11.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 on a separate return basis for each tax paying entity.

As of December 31, 2015, we had no net operating loss carryforwards (“NOLs”) for federal income tax purposes and $39 million of NOL benefit for state income tax purposes, which are partially offset by a valuation allowance. The state NOLs begin to expire in the year 2017. In addition, there are $61 million of tax benefits related to credit carryforwards which are partially offset by a valuation allowance. The state credit carryforwards began to expire in 2015.

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


	For the Years Ended December 31,
	2015		2014		2013
	(In thousands)
Current (benefit) provision:
Federal	$	144,990	$	180,282	$	162,737
State		18,811		(44,565)		(2,421)
Foreign		(3,517)		6,588		13,316
Total from continuing operations		160,284		142,305		173,632

Deferred (benefit) provision:
Federal		165,294		310,977		102,971
State		30,059		15,776		23,223
Foreign		—		(190,253)		—
Increase (decrease) in valuation allowance		11,039		(1,965)		—
Total from continuing operations		206,392		134,535		126,194
Total (benefit) provision	$	366,676	$	276,840	$	299,826

Our $1.136 billion of “Income (loss) before income taxes” on our Consolidated Statements of Operations and Comprehensive Income (Loss) included income of $3 million related to our foreign operations.

The following table shows the principal reasons for the difference between the effective income tax rate and the statutory federal tax rate:


	For the Years Ended December 31,
	2015	2014	2013
	% of pre-tax (income)/loss
Statutory rate	35.0	35.0	35.0
State income taxes, net of federal benefit	3.3	1.1	1.3
Reversal of uncertain tax positions (1)	(1.0)	(3.5)	(9.0)
Foreign tax planning strategies, net of federal benefit (2)	—	(9.8)	—
Amounts reclassified from accumulated other comprehensive income (loss) (3)	(5.5)	—	—
Increase (decrease) in valuation allowance	1.0	(0.2)	—
Other	(0.5)	0.4	(0.9)
Total (benefit) provision for income taxes	32.3	23.0	26.4

(1)

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.

(2)

Our effective tax rate for the year ended December 31, 2014 was favorably impacted by tax planning strategies related to the tax structure of certain foreign legal entities, net of federal benefit, totaling $118 million.

(3)

Our effective tax rate for the year ended December 31, 2015 was favorably impacted by a $63 million credit that was previously recorded in “Accumulated other comprehensive income (loss)” and was released to our income tax provision during the year ended December 31, 2015. Prior to December 31, 2012, we had established a valuation allowance against all deferred tax assets that were capital in nature. At December 31, 2012, it was determined that these deferred tax assets were realizable and the valuation allowance was released, including the valuation allowance related to a specific portfolio of available-for-sale securities for which changes in fair value had historically been recognized as a separate component of “Accumulated other comprehensive income (loss).” Under the intra-period tax allocation rules, a credit of $63 million was recorded in “Accumulated other comprehensive income (loss)” on our Consolidated Balance Sheets related to the release of this valuation allowance. We elected to use the aggregate portfolio method to determine when the $63 million would be released from “Accumulated other comprehensive income (loss)” to “Income tax (provision) benefit, net” on our Consolidated Statements of Operations and Comprehensive Income (Loss). Under the aggregate portfolio approach, the intra-period tax allocation remaining in “Accumulated other comprehensive income (loss)” is not released to “Income tax (provision) benefit, net” until such time that the specific portfolio of available-for-sale securities that generated the original intra-period allocation is liquidated. During the first quarter 2015, this specific available-for-sale security portfolio was liquidated and the $63 million credit that was previously recorded in “Accumulated other comprehensive income (loss)” was released to “Income tax (provision) benefit, net.”

