
Note 11.	Income Taxes

Income tax expense consists of the following:



	Year Ended December 31,
	2012			2011			2010
	(in millions)
Current income tax benefit (expense)
Federal	$	34		$	(1	)	$	48
State	22			(20		)	15
Total current income tax benefit (expense)	56			(21		)	63
Deferred income tax (expense) benefit
Federal	(199		)	(136		)	(270		)
State	(10		)	(95		)	40
Total deferred income tax expense	(209		)	(231		)	(230		)
Foreign income tax (expense) benefit	(1		)	(2		)	1
Total income tax expense	$	(154	)	$	(254	)	$	(166	)

The differences that caused our effective income tax rates to vary from the 35% federal statutory rate for income taxes were as follows:



	Year Ended December 31,
	2012			2011			2010
	(in millions)
Income tax benefit at the federal statutory rate	$	1,460		$	923		$	1,155
Effect of:
State income taxes, net of federal income tax effect	137			80			118
State law changes, net of federal income tax effect	(5		)	(38		)	—
Reduction (increase) in liability for unrecognized tax benefits	38			(1		)	18
Tax expense related to equity awards	(15		)	(13		)	(42		)
Change in valuation allowance	(1,756		)	(1,221		)	(1,418		)
Other, net	(13		)	16			3
Income tax expense	$	(154	)	$	(254	)	$	(166	)
Effective income tax rate	(3.7		)%	(9.6		)%	(5.0		)%

Income tax (expense) benefit allocated to other items was as follows:



	Year Ended December 31,
	2012		2011			2010
	(in millions)
Unrecognized net periodic pension and other postretirement benefit cost⁽¹⁾	$	—	$	—		$	5
Unrealized holding gains/losses on securities⁽¹⁾	—		(1		)	1

_______________


(1)	These amounts have been recognized in accumulated other comprehensive loss.

Deferred income taxes are recognized for the temporary differences between the carrying amounts of our assets and liabilities for financial statement purposes and their tax bases. Deferred tax assets are also recorded for operating loss, capital loss and tax credit carryforwards. The sources of the differences that give rise to the deferred income tax assets and liabilities as of December 31, 2012 and 2011, along with the income tax effect of each, were as follows:



	December 31, 2012						December 31, 2011
	Current			Long-Term			Current			Long-Term
	(in millions)
Deferred tax assets
Net operating loss carryforwards	$	—		$	4,398		$	—		$	3,873
Capital loss carryforwards	—			126			—			52
Accruals and other liabilities	577			1,061			461			1,094
Tax credit carryforwards	—			431			—			471
Pension and other postretirement benefits	—			430			—			324
	577			6,446			461			5,814
Valuation allowance	(472		)	(5,183		)	(284		)	(3,580		)
	105			1,263			177			2,234
Deferred tax liabilities
Property, plant and equipment	—			420			—			1,527
Intangibles	—			6,855			—			6,720
Investments	—			802			—			855
Other	104			233			47			118
	104			8,310			47			9,220
Current deferred tax asset	$	1					$	130
Long-term deferred tax liability				$	7,047					$	6,986

The realization of deferred tax assets, including net operating loss carryforwards, is dependent on the generation of future taxable income sufficient to realize the tax deductions, carryforwards and credits. However, our history of consecutive annual losses reduces our ability to rely on expectations of future income in evaluating the ability to realize our deferred tax assets. Valuation allowances on deferred tax assets are recognized if it is determined that it is more likely than not that the asset will not be realized. As a result, the Company recognized an increase in the valuation allowance of $1.8 billion and $1.3 billion for the years ended December 31, 2012 and 2011, respectively, on deferred tax assets primarily related to federal and state net operating loss carryforwards generated during the period. The increase in the carrying amount of Sprint's valuation allowance for the years ended December 31, 2012 and 2011 in excess of amounts recognized as a change in the valuation allowance in the current period income tax expense is primarily associated with the tax effect of items reflected in other comprehensive income, other accounts, and the expiration of net operating loss and tax credit carryforwards. We do not expect to record significant tax benefits on future net operating losses until our circumstances justify the recognition of such benefits.

