8. Income Taxes

The benefit (provision) for income taxes on the loss from continuing operations before income taxes and equity in net (loss) income of affiliates consists of the following (in thousands):


	Year Ended December 31,
		2014		2013		2012
Current:
U.S. Federal	$	(5,524)	$	25,567	$	55,928
State and local		3,573		976		59,390
Foreign		(220)		(200)		—
Total current		(2,171)		26,343		115,318
Deferred:
U.S. Federal		8,531		(26,981)		(3,325)
State and local		1,745		(1,203)		(18,678)
Total deferred		10,276		(28,184)		(22,003)
Total income tax benefit (provision)	$	8,105	$	(1,841)	$	93,315

Our current tax (provision) benefit includes a decrease (increase) to our liability for UTPs for (in thousands):


	Year Ended December 31,
	2014		2013		2012
Decrease to unrecognized tax benefits	$	3,062	$	1,952	$	61,470
Interest expense		(1,757)		(1,429)		27,672
Penalties		1,250		521		21,175
Total	$	2,555	$	1,044	$	110,317

During 2014, the Company received a $10.6 million tax refund from the carryback of its 2013 federal tax loss against the taxes previously paid for 2012. The current tax provision of $2.2 million for 2014 included a reduction to the benefit recorded in 2013 for this refund after having made lower contributions to our qualified pension plan in 2014 than originally anticipated.

For 2014, the deferred tax benefit included the impact of the impairment charge recorded with regard to our investment in XTAR (see note 6) and the increase to our federal NOL carryforward from the enhanced extraterritorial income exclusion provided by former section 114 of the Internal Revenue Code. Without the Sale, we would not have remeasured the extraterritorial income exclusion because it would have provided only a minimal cash tax benefit. Also, the deferred tax provision for each period included the impact of our equity in net income of Telesat.

During 2013, the current tax benefit of $26.3 million primarily relates to the refunds received from our federal and state income tax returns filed for 2012 (primarily as a result of the enhanced extraterritorial income exclusion) and the anticipated benefit from the carryback of the Company’s 2013 federal tax loss.

During 2012, the statute of limitations for assessment of additional tax expired with regard to certain UTPs related to Old Loral and several of our federal and state income tax returns filed for 2007 and 2008, which resulted in an $86.7 million benefit to our income tax provision from continuing operations (a current tax benefit of $112.9 million, which included the reversal of applicable interest and penalties previously accrued, offset by a deferred tax provision of $26.2 million).

In addition to the benefit (provision) for income taxes on the loss from continuing operations presented above, we also recorded the following items (in thousands):


	Year Ended December 31,
	2014		2013		2012
Tax benefit (provision) on (loss) income from discontinued operations	$	14,482	$	2,995	$	(10,157)
Tax provision on Sale of discontinued operations		—		—		(267,451)
Excess tax benefit from stock-based compensation recorded to paid-in-capital		1,864		(3,128)		16,919
Deferred tax benefit (provision) for adjustments in other comprehensive loss (See Note 4)		4,919		(10,127)		(22,612)

The Company uses the with-and-without approach of determining when excess tax benefits from stock-based compensation have been realized. After finalizing the carryback of its 2013 U.S. federal NOL to 2012, the Company re-determined the excess tax benefit from stock-based compensation and recorded a $1.9 million increase and a $3.1 million decrease to paid-in-capital for the years ended December 31, 2014 and 2013, respectively. In addition to the deferred tax assets on the consolidated balance sheet as of December 31, 2014, the Company has $6.6 million of federal AMT credits that, when realized in the future, will be recorded as an increase to paid-in-capital.

The benefit (provision) for income taxes differs from the amount computed by applying the statutory U.S. Federal income tax rate on the loss from continuing operations before income taxes and equity in net (loss) income of affiliates because of the effect of the following items (in thousands):


	Year Ended December 31,
	2014		2013		2012
Tax benefit at U.S. Statutory Rate of 35%	$	2,811	$	5,435	$	9,524
Permanent adjustments which change statutory amounts:
State and local income taxes, net of federal income tax		4,497		155		34,605
Equity in net (loss) income of affiliates		526		(13,589)		(12,019)
Extraterritorial income exclusion		3,468		6,177		11,200
Domestic production activity benefit		—		2,317		—
Provision for unrecognized tax benefits		(833)		(332)		46,542
Interest on deferred installment sale		(216)		(1,296)		—
Nondeductible expenses		(1,359)		(762)		(603)
Change in valuation allowance		(624)		(121)		2,311
Federal research and development credit		—		402		99
Foreign income taxes		(143)		(130)		—
Other, net		(22)		(97)		1,656
Total income tax benefit (provision)	$	8,105	$	(1,841)	$	93,315

The following table summarizes the activity related to our unrecognized tax benefits (in thousands):


	Year Ended December 31,
	2014		2013		2012
Balance at January 1	$	80,527	$	76,080	$	115,293
Increases related to prior year tax positions		2,141		6,755		453
Decreases related to prior year tax positions		(423)		(1,025)		(27)
Decreases as a result of statute expirations		(3,043)		(1,283)		(61,021)
Decreases as a result of tax settlements		(869)		—		(8,184)
Increases related to current year tax positions		—		—		29,566
Balance at December 31	$	78,333	$	80,527	$	76,080

