12. Income Taxes and Accounting for Uncertainty in Income Taxes

Income Taxes

Our income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported on our Consolidated Balance Sheets, as well as probable operating loss, tax credit and other carryforwards. Deferred tax assets are offset by valuation allowances when we believe it is more likely than not that net deferred tax assets will not be realized. We periodically evaluate our need for a valuation allowance. Determining necessary valuation allowances requires us to make assessments about historical financial information as well as the timing of future events, including the probability of expected future taxable income and available tax planning opportunities.

We file consolidated tax returns in the U.S. The income taxes of domestic and foreign subsidiaries not included in the U.S. tax group are presented in our consolidated financial statements based on a separate return basis for each tax paying entity.

As of December 31, 2013, we had no net operating loss carryforwards (“NOLs”) for federal income tax purposes and $24 million of NOL benefit for state income tax purposes. The state NOLs begin to expire in the year 2020. In addition, there are $13 million of tax benefits related to credit carryforwards which are partially offset by a valuation allowance. The credit carryforwards began to expire in 2013.

The components of the (provision for) benefit from income taxes were as follows:

	For the Years Ended December 31,
	2013			2012			2011
	(In thousands)
Current (provision) benefit:

Federal	$	(162,737	)	$	28,503		$	(252,741	)
State	2,421			8,730			(30,211		)
Foreign	(13,316		)	—			—
Total from continuing operations	(173,632		)	37,233			(282,952		)

Deferred (provision) benefit:
Federal	(102,971		)	(355,220		)	(572,202		)
State	(23,223		)	(47,843		)	(32,430		)
Decrease (increase) in valuation allowance	—			33,839			3,181
Total from continuing operations	(126,194		)	(369,224		)	(607,813		)
Total benefit (provision)	$	(299,826	)	$	(331,991	)	$	(890,765	)

Our $1.137 billion of “Income (loss) before income taxes” on our Consolidated Statements of Operations and Comprehensive Income (Loss), included income of $9 million relates to our foreign operations.

The actual tax provisions for 2013, 2012 and 2011 reconcile to the amounts computed by applying the statutory Federal tax rate to income before taxes as follows:

	For the Years Ended December 31,
	2013		2012		2011
	% of pre-tax (income)/loss
Statutory rate	(35.0	)	(35.0	)	(35.0	)
State income taxes, net of Federal benefit	(1.3	)	(2.6	)	(1.6	)
Reversal of uncertain tax position	9.0		—		—
Other	0.9		0.8		(0.6	)
Decrease (increase) in valuation allowance	—		3.4		0.3
Total benefit (provision) for income taxes	(26.4	)	(33.4	)	(36.9	)

Our effective tax rate for the year ended December 31, 2013 was favorably impacted by the $102 million reversal of an uncertain tax position that was resolved during the third quarter 2013.

The temporary differences, which give rise to deferred tax assets and liabilities as of December 31, 2013 and 2012, were as follows:

	As of December 31,
	2013			2012
	(In thousands)
Deferred tax assets:
NOL, credit and other carryforwards	$	20,947		$	19,737
Accrued expenses	53,700			68,496
Stock-based compensation	23,174			27,088
Deferred revenue	54,330			67,023
Total deferred tax assets	152,151			182,344
Valuation allowance	(9,515		)	(6,903		)
Deferred tax asset after valuation allowance	142,636			175,441

Deferred tax liabilities:
Depreciation and amortization	(1,864,691		)	(1,711,663		)
Unrealized gains on investments	(58,435		)	(11,670		)
Other liabilities	(35,336		)	(32,976		)
Total deferred tax liabilities	(1,958,462		)	(1,756,309		)
Net deferred tax asset (liability)	$	(1,815,826	)	$	(1,580,868	)

Current portion of net deferred tax asset	$	129,864		$	93,767
Noncurrent portion of net deferred tax asset (liability)	(1,945,690		)	(1,674,635		)
Total net deferred tax asset (liability)	$	(1,815,826	)	$	(1,580,868	)

Accounting for Uncertainty in Income Taxes

In addition to filing federal income tax returns, we and one or more of our subsidiaries file income tax returns in all states that impose an income tax and a small number of foreign jurisdictions where we have immaterial operations. We are subject to U.S. federal, state and local income tax examinations by tax authorities for the years beginning in 2002 due to the carryover of previously incurred net operating losses. We are currently under a federal income tax examination for fiscal years 2008 through 2012.

A reconciliation of the beginning and ending amount of unrecognized tax benefits included in “Long-term deferred revenue, distribution and carriage payments and other long-term liabilities” on our Consolidated Balance Sheets was as follows:

	For the Years Ended December 31,
Unrecognized tax benefit	2013			2012			2011
	(In thousands)
Balance as of beginning of period	$	328,951		$	235,067		$	193,320
Additions based on tax positions related to the current year	12,736			110,435			12,721
Additions based on tax positions related to prior years	66,307			—			34,762
Reductions based on tax positions related to prior years	(104,796		)	(5,477		)	(1,169		)
Reductions based on tax positions related to settlements with taxing authorities	(139,022		)	(1,739		)	(1,185		)
Reductions based on tax positions related to the lapse of the statute of limitations	(12,823		)	(9,335		)	(3,382		)
Balance as of end of period	$	151,353		$	328,951		$	235,067

We have $149 million in unrecognized tax benefits that, if recognized, could favorably affect our effective tax rate. We do not expect any portion of this amount to be paid or settled within the next twelve months. In 2013, we reversed $102 million of an uncertain tax position that was resolved during the third quarter 2013, reflected in the table above.

Accrued interest and penalties on uncertain tax positions are recorded as a component of “Other, net” on our Consolidated Statements of Operations and Comprehensive Income (Loss). During the years ended December 31, 2013, 2012 and 2011, we recorded $4 million, less than $1 million and $4 million in interest and penalty expense to earnings, respectively. Accrued interest and penalties were $13 million and $17 million at December 31, 2013 and 2012, respectively. The above table excludes these amounts.