10.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, 2016, we had no net operating loss carryforwards (“NOLs”) for federal income tax purposes and $27 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 $57 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,
	2016		2015		2014
	(In thousands)
Current (benefit) provision:
Federal	$	290,378	$	144,990	$	180,282
State		29,512		18,811		(44,565)
Foreign		10,187		(3,517)		6,588
Total current (benefit) provision		330,077		160,284		142,305

Deferred (benefit) provision:
Federal		469,851		165,294		310,977
State		35,618		30,059		15,776
Foreign		—		—		(190,253)
Increase (decrease) in valuation allowance		1,463		11,039		(1,965)
Total deferred (benefit) provision		506,932		206,392		134,535
Total (benefit) provision	$	837,009	$	366,676	$	276,840

Our $2.306 billion of “Income (loss) before income taxes” on our Consolidated Statements of Operations and Comprehensive Income (Loss) included income of $8 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,
	2016	2015	2014
	% of pre-tax income/(loss)
Statutory rate	35.0	35.0	35.0
State income taxes, net of federal benefit	2.5	3.3	1.1
Reversal of uncertain tax positions	(0.8)	(1.0)	(3.5)
Foreign tax planning strategies, net of federal benefit (1)	—	—	(9.8)
Amounts reclassified from accumulated other comprehensive income (loss) (2)	—	(5.5)	—
Increase (decrease) in valuation allowance	0.1	1.0	(0.2)
Other, net	(0.5)	(0.5)	0.4
Total (benefit) provision for income taxes	36.3	32.3	23.0

(1)

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.

(2)

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,
	2016		2015
		(In thousands)
Deferred tax assets:
NOL, credit and other carryforwards	$	56,498	$	69,558
Accrued expenses		57,418		41,081
Stock-based compensation		16,606		15,753
Unrealized (gains) losses on available for sale and other investments		10,827		—
Deferred revenue		19,064		27,980
Total deferred tax assets		160,413		154,372
Valuation allowance		(22,606)		(21,143)
Deferred tax asset after valuation allowance		137,807		133,229

Deferred tax liabilities:
Depreciation		(914,487)		(994,026)
FCC authorizations and other intangible amortization		(1,379,735)		(975,725)
Unrealized (gains) losses on available for sale and other investments		—		(82,535)
Bases difference in partnerships and cost method investments (1)		(366,937)		(138,160)
Discount on convertible notes and convertible note hedge transaction, net		(47,908)		—
Other liabilities		(24,221)		(27,572)
Total deferred tax liabilities		(2,733,288)		(2,218,018)
Net deferred tax asset (liability)	$	(2,595,481)	$	(2,084,789)

(1)

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.

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 2005 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	2016		2015		2014
		(In thousands)
Balance as of beginning of period	$	335,933	$	207,675	$	151,353
Additions based on tax positions related to the current year		40,492		135,937		69,643
Additions based on tax positions related to prior years		21,797		22,483		55,761
Reductions based on tax positions related to prior years		(34,106)		(22,697)		(18,646)
Reductions based on tax positions related to settlements with taxing authorities		(3,628)		(2,648)		(42,023)
Reductions based on tax positions related to the lapse of the statute of limitations		(3,118)		(4,817)		(8,413)
Balance as of end of period	$	357,370	$	335,933	$	207,675

We have $200 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.

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, 2016 and 2015, we recorded $11 million and $3 million in net interest and penalty expense to earnings, respectively. During the year ended December 31, 2014, we recorded a credit of $3 million in net interest and penalty expense to earnings. Accrued interest and penalties were $26 million and $15 million at December 31, 2016 and 2015, respectively. The above table excludes these amounts.