8. Income Taxes

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


	Year Ended December 31,
		2016		2015		2014
Current:
U.S. Federal	$	(1,718)	$	(1,089)	$	(5,524)
State and local		2,981		7,106		3,573
Foreign		(235)		(235)		(220)
Total current		1,028		5,782		(2,171)
Deferred:
U.S. Federal		(26,337)		35,721		8,531
State and local		(3,198)		3,973		1,745
Total deferred		(29,535)		39,694		10,276
Total income tax (provision) benefit	$	(28,507)	$	45,476	$	8,105

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


	Year Ended December 31,
	2016		2015		2014
Decrease to unrecognized tax benefits	$	2,477	$	4,921	$	3,062
Interest expense		(2,011)		(103)		(1,757)
Penalties		387		1,393		1,250
Total	$	853	$	6,211	$	2,555

The deferred tax (provision) benefit for each period included the impact of equity in net income (loss) of affiliates from our consolidated statement of operations.

For each period presented, the statute of limitations for the assessment of additional tax expired with regard to several of our federal and state UTPs and certain other UTPs were settled. As a result, the reduction to our liability for UTPs provided a current tax benefit, partially offset by an additional provision for the potential payment of interest on our remaining UTPs.

For 2014, the current tax provision of $2.2 million included a reduction to the benefit recorded in 2013 from the carryback of our federal tax loss after having made lower contributions to our qualified pension plan in 2014 than originally anticipated. The deferred tax benefit also included an 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.

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


	Year Ended December 31,
	2016		2015		2014
Tax benefit on loss from discontinued operations	$	200	$	450	$	14,482
Adjustment to tax benefit associated with stock-based compensation recorded to paid-in-capital		(141)		2,609		1,864
Deferred tax (provision) benefit for adjustments in other comprehensive loss (see Note 3)		(8,061)		(313)		4,919

Until December 31, 2016, the Company used the with-and-without approach of determining how and when excess tax benefits from stock-based compensation had been realized and recorded to paid-in-capital. Effective January 1, 2017, the Company is adopting ASU No. 2016-09 for the recognition of both previously unrecognized and future tax benefits from stock-based compensation (see Note 2).

The (provision) benefit 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 income (loss) of affiliates because of the effect of the following items (in thousands):


	Year Ended December 31,
	2016		2015		2014
Tax benefit at U.S. Statutory Rate of 35%	$	2,800	$	3,566	$	2,811
Permanent adjustments which change statutory amounts:
State and local income taxes, net of federal income tax		(4,588)		7,821		4,497
Equity in net income (loss) of affiliates		(29,427)		36,677		526
Extraterritorial income exclusion		—		—		3,468
Provision for unrecognized tax benefits		(1,113)		(708)		(833)
Interest on deferred installment sale		—		—		(216)
Nondeductible expenses		(586)		(1,411)		(1,359)
Change in valuation allowance		4,565		(307)		(624)
Foreign income taxes		(153)		(153)		(143)
Other, net		(5)		(9)		(22)
Total income tax (provision) benefit	$	(28,507)	$	45,476	$	8,105

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


	Year Ended December 31,
	2016		2015		2014
Balance at January 1	$	72,298	$	78,333	$	80,527
Increases related to prior year tax positions		1,525		1,955		2,141
Decreases related to prior year tax positions		—		—		(423)
Decreases as a result of statute expirations		(5,674)		(6,876)		(3,043)
Decreases as a result of tax settlements		—		(1,114)		(869)
Balance at December 31	$	68,149	$	72,298	$	78,333

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 2012. Earlier years related to certain foreign jurisdictions remain subject to examination. Various federal, 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 state income tax returns filed for 2012, potentially resulting in a $14.0 million reduction to our unrecognized tax benefits. Pursuant to the Purchase Agreement for the Sale, we are obligated to indemnify SSL for taxes related to periods prior to the closing of the transaction.

Our liability for UTPs decreased from $69.5 million at December 31, 2015 to $68.7 million at December 31, 2016 and is included in long-term liabilities in the consolidated balance sheets. At December 31, 2016, we have accrued $7.6 million and $6.0 million for the potential payment of tax-related interest and penalties, respectively. If our positions are sustained by the taxing authorities, approximately $30.2 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, 2016, 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, 2016, 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 15).

At December 31, 2016, we had federal NOL carryforwards of $270.9 million, state NOL carryforwards, primarily California ($6.1 million) and New York ($2.2 million), and federal research credits of $1.2 million which expire from 2017 to 2036, as well as federal and state AMT and state research credit carryforwards of approximately $7.4 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.

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, 2016, we had a valuation allowance totaling $3.6 million against our deferred tax assets for certain tax credit and loss carryovers due to the limited carryforward periods. During 2016, the valuation allowance decreased by $4.6 million, which was recorded as a benefit to continuing operations in our statement of operations after a significant portion of our California NOL carryforward expired unutilized. 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 2015, the valuation allowance increased by $0.3 million, which was recorded as a provision to continuing operations in our statement of operations.

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.

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


	December 31,
	2016		2015
Deferred tax assets:
Net operating loss and tax credit carryforwards	$	119,524	$	117,676
Compensation and benefits		1,582		1,639
Indemnification liabilities		1,346		5,434
Other, net		219		2,023
Federal benefit of uncertain tax positions		7,528		7,818
Pension costs		5,984		6,294
Investments in and advances to affiliates		—		20,004
Total deferred tax assets before valuation allowance		136,183		160,888
Less valuation allowance		(3,647)		(8,212)
Deferred tax assets net of valuation allowance		132,536		152,676
Deferred tax liabilities:
Investments in and advances to affiliates		17,257		—
Total deferred tax liabilities		17,257		—
Net deferred tax assets	$	115,279	$	152,676

Classification on consolidated balance sheets:
Deferred tax assets	$	115,285	$	152,676
Long-term liabilities		(6)		—
Net deferred tax assets	$	115,279	$	152,676