With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years prior to 2007. Earlier years related to certain foreign jurisdictions remain subject to examination. Various state and foreign income tax returns are currently under examination. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward. While we intend to contest any future tax assessments for uncertain tax positions, no assurance can be provided that we would ultimately prevail. During the next twelve months, the statute of limitations for assessment of additional tax will expire with regard to certain UTPs related to our federal income tax returns filed for 2007 and 2011 and state income tax returns filed for 2007, 2010 and 2011, potentially resulting in a $8.5 million reduction to our unrecognized tax benefits. Pursuant to the Purchase Agreement for the Sale, we are obligated to indemnify SS/L for taxes related to periods prior to the closing of the transaction.

Our liability for UTPs decreased from $79.7 million at December 31, 2013 to $77.1 million at December 31, 2014 and is included in long-term liabilities in the consolidated balance sheets. At December 31, 2014, we have accrued $5.8 million and $7.8 million for the potential payment of tax-related interest and penalties, respectively. If our positions are sustained by the taxing authorities, approximately $35.7 million of the tax benefits will reduce the Company’s income tax provision from continuing operations. Other than as described above, there were no significant changes to our unrecognized tax benefits during the year ended December 31, 2014, and we do not anticipate any other significant increases or decreases to our unrecognized tax benefits during the next twelve months.

In connection with the acquisition of our ownership interest in Telesat, Loral indemnified Telesat for Loral Skynet tax liabilities relating to periods preceding 2007 and retained the benefit of tax recoveries related to the transferred assets. The unrecognized tax benefits related to the Loral Skynet subsidiaries were transferred to Telesat subject to the Telesat Indemnification. At December 31, 2014, Loral’s asset or liability for the Telesat Indemnification based upon the probable outcome of these matters is not expected to be material (see Notes 6 and 16).

At December 31, 2014, we had federal NOL carryforwards of $264.8 million, state NOL carryforwards, primarily California ($77.8 million), and federal research credits of $1.2 million which expire from 2016 to 2024, as well as federal and state AMT and state research credit carryforwards of approximately $9.4 million that may be carried forward indefinitely.

The reorganization of the Company on the Effective Date constituted an ownership change under section 382 of the Internal Revenue Code. Accordingly, use of our tax attributes, such as NOLs and tax credits generated prior to the ownership change, are subject to an annual limitation of approximately $32.6 million, subject to increase or decrease based on certain factors. Our annual limitation was increased significantly each year through 2010, the last year allowed for the recognition of additional benefits from our “net unrealized built-in gains” (i.e., the excess of fair market value over tax basis for our assets) as of the Effective Date.

We assess the recoverability of our NOLs and other deferred tax assets and based upon this analysis, record a valuation allowance to the extent recoverability does not satisfy the “more likely than not” recognition criteria. We continue to maintain our valuation allowance until sufficient positive evidence exists to support full or partial reversal. As of December 31, 2014, we had a valuation allowance totaling $7.9 million against our deferred tax assets for certain tax credit and loss carryovers due to the limited carryforward periods. During 2014, the valuation allowance increased by $0.7 million, of which $0.6 million was recorded as a provision to continuing operations in our statement of operations and $0.1 million was charged to other comprehensive loss. Subsequent to the Sale, to the extent that profitability from operations is not sufficient to realize the benefit from our remaining net deferred tax assets, we would generate sufficient taxable income from the appreciated value of our Telesat investment, which currently has a nominal tax basis, in order to prevent federal net operating losses from expiring and realize the benefit of all remaining deferred tax assets.

During 2013, the valuation allowance increased by $0.1 million which was recorded as a provision to continuing operations in our statement of operations.

During 2012, the valuation allowance decreased by $3.8 million, of which $2.3 million was recorded as a benefit to continuing operations and $1.5 million was recorded as a benefit to discontinued operations in our statement of operations.

The significant components of the net deferred income tax assets are (in thousands):


	December 31,
	2014		2013
Deferred tax assets:
Net operating loss and tax credit carryforwards	$	122,152	$	132,820
Compensation and benefits		1,790		1,590
Indemnification liabilities		9,114		5,946
Other, net		4,850		4,909
Federal benefit of uncertain tax positions		10,026		10,216
Pension costs		6,752		1,154
Total deferred tax assets before valuation allowance		154,684		156,635
Less valuation allowance		(7,905)		(7,228)
Deferred tax assets net of valuation allowance		146,779		149,407
Deferred tax liabilities:
Deferred installment sale		(12,376)		(37,974)
Investments in and advances to affiliates		(22,082)		(28,848)
Total deferred tax liabilities		(34,458)		(66,822)
Net deferred tax assets	$	112,321	$	82,585

Classification on consolidated balance sheets:
Current deferred tax assets	$	654	$	3,784
Long-term deferred tax assets		112,898		83,708
Other current liabilities		(416)		—
Long term liabilities		(815)		(4,907)
Net deferred tax assets	$	112,321	$	82,585