(9) INCOME TAXES

The provision (benefit) for income taxes included the following components:


		2016		2015		2014
	(in millions)
Current:
Federal	$	(6)	$	1	$	11
State		(1)		(3)		10
		(7)		(2)		21

Deferred:
Federal		(22)		(1,697)		501
State		–		(304)		2
Foreign		–		(2)		1
		(22)		(2,003)		504
Provision (benefit) for income taxes	$	(29)	$	(2,005)	$	525

The provision for income taxes was an effective rate of 1% in 2016, 31% in 2015 and 36% in 2014. The following reconciles the provision for income taxes included in the consolidated statements of operations with the provision which would result from application of the statutory federal tax rate to pre-tax financial income:


	2016		2015		2014
	(in millions)
Expected provision (benefit) at federal statutory rate	$	(935)	$	(2,296)	$	507
Increase (decrease) resulting from:
State income taxes, net of federal income tax effect		(79)		(194)		58
Nondeductible expenses		–		–		3
State rate redetermination		–		–		(48)
Change in uncertain tax positions		(19)		(7)		–
Change in valuation allowance		1,002		495		5
Other		2		(3)		–
Provision (benefit) for income taxes	$	(29)	$	(2,005)	$	525

Our effective tax rate decreased in 2016, as compared with 2015, primarily due to the recognition of a valuation allowance in the fourth quarter of 2015 that persisted throughout 2016.

The components of the Company’s deferred tax balances as of December 31, 2016 and 2015 were as follows:


	2016		2015
	(in millions)
Deferred tax liabilities:
Differences between book and tax basis of property	$	81	$	216
Other		1		2
		82		218

Deferred tax assets:
Accrued compensation		38		19
Alternative minimum tax credit carryforward		100		125
Accrued pension costs		19		19
Asset retirement obligations		53		77
Net operating loss carryforward		1,177		445
Derivative activity		142		–
Other		29		26
		1,558		711
Valuation allowance		(1,476)		(493)
Net deferred tax liability	$	–	$	–

In 2016, the Company paid less than $1 million in state income taxes and received $15 million in federal income tax refunds. In 2015, the Company paid less than $1 million in state income taxes and did not pay federal income taxes. The Company’s net operating loss carryforward as of December 31, 2016 was $3.2 billion and $2.2 billion for federal and state reporting purposes, respectively, the majority of which will expire between 2029 and 2036. Additionally, the Company has an income tax net operating loss carryforward related to its Canadian operations of $35 million, with expiration dates of 2030 through 2036. The Company also had an alternative minimum tax credit carryforward of $100 million and a statutory depletion carryforward of $13 million as of December 31, 2016.

A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. To assess the likelihood, the Company uses estimates and judgment regarding future taxable income, and considers the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as current and forecasted business economics of the oil and gas industry.

Due to the continued write-downs of the carrying value of natural gas and oil properties, the Company maintained its net deferred tax asset position at December 31, 2016. The Company believes it is more likely than not that these deferred tax assets will not be realized and recorded a $983 million increase in valuation allowance for the year ended December 31, 2016, reflected as a component of income tax expense. Management assesses available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. In management’s view, the cumulative loss incurred over the three-year period ending December 31, 2016, outweighs any positive factors, such as the possibility of future growth. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income are increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as future expected growth.

Deferred tax assets relating to tax benefits of employee stock option grants have been reduced to reflect exercises. Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of the grant (“windfalls”). Although these additional tax benefits or “windfalls” are reflected in net operating loss carryforwards, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. Accordingly, since the tax benefit does not reduce the Company’s current taxes payable in 2016 due to net operating loss carryforwards, these “windfall” tax benefits are not reflected in its net operating losses in deferred tax assets for 2016. Windfalls included in net operating loss carryforwards but not reflected in deferred tax assets for 2016 were $149 million.

A tax position must meet certain thresholds for any of the benefit of the uncertain tax position to be recognized in the financial statements. As of December 31, 2016, the amount of unrecognized tax benefits related to alternative minimum tax was $17 million. The uncertain tax position identified would not have a material effect on the effective tax rate. No material changes to the current uncertain tax position are expected within the next 12 months. As of December 31, 2016, the Company had accrued a liability of less than $1 million of interest related to this uncertain tax position. The Company recognizes penalties and interest related to uncertain tax positions in income tax expense.

A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:


	2016		2015
	(in millions)
Unrecognized tax benefits at beginning of period	$	37	$	44
Additions based on tax positions related to the current year		–		7
Additions to tax positions of prior years		–		–
Reductions to tax positions of prior years		(20)		(14)
Unrecognized tax benefits at end of period	$	17	$	37

The Internal Revenue Service is currently auditing the Company’s federal income tax return for 2014. The income tax years 2013 to 2016 remain open to examination by the major taxing jurisdictions to which the Company is subject.