Income Taxes

The following table summarizes the income tax (expense) benefit attributable to the income (loss) before income taxes for each of the three years ended December 31, 2016, 2015 and 2014:



	2016			2015			2014
(dollars in millions)
Current:
United States Federal	$	—		$	—		$	—
State	(4		)	(3		)	(1		)
Foreign	(41		)	(33		)	(40		)
	(45		)	(36		)	(41		)
Deferred, net of changes in valuation allowances:
United States federal	(177		)	2,941			6
State	(27		)	246			15
Foreign	84			(1		)	96
	(120		)	3,186			117
Income Tax (Expense) Benefit	$	(165	)	$	3,150		$	76

The United States and Foreign components of income (loss) before income taxes for each of the three years ended December 31, 2016, 2015 and 2014 are as follows (some of the income (loss) is subject to taxation in multiple jurisdictions):



	2016		2015			2014
(dollars in millions)
United States	$	794	$	401		$	207
Foreign	48		(118		)	31
	$	842	$	283		$	238

A reconciliation of the actual income tax (expense) benefit and the tax computed by applying the U.S. federal rate (35%) to the income before income taxes for each of the three years ended December 31, 2016, 2015 and 2014 is shown in the following table:



	2016			2015			2014
	(dollars in millions)
Computed Tax Expense at Statutory Rate	$	(295	)	$	(99	)	$	(83	)
State and Local Income Taxes	(31		)	(15		)	(8		)
Effect of Earnings in Jurisdictions outside of the United States	24			30			13
Change in Valuation Allowance	139			3,401			205
Disallowed Interest	(58		)	(62		)	(25		)
Non-Deductible Deconsolidation Loss	—			(57		)	—
Other Permanent Items	(33		)	(25		)	(19		)
Adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting	22			—			—
U.S. Federal Law Changes	110			—			—
Indefinite-Lived Assets	—			—			2
Uncertain Tax Positions	(2		)	(5		)	3
Changes in Tax Rates	(24		)	(20		)	(7		)
Other, net	(17		)	2			(5		)
Income Tax (Expense) Benefit	$	(165	)	$	3,150		$	76

The components of the net deferred tax assets as of December 31, 2016 and 2015 are as follows:



	2016			2015
	(dollars in millions)
Deferred Tax Assets:
Deferred revenue	364			351
Unutilized tax net operating loss carry forwards	4,550			4,959
Fixed assets	95			115
Other	471			501
Total Deferred Tax Assets	5,480			5,926
Deferred Tax Liabilities:
Deferred revenue	(57		)	(58		)
Fixed assets	(962		)	(924		)
Intangible assets	(357		)	(399		)
Other	(120		)	(350		)
Total Deferred Tax Liabilities	(1,496		)	(1,731		)
Net Deferred Tax Assets before Valuation Allowance	3,984			4,195
Valuation Allowance	(862		)	(1,002		)
Net Deferred Tax Assets after Valuation Allowance	$	3,122		$	3,193

As of December 31, 2016, we had available net operating loss carry forwards of approximately $9.0 billion after taking into account the effects of Section 382 limitation of the Internal Revenue Code for U.S. federal income tax purposes.

As a result of certain realization requirements of applicable accounting guidance, the table of deferred tax asset and liabilities shown above does not include certain deferred tax assets as of December 31, 2015 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. However, effective January 1, 2016 we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, and the deferred tax assets related to equity compensation are reflected in the table for the year ended December 31, 2016.

Our loss carry forwards expire in future years through 2035 and are subject to examination by the tax authorities up to three years after the carry forwards are utilized. The U.S. net operating tax loss carry forwards available for federal income tax purposes expire as follows (dollars in millions):



Expiring December 31,	Amount
2024	$	891
2025	1,267
2026	1,254
2027	1,645
2028	477
2029	694
2030	663
2031	833
2032	729
2033	194
2034	389
2035	1
	$	9,037

Under the rules prescribed by Internal Revenue Code Section 382 and applicable regulations, if certain transactions occur with respect to an entity's capital stock that result in a cumulative ownership shift of more than 50 percentage points by 5% stockholders over a three-year testing period, annual limitations are imposed with respect to the entity's ability to utilize its net operating loss carry forwards and certain current deductions against any taxable income the entity achieves in future periods and could result in a substantial income tax expense at the time of the shift. We extended the term of our Stockholder Rights Plan, which was adopted to protect our U.S. federal net operating loss carry forwards from these limitations. This plan was designed to deter trading that would result in a change of control (as defined in Section 382) and therefore protect our ability to use our U.S. federal net operating loss carry forwards in the future.

As of December 31, 2016, we had state net operating loss carry forwards of approximately $9.4 billion that have various expiration periods through 2035. We had approximately $5.5 billion of foreign jurisdiction net operating loss carry forwards that are subject to limitations on their utilization. The majority of these foreign jurisdiction tax loss carry forwards have no expiration period.

We recognize deferred tax assets and liabilities for our domestic and non-U.S. operations, for operating loss and other credit carry forwards and the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns, and future profitability by tax jurisdiction. We have historically provided a valuation allowance to reduce our U.S. federal and state and foreign deferred tax assets to the amount that is more likely than not to be realized. We monitor our cumulative loss position and other evidence each quarter to determine the appropriateness of our valuation allowance. Although we believe our estimates are reasonable, the ultimate determination of the appropriate amount of valuation allowance involves significant judgment.

