Note 18: Income Taxes From Continuing Operations

Components of Income Taxes

The components of income from continuing operations before income taxes were as follows:



	Year Ended December 31,
Dollars in thousands	2015		2014		2013
U.S. operations	$	121,940	$	188,473	$	259,057
Foreign operations	1,125		2,368		3,341
Total income from continuing operations before income taxes	$	123,065	$	190,841	$	262,398

Components of Income Tax Expense

The components of income tax expense from continuing operations were as follows:



	Year Ended December 31,
Dollars in thousands	2015			2014			2013
Current:
U.S. Federal	$	89,996		$	69,117		$	38,876
State and local	10,658			12,294			10,104
Foreign	469			415			(424		)
Total current	101,123			81,826			48,556
Deferred:
U.S. Federal	(27,641		)	(16,232		)	(3,642		)
State and local	380			427			(5,653		)
Foreign	(243		)	143			449
Total deferred	(27,504		)	(15,662		)	(8,846		)
Total income tax expense	$	73,619		$	66,164		$	39,710

Rate Reconciliation

The income tax expense differs from the amount that would result by applying the U.S. statutory rate to income before income taxes as follows:



	Year Ended December 31,
	2015		2014		2013
U.S Federal tax expense at statutory rates	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	5.8		4.1		3.9
Federal and state credits	(1.6	)	(1.1	)	(0.9	)
Domestic production activities deduction	(4.9	)	(3.6	)	(0.6	)
Goodwill Impairment	24.4		—		—
Recognition of outside basis differences	—		(1.1	)	(15.4	)
ecoATM option payments	0.2		1.4		0.7
Valuation allowance	0.2		—		2.3
Acquisition of ecoATM	—		—		(9.3	)
Other	0.7		—		(0.6	)
Effective tax rate	59.8	%	34.7	%	15.1	%

Our effective tax rate for the year ended December 31, 2015, was higher than the U.S. Federal statutory rate of 35.0% primarily due to an $85.9 million non-tax deductible goodwill impairment charge recorded in the second quarter of 2015 and state income taxes, partially offset by the domestic production activities deduction and federal and state tax credits.

On December 18, 2015, the President signed into law the Protecting Americans from Tax Hikes Act of 2015, which retroactively extended a number of tax deductions and credits that otherwise would have expired, including the research and development credit and bonus depreciation. We reported the 2015 impact of the Act in the fourth quarter.

Our effective tax rate for the year ended December 31, 2014 was lower than the U.S. Federal statutory rate of 35.0% due primarily to the domestic production activities deduction and federal and state tax credits, partially offset by state income taxes.

Our effective tax rate for the year ended December 31, 2013 was lower than the U.S. Federal statutory rate of 35.0% due primarily to the following items:


•	During the fourth quarter of 2013, we reported a $16.7 million tax benefit related to the recognition of a worthless stock deduction from an outside basis difference in a corporate subsidiary.


•	During the third quarter of 2013, we reported a $24.3 million tax benefit related to the non-taxable gain upon the re-measurement of our previously held equity interest in ecoATM.

•

During the second quarter of 2013, we entered into an arrangement to sell certain NCR kiosks and a series of transactions to reorganize Redbox related subsidiary structures through the sale of a wholly owned subsidiary. As a result of the series of transactions we recorded a discrete one-time tax benefit of $17.8 million, net of a valuation allowance, through the realization of capital and ordinary gains and losses.

The combined impact of these three items was a 22.4 percentage point reduction in the effective tax rate for the year ended December 31, 2013. In addition, our 2013 effective tax rate was increased by state income taxes, offset partially by the domestic production activities deduction.

We did not provide for U.S. income taxes on certain undistributed earnings of foreign operations that were considered permanently invested outside of the United States. Upon repatriation, some of these earnings would generate foreign tax credits, which may reduce the U.S. tax liability associated with any future foreign dividend. At December 31, 2015, the cumulative amount of earnings upon which U.S. income taxes have not been provided was approximately $18.8 million.

