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):



	2017			2016			2015
(Loss) income from continuing operations before income taxes	$	(118,296	)	$	434,242		$	(289,419	)

Federal income taxes at 35%	(41,404		)	151,985			(101,297		)
State and local income taxes, net of federal tax benefit	(4,606		)	17,474			3,195
Domestic production activities deduction	(5,539		)	(6,807		)	(6,554		)
Non-deductible reorganization and transaction costs	7,598			497			622
Non-deductible goodwill	—			—			133,350
Impact of federal and state rate changes	(262,851		)	—			—
Income tax settlements and other adjustments, net	634			179,558			(7,842		)
Other, net	4,795			4,495			4,444
Income tax (benefit) expense from continuing operations	$	(301,373	)	$	347,202		$	25,918

Effective tax rate	254.8%			80.0%			(9.0)%

In 2017, income tax benefit amounted to $301 million, which reflects a $256 million provisional discrete net tax benefit due to the Tax Reform as defined and further described below and a one-time benefit of $7 million due to a decrease in the Company’s net state deferred tax liabilities as a result of a change in the Company’s state effective income tax rate.

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform”) was signed into law. Under ASC Topic 740, the effects of Tax Reform are recognized in the period of enactment and as such are recorded in the Company’s fourth quarter of 2017. The Company is in the process of analyzing certain provisions of Tax Reform including but not limited to the repeal of the domestic production activities deduction and changes to the deductibility of executive compensation. Consistent with the guidance under ASC Topic 740, and subject to Staff Accounting Bulletin (“SAB”) 118, which provides for a measurement period to complete the accounting for certain elements of Tax Reform, the Company recorded the provisional impact from the enactment of Tax Reform in the fourth quarter of 2017. As a result of Tax Reform, the Company recorded a provisional discrete net tax benefit of $256 million, primarily due to a remeasurement of the net deferred tax liabilities resulting from the decrease in the U.S. federal corporate income tax rate from 35% to 21%. Further impacts of Tax Reform may be reflected in future quarters upon issuance of clarifications to existing law or additional technical guidance from the Department of Treasury and the completion of the Company’s tax return filings. Tax Reform also provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company does not have any net accumulated E&P in its foreign subsidiaries and therefore is not subject to tax for the year ended December 31, 2017. Further, the Company has analyzed the effects of new taxes due on certain foreign income, such as global intangible low-taxed income (“GILTI”), base-erosion anti-abuse tax (“BEAT”), foreign-derived intangible income (“FDII”) and limitations on interest expense deductions (if certain conditions apply) that are effective starting in fiscal 2018. The Company has determined that these new provisions are not applicable to the Company.

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 primarily related to the resolution of certain federal and state income tax matters and other adjustments.

The Company has not recorded a provision for deferred U.S. income tax expense on any undistributed earnings of foreign subsidiaries since the Company intends to indefinitely reinvest the earnings of these foreign subsidiaries outside the U.S. The Company had less than $1 million at each of December 31, 2017, December 31, 2016 and December 31, 2015. The amount of unrecognized U.S. deferred income tax liability with respect to these undistributed foreign earnings is not material.

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



	2017			2016		2015
Current:
U.S. federal	$	94,873		$	273,205	$	138,871
State and local	18,810			35,057		16,677
Sub-total	113,683			308,262		155,548
Deferred:
U.S. federal	(381,063		)	32,783		(110,390		)
State and local	(33,993		)	6,157		(19,240		)
Sub-total	(415,056		)	38,940		(129,630		)
Total income tax (benefit) expense from continuing operations	$	(301,373	)	$	347,202	$	25,918

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



	December 31, 2017			December 31, 2016
Deferred tax assets:
Broadcast rights	$	53,249		$	78,531
Postretirement benefits other than pensions	1,970			3,467
Stock-based compensation and other employee benefits	13,995			20,261
Pensions	93,913			175,766
Deferred gain on spectrum	49,103			—
Other accrued liabilities	9,630			15,518
Other future deductible items	14,479			16,638
Net operating loss carryforwards	1,436			1,582
Accounts receivable	1,240			4,902
	239,015			316,665
Valuation allowance	(633		)	—
Total deferred tax assets	$	238,382		$	316,665

Deferred tax liabilities:
Net intangible assets	$	370,284		$	564,405
Investments	209,751			399,103
Deferred gain on partnership contributions	96,076			157,567
Net properties	70,445			112,864
Outside basis difference on Gracenote Companies	—			63,403
Other	—			3,571
Total deferred tax liabilities	746,556			1,300,913
Net deferred tax liabilities	$	508,174		$	984,248

Federal, State and Foreign Operating Loss Carryforwards—At December 31, 2017 and December 31, 2016, the Company had approximately $50 million and $56 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 discontinued operations, as further described in Note 2.

Newsday 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 both December 31, 2017 and 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.

Chicago Cubs Transactions—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, 2017 would be approximately $63 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, 2017, the Company has paid or accrued approximately $53 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, 2017 and December 31, 2016 includes a deferred tax liability of $96 million and $158 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 both December 31, 2017 and December 31, 2016. If all of the unrecognized tax benefits at those dates had been recognized, there would have been a favorable $20 million and $17 million impact on the Company’s reported income tax expense in 2017 and 2016, 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 less than $1 million and $80 million for the years ended December 31, 2017 and December 31, 2016, respectively. 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, 2017 and December 31, 2016.

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 2015, 2016 and 2017 (in thousands):



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
Gross increase as a result of tax positions related to a prior period	223
Gross increase as a result of tax positions related to the current period	2,414
Gross decrease as a result of tax positions related to a prior period	(277		)
Decreases related to settlements with taxing authorities	(1,568		)
Decrease related to statute of limitations expirations	(2		)
Liability at December 31, 2017	$	23,322

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 $11 million within the next twelve months due to the resolution of tax examination issues and statute of limitations expirations.