In the fourth quarter of 2014, we released $100 million of deferred tax valuation allowance primarily related to our business in the U.K. due to a recapitalization and consolidation of legal entities whereby one U.K. entity with a full valuation allowance was merged with an entity that had no valuation allowance against its deferred tax assets, as we had an expectation of future taxable income for the combined entities.

In the fourth quarter of 2015, we released the majority of the valuation allowance against our U.S. federal and state deferred tax assets, resulting in a non-cash benefit to income tax expense of approximately $3.3 billion, $3.1 billion of which was related to future years’ earnings. In making the determination to release the valuation allowance against U.S. federal and state deferred tax assets, we took into consideration our movement into a cumulative income position for the most recent 3-year period, including pro forma adjustments for acquired entities, our 8 out of 9 consecutive quarters of pre-tax operating income, and forecasts of future earnings for our U.S. business. We expect to continue to generate income before taxes in the United States in future periods.

During 2016, we recognized a $22 million income tax benefit from the vesting of stock based compensation due to the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. We also recognized $82 million of income tax benefit related to the release of deferred tax asset valuation allowances primarily in Germany, Brazil, and Mexico. The determinations to release the foreign valuation allowances were driven by our projection of future profitability for each legal entity due to the recapitalization of our German subsidiary, the planned action to restructure our Brazilian business, and the merger of our Mexican subsidiaries.

We continue to maintain our existing valuation allowance against net deferred tax assets in many of our state and foreign jurisdictions where we do not currently believe the realization of our deferred tax assets is more likely than not.

The valuation allowance for deferred tax assets was approximately $0.9 billion as of December 31, 2016 and $1.0 billion as of December 31, 2015. The change in valuation allowance is primarily due to the release of the valuation allowance against foreign deferred tax assets.

With respect to our foreign corporate subsidiaries, we provide for U.S. income taxes on the undistributed earnings and the other outside basis temporary differences (differences between a parent's book and tax basis in a subsidiary, including currency translation adjustments) unless they are considered indefinitely reinvested outside the United States. The amount of temporary differences related to undistributed earnings and other outside basis temporary differences of investments in foreign subsidiaries upon which U.S. income taxes have not been provided was immaterial.

With respect to our foreign branches, we had historically established deferred tax liabilities for foreign branches with an overall cumulative translation gain, but had not established deferred tax assets for those with an overall translation loss as we had no plans to trigger realization of the losses in the foreseeable future. On December 7, 2016, the Internal Revenue Service issued regulations under Internal Revenue Code Section 987 addressing the taxation of foreign currency translations gains and losses arising from foreign branches. The new regulations require a “fresh start” recalculation of the unrealized gains and losses as of the adoption date. The regulations provide that the tax bases of specified assets, such as fixed assets, will be translated at historic foreign exchange rates. As a result, the deferred taxes related to such foreign currency translation are expected to reverse through the operations of the branch thereby allowing the recognition of deferred tax assets arising from translation losses as well. The issuance of the regulations resulted in us recognizing an estimated one-time tax benefit of $110 million during the fourth quarter 2016.

Our liability for uncertain income tax positions totaled $18 million at December 31, 2016 and $18 million at December 31, 2015. If the remaining balance of unrecognized tax benefits were realized in a future period, it would result in a tax benefit of $17 million ($17 million as of December 31, 2015) and a reduction in the effective tax rate. We do not expect that the liability for uncertain tax positions will materially increase or decrease during the twelve months ended December 31, 2017. A reconciliation of the beginning and ending balance of unrecognized income tax benefits follows (dollars in millions):



	Amount
Balance as of January 1, 2014	$	13
Tax positions of prior years netted against deferred tax assets	5
Gross increases - tax positions of prior years	1
Gross increases - tax positions during 2014	—
Gross decreases - lapse of statute of limitations	(2		)
Gross decreases - settlement with taxing authorities	—
Balance as of December 31, 2014	17
Tax positions of prior years netted against deferred tax assets	(2		)
Gross increases - tax positions of prior years	3
Gross increases - tax positions during 2015	2
Gross decreases - lapse of statute of limitations	(2		)
Gross decreases - settlement with taxing authorities	—
Balance as of December 31, 2015	18
Tax positions of prior years netted against deferred tax assets	(1		)
Gross increases - tax positions during 2016	2
Gross decreases - tax positions of prior years	(1		)
Gross decreases - lapse of statute of limitations	—
Gross decreases - settlement with taxing authorities	—
Balance as of December 31, 2016	$	18

The unrecognized tax benefits in the table above do not include accrued interest and penalties of $18 million, $16 million and $17 million as of December 31, 2016, 2015 and 2014, respectively. Our policy is to record interest and penalties related to uncertain tax positions in income tax expense. We recognized accrued interest and penalties related to uncertain tax positions in income tax expense in our Consolidated Statements of Income of approximately $1 million, a benefit of less than $1 million and a benefit of approximately $1 million for the years ended December 31, 2016, 2015 and 2014, respectively.

We, or at least one of our subsidiaries, file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carry forwards are available.

We incur tax expense attributable to income in various subsidiaries that are required to file state or foreign income tax returns on a separate legal entity basis. We also recognize accrued interest and penalties in income tax expense related to uncertain tax benefits. Our tax rate is volatile and may move up or down with changes in, among other things, the amount and source of income or loss, our ability to utilize foreign tax credits, changes in tax laws, and the movement of liabilities established for uncertain tax positions as statutes of limitations expire or positions are otherwise effectively settled.