Unrecognized Tax Benefits

The aggregate changes in the balance of unrecognized tax benefits were as follows:



Dollars in thousands	Year Ended December 31,
Dollars in thousands	2015			2014			2013
Balance, beginning of the year	$	4,639		$	2,781		$	2,383
Additions based on tax positions related to the current year	1,837			1,836			824
Additions for tax positions related to prior years	527			806			18
Reductions for tax positions related to prior years	(118		)	—			(257		)
Reductions from lapse of applicable statute of limitations	—			(784		)	(49		)
Settlements	—			—			(138		)
Balance, end of year	$	6,885		$	4,639		$	2,781

We recognize interest and penalties, if any, related to income tax matters in Income tax expense. We accrued interest of $0.3 million and $0.1 million as of December 31, 2015 and December 31, 2014, respectively. It was not necessary to accrue interest in 2013 or accrue for penalties in any period presented.

Tax Years Open for Examination

As of December 31, 2015, for our major tax jurisdictions, the years 2012 through 2014 were open for examination by U.S. Federal and most state tax authorities. Additionally, the years 1998 through 2011 are subject to examination, to the extent that net operating loss and income tax credit carryforwards from those years were utilized in 2010 and later years.

Deferred Income Taxes

Deferred income tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the carrying amounts used for income tax purposes. Future tax benefits for net operating loss and tax credit carryforwards are also recognized to the extent that realization of such benefits is more likely than not.

In determining our tax provisions, management determined the deferred tax assets and liabilities for each separate tax jurisdiction and considered a number of factors including the positive and negative evidence regarding the realization of our deferred tax assets to determine whether a valuation allowance should be recognized with respect to our deferred tax assets.

Significant components of our deferred tax assets and liabilities and the net increase (decrease) in the valuation allowance were as follows:



Dollars in thousands	December 31,
	2015			2014
Deferred tax assets:
Income tax loss carryforwards	$	3,015		$	5,690
Capital loss carryforwards	4,759			5,930
Credit carryforwards	3,482			2,929
Accrued liabilities and allowances	27,188			22,652
Stock-based compensation	9,065			11,901
Intangible assets	13,109			17,166
Other	5,720			3,776
Gross deferred tax assets	66,338			70,044
Less: Valuation Allowance	(7,141		)	(6,898		)
Total deferred tax assets	59,197			63,146
Deferred tax liabilities:
Property and equipment	(42,984		)	(68,417		)
Product costs	(46,699		)	(43,140		)
Total deferred tax liabilities	(89,683		)	(111,557		)
Net deferred tax liabilities	$	(30,486	)	$	(48,411	)

Change in Valuation Allowance



Dollars in thousands	Year Ended December 31,
Dollars in thousands	2015		2014		2013
Increase in valuation allowance	$	243	$	—	$	6,898

The increase in our valuation allowance is due to changes in the expected future and actual utilization of capital losses and state tax credit carryforwards.

Deferred Tax Assets Relating to Income Tax Loss Carryforwards

Our deferred tax assets relating to income tax loss carryforwards and expiration periods are summarized as follows:



Dollars in thousands	December 31, 2015
Dollars in thousands	Federal		State		Foreign
Net operating loss carryforwards	$	23	$	24,570	$	7,082
Deferred tax assets related to net operating loss carryforwards	$	8	$	1,118	$	1,889
Years that net operating loss carryforwards will expire between	2029-2034		2017-2033		2033-2035

U.S. State Tax Credits and Expiration Periods

The following table shows our U.S. state tax credits before valuation allowances and related expiration periods.



Dollars in thousands	December 31, 2015
Dollars in thousands	Amount		Expiration
U.S state tax credits:
Illinois state tax credits	$	2,894	2017-2021
California U.S. state tax credits	588		Do not expire
Total U.S. state tax credits	$	3,482