Deferred taxes arise because of the differences in the book and tax bases of certain assets and liabilities. Significant components of deferred tax assets and liabilities were as follows:


	As of December 31,
	2015		2014
		(In thousands)
Deferred tax assets:
NOL, credit and other carryforwards	$	69,558	$	55,280
Accrued expenses		41,081		46,456
Stock-based compensation		15,753		19,994
Deferred revenue		27,980		32,373
Total deferred tax assets		154,372		154,103
Valuation allowance		(21,143)		(8,652)
Deferred tax asset after valuation allowance		133,229		145,451

Deferred tax liabilities:
Depreciation (1)		(994,026)		(1,249,529)
FCC authorizations and other intangible amortization (1)		(975,725)		(581,030)
Unrealized gains on available for sale investments		(82,535)		(8,296)
Bases difference in partnerships and cost method investments (2)		(138,160)		(130,736)
Other liabilities		(27,572)		(32,904)
Total deferred tax liabilities		(2,218,018)		(2,002,495)
Net deferred tax asset (liability)	$	(2,084,789)	$	(1,857,044)

(1)

During the fourth quarter 2015, we have changed the classification of capitalized interest related to certain FCC authorizations on our Consolidated Balance Sheets from construction in progress within “Property and Equipment, net” to “FCC authorizations,” which is the qualifying asset on which interest is capitalized. Accordingly, as of December 31, 2015, $167 million of deferred taxes related to interest capitalized on these FCC authorizations as of December 31, 2014 was moved from “Depreciation” to “FCC authorizations and other intangible amortization” in the table above. See Note 2 for further information.

(2)

Included in this line item are deferred taxes related to, among other things, our non-controlling investments in Northstar Spectrum and SNR HoldCo, including deferred taxes created by the tax amortization of the Northstar Licenses and SNR Licenses. Also included in this line item are deferred taxes related to our cost method investments, including our cost method investments in the Tracking Stock.

During November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which simplifies the presentation of deferred income taxes. This standard requires that current deferred tax assets and liabilities be classified as noncurrent in a statement of financial position. We early adopted ASU 2015-17 effective December 31, 2015 on a retrospective basis, which resulted in a reclassification of our net current deferred tax asset to the net noncurrent deferred tax liabilities in our Consolidated Balance Sheets. Prior period amounts have been reclassified to conform to the current period presentation.

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 NOLs. 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	2015		2014		2013
		(In thousands)
Balance as of beginning of period	$	207,675	$	151,353	$	328,951
Additions based on tax positions related to the current year		135,937		69,643		12,736
Additions based on tax positions related to prior years		22,483		55,761		66,307
Reductions based on tax positions related to prior years		(22,697)		(18,646)		(104,796)
Reductions based on tax positions related to settlements with taxing authorities		(2,648)		(42,023)		(139,022)
Reductions based on tax positions related to the lapse of the statute of limitations		(4,817)		(8,413)		(12,823)
Balance as of end of period	$	335,933	$	207,675	$	151,353

We have $199 million in unrecognized tax benefits that, if recognized, could favorably affect our effective tax rate. We do not expect any material portion of this amount to be paid or settled within the next twelve months. During 2012, as a result of the DBSD Transaction and TerreStar Transaction, we recognized the acquired assets and assumed liabilities based on our estimates of fair value at their acquisition date, including $102 million in an uncertain tax position in “Long-term deferred revenue, distribution and carriage payments and other long-term liabilities” on our Consolidated Balance Sheets. Subsequently, during 2013, this uncertain tax position was resolved and $102 million, reflected in the table above, was reversed and recorded as a decrease in “Income tax (provision) benefit, net” on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2013.

Accrued interest and penalties on uncertain tax positions are recorded as a component of “Interest expense, net of amounts capitalized” and “Other, net,” respectively, on our Consolidated Statements of Operations and Comprehensive Income (Loss). During the year ended December 31, 2015, we recorded $3 million in net interest and penalty expense to earnings. During the year ended December 31, 2014, we recorded a credit of $3 million in net interest and penalty expense to earnings. During the year ended December 31, 2013, we recorded $4 million in net interest and penalty expense to earnings. Accrued interest and penalties were $15 million and $10 million at December 31, 2015 and 2014, respectively. The above table excludes these amounts.