Income Taxes

12 Months Ended

Dec. 31, 2019

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. The Tax Act reduces the U.S. corporate income tax rate from a maximum of 35% to 21% for all corporations, effective January 1, 2018, and makes certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items.

As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we revalued our net deferred tax assets at December 31, 2017 and recognized a provisional $195 million tax expense in our consolidated statement of operations for the successor period ended December 31, 2017. As a result of finalizing our provisional amount recorded in 2017, we recorded an increase to this amount of $92 million in 2018.



	Successor							Predecessor
	Year Ended December 31, 2019			Year Ended December 31, 2018		Period Ended December 31, 2017		Period Ended October 31, 2017
	(Dollars in millions)
Income tax expense was as follows:
Federal
Current	$	12		—		—		—
Deferred	186			199		231		193
State
Current	4			(9	)	2		7
Deferred	41			28		6		16
Foreign
Current	17			30		4		39
Deferred	(5		)	(52	)	(9	)	13
Total income tax expense	$	255		196		234		268



	Successor				Predecessor
	Year Ended December 31, 2019	Year Ended December 31, 2018		Period Ended December 31, 2017	Period Ended October 31, 2017
	(Dollars in millions)
Income tax expense was allocated as follows:
Income tax expense in the consolidated statements of operations:
Attributable to income	255	196		234	268
Member's/Stockholders' equity:
Tax effect of the change in accumulated other comprehensive loss	5	(49	)	17	49

The following is a reconciliation from the statutory federal income tax rate to our effective income tax rate:



	Successor						Predecessor
	Year Ended December 31, 2019		Year Ended December 31, 2018		Period Ended December 31, 2017		Period Ended October 31, 2017
	(Percentage of pre-tax income)
Statutory federal income tax rate	21.0	%	21.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	(1.2	)%	2.8	%	3.6	%	2.9	%
Goodwill impairment	(26.4	)%	—	%	—	%	—	%
Tax Reform	(0.2	)%	17.2	%	210.6	%	—	%
Global intangible low-taxed income	(0.4	)%	1.8	%	—	%	—	%
CenturyLink acquisition transaction costs	—	%	—	%	11.3	%	—	%
Uncertain tax positions	—	%	0.5	%	1.2	%	0.1	%
Base erosion and anti-abuse tax	(0.4	)%	—	%	—	%	—	%
Net foreign income tax	(0.8	)%	(4.8	)%	(19.3	)%	0.9	%
Executive compensation limitation	(0.2	)%	1.2	%	5.4	%	0.9	%
Research and development credits	0.1	%	(1.3	)%	(0.9	)%	(1.2	)%
Other, net	(0.1	)%	(1.9	)%	4.7	%	0.1	%
Effective income tax rate	(8.6	)%	36.5	%	251.6	%	38.7	%

For the years ended December 31, 2019 and December 31, 2018, the effective tax rate is (8.6)% and 36.5% compared to 251.6% for the successor period ended December 31, 2017 and 38.7% for the predecessor period ended October 31, 2017, respectively. The effective tax rate for the year ended December 31, 2019 includes a $779 million unfavorable impact of a non-deductible goodwill impairment. The effective tax rate for the year ended December 31, 2018 reflects $92 million of an estimated one-time income tax expense related to income tax law changes under the Tax Act enacted in 2017. The effective tax rate for the successor period ended December 31, 2017 reflects $195 million of an estimated one-time income tax expense related to income tax law changes under the Tax Act enacted in 2017.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:



	December 31,
	2019			2018
	(Dollars in millions)
Deferred tax assets
Deferred revenue	$	306		298
Net operating loss carry forwards	3,233			3,494
Property, plant and equipment	58			57
Other	326			309
Gross deferred tax assets	3,923			4,158
Less valuation allowance	(892		)	(931	)
Net deferred tax assets	3,031			3,227
Deferred tax liabilities
Deferred revenue	(41		)	(45	)
Property, plant and equipment	(974		)	(853	)
Intangible assets	(1,898		)	(1,998	)
Other	(29		)	(25	)
Gross deferred tax liabilities	(2,942		)	(2,921	)
Net deferred tax assets	89			306

Of the $89 million and $306 million net deferred tax assets at December 31, 2019 and 2018, respectively, $241 million and $202 million is reflected as a long-term liability and $330 million and $508 million is reflected as a net noncurrent deferred tax asset at December 31, 2019 and 2018, respectively.

During the twelve months ended December 31, 2017, we completed an extensive analysis of our Internal Revenue Code ("IRC") Section 382 limitation that resulted in an increase of the amount of net operating loss carry forwards as of December 31, 2017 by approximately $1.0 billion on a pre-tax basis that was recorded in purchase accounting. At December 31, 2019, we had federal NOLs of $12.9 billion before uncertain tax positions of $4.3 billion and state NOLs of $9.2 billion. If unused, the NOLs will expire between 2022 and 2037. At December 31, 2019, we had foreign NOLs of $6.0 billion.

We establish valuation allowances when necessary to reduce the deferred tax assets to amounts we expect to realize. As of December 31, 2019, a valuation allowance of $892 million was recorded as it is more likely than not that this amount of net operating loss and tax credit carryforwards will not be utilized prior to expiration. Our valuation allowance at December 31, 2019 and 2018 is primarily related to foreign and state NOL carryforwards.

A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 to December 31 for 2019 and 2018 is as follows:



	2019			2018
	(Dollars in millions)
Unrecognized tax benefits at beginning of period	$	970		21
Tax positions of prior periods netted against deferred tax assets	(24		)	950
(Decrease) increase in tax positions taken in the prior period	1			(1	)
Increase in tax positions taken in the current period	5			3
Decrease due to settlement/payments	—			(1	)
Decrease from the lapse of statute of limitations	—			(2	)
Unrecognized tax benefits at end of period	952			970

The total amount (including interest and any related federal benefit) of unrecognized tax benefits that, if recognized, would impact the effective income tax rate was $30 million and $23 million for the years ended December 31, 2019 and December 31, 2018, respectively.

Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented before related tax benefits) of approximately $8 million and $6 million at December 31, 2019 and 2018, respectively.

We, or at least one of our affiliates, 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 2002. 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.

Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may decrease by up to $3 million within the next 12 months. The actual amount of such decrease, if any, will depend on several future developments and events, many of which are outside our control.