at December 31, 2016. In connection with the final agreement, the Company also recorded an income tax benefit of $3 million to adjust the previously recorded estimate of the deferred tax liability adjustment described above.

As further described in Note 8, 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. On June 28, 2016, the IRS issued the Company a Notice of Deficiency (“Notice”) which presents the IRS’s position that the gain should have been included in the Company’s 2009 taxable income. Accordingly, the IRS has proposed a $182 million tax and a $73 million gross valuation misstatement penalty. In addition, after-tax interest on the aforementioned proposed tax and penalty through December 31, 2016 would be approximately $41 million. The Company continues to disagree with the IRS’s position that the transaction generated a taxable gain in 2009, the proposed penalty and the IRS’s calculation of the gain. During the third quarter of 2016, the Company filed a petition in U.S. Tax Court to contest the IRS’s determination. The Company continues to pursue resolution of this disputed tax matter with the IRS. If the IRS prevails in their position, the gain on the Chicago Cubs Transactions would be deemed to be taxable in 2009. The Company estimates that the federal and state income taxes would be approximately $225 million before interest and penalties. Any tax, interest and penalty due will be offset by tax payments made relating to this transaction subsequent to 2009. As of December 31, 2016, the Company has paid approximately $42 million of federal and state tax payments through its regular tax reporting process. The Company does not maintain any tax reserves relating to the Chicago Cubs Transactions. In accordance with ASC Topic 740, the Company’s Consolidated Balance Sheet at December 31, 2016 and December 31, 2015 includes a deferred tax liability of $158 million and $164 million, respectively, related to the future recognition of taxable income related to the Chicago Cubs Transactions.

Accounting for Uncertain Tax Positions—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. Under ASC Topic 740, a company may recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. ASC Topic 740 requires the tax benefit recognized in the financial statements to be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure.

The Company’s liability for unrecognized tax benefits totaled $23 million at December 31, 2016 and $34 million at December 31, 2015. If all of the unrecognized tax benefits at those dates had been recognized, there would have been a favorable $17 million and $26 million impact on the Company’s reported income tax expense in 2016 and 2015, respectively.

As allowed by ASC Topic 740, the Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. The Company’s accrued interest and penalties included in the Newsday settlement as described above totaled $80 million for the year ended December 31, 2016. Excluding the impact of Newsday, the Company’s accrued interest and penalties related to uncertain tax positions totaled $1 million of tax expense for both December 31, 2016 and December 31, 2015.

The Company is no longer subject to IRS audit and has paid all taxes for years prior to 2013, with the exception of 2009 as described above. State income tax returns are generally subject to examination for a period of three to five years after they are filed, although many states often receive extensions of time from the Company. In addition, states may examine the state impact of any federal changes for a period of up to one year after the states are formally notified of the changes. The Company currently has various state income tax returns in the process of examination or administrative appeals. No foreign income tax returns are currently in the process of examination or administrative appeal.

The following summarizes the changes in the Company’s liability for unrecognized tax benefits during 2014, 2015 and 2016 (in thousands):



Liability at December 29, 2013	$	21,544
Gross increase as a result of tax positions related to a prior period	913
Decrease related to statute of limitations expirations	(3,605		)
Liability at December 28, 2014	$	18,852
Gross increase as a result of tax positions related to a prior period	12,573
Gross increase as a result of tax positions related to the current period	3,841
Decrease related to statute of limitations expirations	(1,634		)
Liability at December 31, 2015	$	33,632
Gross increase as a result of tax positions related to a prior period	46,034
Gross increase as a result of tax positions related to the current period	449
Gross decrease as a result of tax positions related to a prior period	(2,591		)
Decreases related to settlements with taxing authorities	(45,130		)
Reclassifications to income taxes payable	(1,615		)
Decrease related to statute of limitations expirations	(8,247		)
Liability at December 31, 2016	$	22,532

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 believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by approximately $1 million within the next twelve months due to the resolution of tax examination issues and statute of limitations expirations.