NOTE 6. INCOME TAXES

Deferred Income Taxes

Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. Primarily due to differences in depreciation rates for federal income tax purposes and for financial reporting purposes, the Company has generated a net deferred tax liability.

Deferred tax (assets) and liabilities comprise the following (in millions):



	2015			2014
Excess of tax over book depreciation	$	1,110		$	1,042
Other—net	23			22
Gross deferred tax liabilities	1,133			1,064

Mileage Plan	(208		)	(206		)
Inventory obsolescence	(22		)	(20		)
Deferred gains	(8		)	(10		)
Employee benefits	(167		)	(166		)
Fuel hedge contracts	(5		)	(5		)
Other—net	(41		)	(24		)
Gross deferred tax assets	(451		)	(431		)
Net deferred tax liabilities	$	682		$	633

The Company has concluded that it is more likely than not that its deferred tax assets will be realizable and thus no valuation allowance has been recorded as of December 31, 2015. This conclusion is based on the expected future reversals of existing taxable temporary differences, anticipated future taxable income, and the potential for future tax planning strategies to generate taxable income, if needed. The Company will continue to reassess the need for a valuation allowance during each future reporting period.

Components of Income Tax Expense

The components of income tax expense were as follows (in millions):



	2015			2014		2013
Current tax expense:
Federal	$	397		$	229	$	145
State	30			27		17
Total current	427			256		162

Deferred tax expense:
Federal	60			103		131
State	(23		)	11		15
Total deferred	37			114		146
Income tax expense	$	464		$	370	$	308

Income Tax Rate Reconciliation

Income tax expense reconciles to the amount computed by applying the U.S. federal rate of 35% to income before income tax and accounting change as follows (in millions):



	2015			2014			2013
Income before income tax	$	1,312		$	975		$	816

Expected tax expense	459			341			286
Nondeductible expenses	4			4			4
State income taxes	19			25			21
State income sourcing	(15		)	—			—
Other—net	(3		)	—			(3		)
Actual tax expense	$	464		$	370		$	308

Effective tax rate	35.4		%	37.9		%	37.7		%

In the fourth quarter of 2015, the Company filed amended state tax returns for the years 2010 through 2013 to update the Company’s position on income sourcing in various states. These positions were also taken on 2014 filings and will be taken going forward. The cumulative benefit of this change is $26 million, net of federal impact and unrecognized tax benefits of $18 million.

Uncertain Tax Positions

The Company has identified its federal tax return and its state tax returns in Alaska, Oregon, and California as “major” tax jurisdictions. A summary of the Company's jurisdictions and the periods that are subject to examination are as follows:



Jurisdiction	Period
Federal	2012 to 2014
Alaska	2012 to 2014
California	2010 to 2014
Oregon	2003 to 2014*

*The 2003, 2004, 2008-2010 and 2011 Oregon tax returns are subject to examination only to the extent of net operating loss carryforwards from those years that were utilized in 2010 and later years.

Changes in the liability for unrecognized tax benefits during 2015, 2014, and 2013 are as follows (in millions):



	2015		2014		2013
Balance at January 1,	$	3	$	2	$	1
Additions based on tax positions and settlements related to the current year	19		1		1
Balance at December 31,	$	22	$	3	$	2

At December 31, 2015, the total amount of unrecognized tax benefits is recorded as a liability, all of which impacts the effective tax rate. The Company added $19 million of reserves for uncertain tax positions in 2015, primarily due to changes in income sourcing for state income taxes. These uncertain tax positions could change as a result of the Company’s ongoing audits, settlement of issues, new audits and status of other taxpayer court cases and we cannot predict the timing of these actions. Due to the positions being taken in various jurisdictions, at the current time, an estimate of the range of reasonably possible outcomes cannot be made, beyond amounts currently accrued. No interest or penalties related to these tax positions were accrued as of December 31, 2015.