We believe it is more likely than not that our remaining deferred income tax assets, net of the valuation allowance, will be realized based on current income tax laws and expectations of future taxable income stemming from the reversal of existing deferred tax liabilities. Uncertainties surrounding income tax law changes, shifts in operations between state taxing jurisdictions and future operating income levels may, however, affect the ultimate realization of all or some of these deferred income tax assets.

Income tax expense of $154 million, $254 million, and $166 million for the years ended December 31, 2012, 2011, and 2010, respectively, is primarily attributable to taxable temporary differences from amortization of FCC licenses. FCC licenses are amortized over 15 years for income tax purposes but, because these licenses have an indefinite life, they are not amortized for financial statement reporting purposes. This difference results in net deferred income tax expense since the taxable temporary difference cannot be scheduled to reverse during the loss carryforward period. In addition, during 2012, a $69 million tax benefit was recorded as a result of the successful resolution of various federal and state income tax uncertainties. During 2011, a $59 million expense was recorded as a result of the effect of changes in corporate state income tax laws.

During 2012, 2011 and 2010, we generated $319 million, $194 million, and $210 million, respectively, of foreign income, which is included in loss before income taxes. We have no material unremitted earnings of foreign subsidiaries. Cash was paid for income taxes, net, of $28 million and $35 million in 2012 and 2011, respectively. Cash refunds for income taxes were received, net, of $139 million in 2010.

As of December 31, 2012, we had federal operating loss carryforwards of $10.8 billion and state operating loss carryforwards of $14.9 billion. Related to these loss carryforwards, we have recorded federal tax benefits of $3.7 billion and net state tax benefits of $709 million before consideration of the valuation allowances. Approximately $971 million of the federal net operating loss carryforwards expire between 2016 and 2020. The remaining $9.8 billion expire in varying amounts between 2021 and 2032. The state operating loss carryforwards expire in varying amounts through 2032.

In addition, we had available, for income tax purposes, federal alternative minimum tax net operating loss carryforwards of $11.2 billion and state alternative minimum tax net operating loss carryforwards of $3.0 billion. The loss carryforwards expire in varying amounts through 2032. We also had available capital loss carryforwards of $342 million. Related to these capital loss carryforwards are tax benefits of $126 million. Capital loss carryforwards of $112 million expire in 2013 and the remaining $230 million expires between 2014 and 2017.

We also had available $431 million of federal and state income tax credit carryforwards as of December 31, 2012. Included in this amount are $7 million of income tax credits which expire prior to 2016 and $294 million which expire in varying amounts between 2016 and 2032. The remaining $130 million do not expire.

Unrecognized tax benefits are established for uncertain tax positions based upon estimates regarding potential future challenges to those positions at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. These estimates are updated at each reporting date based on the facts, circumstances and information available. Interest related to these unrecognized tax benefits is recognized in interest expense. Penalties are recognized as additional income tax expense. The total unrecognized tax benefits attributable to uncertain tax positions as of December 31, 2012 and 2011 were $171 million and $225 million, respectively. At December 31, 2012, the total unrecognized tax benefits included items that would favorably affect the income tax provision by $151 million, if recognized without an offsetting valuation allowance adjustment. As of December 31, 2012 and 2011, the accrued liability for income tax related interest and penalties was $5 million and $26 million, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2012			2011
	(in millions)
Balance at January 1	$	225		$	228
Additions based on current year tax positions	1			4
Additions based on prior year tax positions	1			4
Reductions for prior year tax positions	(1		)	(1		)
Reductions for settlements	(52		)	(2		)
Reductions for lapse of statute of limitations	(3		)	(8		)
Balance at December 31	$	171		$	225

We file income tax returns in the U.S. federal jurisdiction and each state jurisdiction which imposes an income tax. We also file income tax returns in a number of foreign jurisdictions. However, our foreign income tax activity has been immaterial.

The Internal Revenue Service (IRS) has completed the examination of our 2007, 2008 and 2009 consolidated income tax returns. Settlement agreements were reached with the Appeals or Exam division of the IRS for examination issues in dispute for years prior to 2010. The issues were immaterial to our consolidated financial statements.

We are involved in multiple state income tax examinations related to various years beginning with 1996, which are in various stages of the examination, administrative review or appellate process. Based on our current knowledge of the examinations, administrative reviews and appellate processes, we believe it is reasonably possible a number of our uncertain tax positions may be resolved during the next twelve months which could result in a reduction of up to $25 million in our unrecognized tax benefits.