Income Taxes

The components of the income tax provision (benefit) for each of the periods presented below are as follows:



	Years Ended December 31,
	2016			2015			2014
	($ in millions)
Current
Federal	$	(14	)	$	—		$	—
State	(5		)	(36		)	47
Current Income Taxes	(19		)	(36		)	47
Deferred
Federal	(147		)	(4,385		)	1,115
State	(24		)	(42		)	(18		)
Deferred Income Taxes	(171		)	(4,427		)	1,097
Total	$	(190	)	$	(4,463	)	$	1,144

The effective income tax expense (benefit) differed from the computed "expected" federal income tax expense on earnings before income taxes for the following reasons:



	Years Ended December 31,
	2016			2015			2014
	($ in millions)
Income tax expense (benefit) at the federal statutory rate (35%)	$	(1,606	)	$	(6,684	)	$	1,120
State income taxes (net of federal income tax benefit)	(30		)	(406		)	68
Remeasurement of state deferred tax liabilities	—			—			(114		)
Change in valuation allowance	1,423			2,727			74
Other	23			(100		)	(4		)
Total	$	(190	)	$	(4,463	)	$	1,144

In accordance with U.S. GAAP, intraperiod tax allocation provisions require allocation of $190 million of tax benefit to continuing operations. This tax benefit was partially offset by $165 million of tax expense and $10 million of tax benefit associated with the equity components of the debt transactions that occurred during the year. See Note 3 for further discussion of our debt transactions. Additionally, $4 million of tax expense was allocated to other comprehensive income. The result is a net tax benefit of $31 million which is primarily due to tax elections that allow for realization of deferred tax assets related to alternative minimum tax (AMT) credits.

We reassessed the realizability of our deferred tax assets given the low commodity prices and recorded a $1.423 billion increase in our valuation allowance in our consolidated statement of operations for the year ended December 31, 2016. The increase in the valuation allowance is to offset the portion of the tax benefit at expected rates that we believe is more likely than not to not be realized.

Deferred income taxes are provided to reflect temporary differences in the basis of net assets for income tax and financial reporting purposes. The tax-effected temporary differences and tax loss carryforwards which comprise deferred taxes are as follows:



	Years Ended December 31,
	2016			2015
	($ in millions)
Deferred tax liabilities:
Volumetric production payments	$	(223	)	$	(802	)
Derivative instruments	—			(300		)
Other	(62		)	(71		)
Deferred tax liabilities	(285		)	(1,173		)

Deferred tax assets:
Property, plant and equipment	593			1,144
Net operating loss carryforwards	2,587			1,556
Carrying value of debt	539			532
Asset retirement obligations	98			174
Investments	275			260
Derivative instruments	161			—
Accrued liabilities	319			333
Other	118			123
Deferred tax assets	4,690			4,122
Valuation allowance	(4,389		)	(2,949		)
Net deferred tax assets	301			1,173
Net deferred tax assets^(a)	$	16		$	—

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(a)	The net deferred tax assets are included in other long-term assets in the accompanying balance sheets.

As of December 31, 2016, Chesapeake had federal income tax NOL carryforwards of approximately $6.2 billion and state NOL carryforwards of approximately $9.5 billion which excludes the NOL carryforwards related to unrecognized tax benefits. The associated deferred tax assets related to these NOL carryforwards were $2.161 billion and $426 million, respectively. The NOL carryforwards expire between 2031 and 2036. The value of these carryforwards depends on the ability of Chesapeake to generate taxable income. As of December 31, 2016 and 2015, we had deferred tax assets of $4.690 billion and $4.122 billion upon which we had a valuation allowance of $4.389 billion and $2.949 billion, respectively. Of the net change in the valuation allowance of $1.440 billion for both federal and state deferred tax assets, $1.423 billion is reflected as a component of income tax expense in the consolidated statement of operations and $17 million is reflected as a component of equity.

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 that likelihood, we use estimates and judgment regarding our future taxable income, and we consider the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry. As of December 31, 2016, we believe it is more likely than not that these deferred tax assets will not be realized. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. A significant piece of objective negative evidence evaluated is the cumulative loss incurred over the three-year period ending December 31, 2016. Such objective negative evidence limits the ability to consider other subjective positive evidence, such as our projections for future growth. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income are reduced or 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.

The ability of Chesapeake to utilize NOL carryforwards to reduce future federal taxable income and federal income tax is subject to various limitations under the Internal Revenue Code of 1986, as amended. The utilization of these carryforwards may be limited upon the occurrence of certain ownership changes, including the issuance or exercise of rights to acquire stock, the purchase or sale of stock by 5% stockholders, as defined in the Treasury regulations, and the offering of stock by us during any three-year period resulting in an aggregate change of more than 50% in the beneficial ownership of Chesapeake.

As of December 31, 2016, we do not believe that an ownership change has occurred that would limit our NOL carryforwards. Future equity transactions by Chesapeake or by 5% stockholders (including relatively small transactions and transactions beyond our control) could cause an ownership change and therefore a limitation on the annual utilization of NOLs.

Accounting guidance for recognizing and measuring uncertain tax positions prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Guidance is also provided regarding de-recognition, classification and disclosure of these uncertain tax positions. As of December 31, 2016 and 2015, the amount of unrecognized tax benefits related to NOL carryforwards and state tax liabilities associated with uncertain tax positions was $202 million and $280 million, respectively. Of the 2016 amount, $76 million is related to state tax liabilities while the remainder is related to NOL carryforwards. Of the 2015 amount, $44 million is related to state tax liabilities while the remainder is related to NOL carryforwards. The uncertain tax positions identified would not have a material effect on the effective tax rate. No material changes to the current uncertain tax positions are expected within the next 12 months. As of both December 31, 2016 and 2015, we had accrued liabilities of $20 million for interest related to these uncertain tax positions. Chesapeake recognizes interest related to uncertain tax positions in interest expense. Penalties, if any, related to uncertain tax positions would be recorded in other expenses.

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



	2016			2015			2014
	($ in millions)
Unrecognized tax benefits at beginning of period	$	280		$	303		$	644
Additions based on tax positions related to the current year	—			27			13
Additions to tax positions of prior years	33			—			—
Settlements	(111		)	—			—
Reductions to tax positions of prior years	—			(50		)	(354		)
Unrecognized tax benefits at end of period	$	202		$	280		$	303

Chesapeake's federal and state income tax returns are routinely audited by federal and state fiscal authorities. The Internal Revenue Service (IRS) is currently auditing our federal income tax returns for 2010 through 2015. The 2010 through 2016 years and the 2007 through 2016 years remain open for all purposes of examination by the IRS and other taxing authorities in material jurisdictions, respectively.