Income Taxes

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



	Years Ended December 31,
	2017			2016			2015
	($ in millions)
Current
Federal	$	(14	)	$	(14	)	$	—
State	5			(5		)	(36		)
Current Income Taxes	(9		)	(19		)	(36		)
Deferred
Federal	13			(147		)	(4,385		)
State	(2		)	(24		)	(42		)
Deferred Income Taxes	11			(171		)	(4,427		)
Total	$	2		$	(190	)	$	(4,463	)

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,
	2017			2016			2015
	($ in millions)
Income tax expense (benefit) at the federal statutory rate (35%)	$	333		$	(1,606	)	$	(6,684	)
State income taxes (net of federal income tax benefit)	66			(30		)	(406		)
Remeasurement of deferred tax assets and liabilities	1,266			—			—
Change in valuation allowance	(1,676		)	1,423			2,727
Other	13			23			(100		)
Total	$	2		$	(190	)	$	(4,463	)

On December 22, 2017, the President of the United States signed into law the Tax Act, which substantially revised numerous areas of U.S. federal income tax law, including lowering the tax rate for corporations from a maximum rate of 35% to a flat rate of 21% and eliminating the corporate alternative minimum tax (AMT). These changes are generally in effect for tax years beginning after December 31, 2017. Although we are still in the process of evaluating the full impact of the Tax Act, the table above reflects the adjustments for remeasurement of deferred tax assets and liabilities. This remeasurement did not impact our income tax provision or balance sheet due to the offsetting effect of adjusting the valuation allowance. Due to various estimates included in determining the tax provision, the remeasurement is considered provisional and may be adjusted through subsequent events such as the filing of our consolidated federal income tax return for the period ended December 31, 2017.

We reassessed the realizability of our deferred tax assets and continue to maintain a valuation allowance against a significant portion of our net deferred tax assets excluding the deferred tax assets related to AMT credit carryovers that are expected to be realized in the future. The $1.676 billion net decrease in our valuation allowance is reflected as a component of income tax expense in our consolidated statement of operations for the year ended December 31, 2017. This decrease is primarily due to offsetting the provisional remeasurement of deferred tax assets and liabilities as a result of the Tax Act, as well as an offset to current year tax expense.

Deferred income taxes are provided to reflect temporary differences in the tax basis of assets and liabilities and their reported amounts in the financial statements. The tax-effected temporary differences, tax credits and net operating loss carryforwards that comprise our deferred taxes are as follows:



	Years Ended December 31,
	2017			2016
	($ in millions)
Deferred tax liabilities:
Volumetric production payments	$	(129	)	$	(223	)
Other	(20		)	(62		)
Deferred tax liabilities	(149		)	(285		)

Deferred tax assets:
Property, plant and equipment	1			593
Net operating loss carryforwards	2,248			2,587
Carrying value of debt	161			539
Asset retirement obligations	42			98
Investments	161			275
Derivative instruments	17			161
Accrued liabilities	125			319
Other	71			118
Deferred tax assets	2,826			4,690
Valuation allowance	(2,674		)	(4,389		)
Net deferred tax assets	152			301
Net deferred tax assets	$	3		$	16

As of December 31, 2017, we had federal NOL carryforwards of approximately $8.073 billion and state NOL carryforwards of approximately $10.066 billion, which excludes the NOL carryforwards related to unrecognized tax benefits. The associated deferred tax assets related to these federal and state NOL carryforwards were $1.695 billion and $581 million, respectively. The NOL carryforwards expire between 2031 and 2037. The value of these carryforwards depends on our ability to generate taxable income. As of December 31, 2017 and 2016, we had deferred tax assets of $2.826 billion and $4.690 billion upon which we had a valuation allowance of $2.674 billion and $4.389 billion, respectively. Of the net change in the valuation allowance of $1.715 billion for both federal and state deferred tax assets, $1.676 billion is reflected as a component of income tax expense in the consolidated statement of operations and the remainder is reflected in components of stockholders’ equity.

A valuation allowance for deferred tax assets, including NOL carryforwards, is recognized when it is more-likely- than-not that all or some portion 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. Management assesses all 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 objectively verifiable negative evidence is the cumulative loss incurred over the three-year period ending December 31, 2017. Such objective negative evidence limits our ability to consider various forms of subjective positive evidence, such as our projections for future income. Accordingly, management has not changed its judgement with respect to the need for a valuation allowance against substantially all of our net deferred tax asset position. 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 positive evidence such as future expected growth.

Our ability to utilize NOL carryforwards to reduce future federal taxable income and federal income tax is subject to various limitations under the Code. 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 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, 2017, we do not believe that an ownership change has occurred that would limit our NOL carryforwards. Certain future transactions involving our equity (including relatively small transactions and transactions beyond our control) could cause an ownership change and therefore a limitation on the annual utilization of NOL carryforwards and possibly other tax attributes.

Accounting guidance for recognizing and measuring uncertain tax positions requires a more-likely-than-not threshold condition be met on a tax position, based solely on the technical merits of being sustained, before any benefit of the tax position can 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, 2017 and 2016, the amount of unrecognized tax benefits related to NOL carryforwards and tax liabilities associated with uncertain tax positions was $106 million and $202 million, respectively. Of the 2017 amount, $74 million is related to state tax liabilities, $4 million is related to federal tax liabilities and the remainder is related to NOL carryforwards. Of the 2016 amount, $76 million is related to state tax liabilities while the remainder is related to NOL carryforwards. If recognized, $74 million of the uncertain tax positions identified would have an effect on the effective tax rate. No material changes to the current uncertain tax positions are expected within the next 12 months. As of December 31, 2017 and 2016, we had accrued liabilities of $23 million and $20 million, respectively, for interest related to these uncertain tax positions. We recognize interest related to uncertain tax positions as a component of 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:



	2017			2016			2015
	($ in millions)
Unrecognized tax benefits at beginning of period	$	202		$	280		$	303
Additions based on tax positions related to the current year	—			—			27
Additions to tax positions of prior years	4			33			—
Settlements	(100		)	(111		)	—
Reductions to tax positions of prior years	—			—			(50		)
Unrecognized tax benefits at end of period	$	106		$	202		$	280

Our 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. During the 2017 fourth quarter, we reached a tentative settlement with the IRS in regards to our 2010 to 2013 federal income tax returns. Even though the audit remains open, we have concluded that uncertain tax positions related to these respective years are effectively settled and the corresponding unrecognized tax benefits have now been recorded. The 2010 through 2017 years and the 2007 through 2017 years remain open for all purposes of examination by the IRS and other taxing authorities in material jurisdictions, respectively.