Income Taxes

Sprint Corporation is the parent of an affiliated group of corporations which join in the filing of a U.S. federal consolidated income tax return. Additionally, we file income tax returns in each state jurisdiction which imposes an income tax. In certain state jurisdictions, Sprint and its subsidiaries file combined tax returns with certain other SoftBank affiliated entities. State tax expense or benefit has been determined utilizing the separate return approach as if Sprint and its subsidiaries file on a stand-alone basis. We also file income tax returns in a number of foreign jurisdictions; however, our foreign income tax activity is immaterial. Cash paid and received for income tax purposes was insignificant for all periods presented.

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (3) bonus depreciation that will allow for full expensing of qualified property; (4) creating a new limitation on deductible interest expense; (5) eliminating the corporate alternative minimum tax; and (6) new tax rules related to foreign operations.

Section 15 of the Internal Revenue Code stipulates that our fiscal year ending March 31, 2018 will have a blended federal statutory tax rate of 31.5%, which is based on the applicable tax rates before and after the effectiveness of the Tax Act and the number of days in the year. The differences that caused our effective income tax rates to differ from the U.S. federal statutory rate for income taxes were as follows:



	Year Ended March 31,
	2018			2017			2016
	(in millions)
Income tax (expense) benefit at the federal statutory rate	$	(95	)	$	270		$	649
Effect of:
State income taxes, net of federal income tax effect	(43		)	24			38
State law changes, net of federal income tax effect	9			4			20
Increase liability for unrecognized tax benefits	(29		)	(14		)	(4		)
Increase deferred tax liability for business activity changes	(89		)	—			—
Credit for increasing research activities	15			15			14
Tax (expense) benefit from organizational restructuring	—			(118		)	90
Change in federal and state valuation allowance⁽¹⁾	224			(615		)	(939		)
Tax benefit from the Tax Act	7,088			—			—
Other, net	(6		)	(1		)	(9		)
Income tax benefit (expense)	$	7,074		$	(435	)	$	(141	)
Effective income tax rate	(2,334.7		)%	(56.4		)%	(7.6		)%

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(1)	Exclusive of $2.1 billion federal and state release included in Tax benefit from the Tax Act line.

Income tax benefit (expense) consists of the following:



	Year Ended March 31,
	2018			2017			2016
	(in millions)
Current income tax benefit (expense)
Federal	$	22		$	50		$	13
State	(58		)	(50		)	(30		)
Total current income tax expense	(36		)	—			(17		)
Deferred income tax benefit (expense)
Federal	7,234			(284		)	(206		)
State	(115		)	(149		)	83
Total deferred income tax benefit (expense)	7,119			(433		)	(123		)
Foreign income tax expense	(9		)	(2		)	(1		)
Total income tax benefit (expense)	$	7,074		$	(435	)	$	(141	)

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



	Year Ended March 31,
	2018			2017			2016
	(in millions)
Unrecognized net periodic pension and other postretirement benefit cost⁽¹⁾	$	9		$	(24	)	$	—
Unrealized holding gains (losses) on derivatives⁽¹⁾	$	(6	)	$	—		$	—

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

We recognized, as a provisional estimate, a $7.1 billion non-cash tax benefit through income from continuing operations for the re-measurement of deferred tax assets and liabilities due to changes in tax laws included in the Tax Act. This re-measurement of deferred taxes had no impact on cash flows.

The re-measurement was driven by two provisions in the Tax Act. First as a result of the corporate tax rate reduction from 35% to 21%, we recognized a $5.0 billion non-cash tax benefit through income from continuing operations for the re-measurement of our deferred tax assets and liabilities. Secondly, the Tax Act included a provision whereby net operating losses generated in tax years beginning after December 31, 2017 may be carried forward indefinitely. 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. The provision in the Tax Act, modifying the carryforward period of net operating losses, changed our assessment as to the ability to recognize deferred tax assets on certain deductible temporary differences projected to be realized in tax years with an indefinite-lived carryforward period. In assessing the ability to realize these deferred tax assets, we considered taxable temporary differences from indefinite-lived assets, such as FCC licenses, to be an available source of future taxable income. This source of income was not previously considered because it could not be scheduled to reverse in the same period as the definite-lived deductible temporary differences. As a result of this change in assessment, we recognized a $2.1 billion non-cash tax benefit through income from continuing operations to reduce our valuation allowance.

We believe it is more likely than not that our remaining deferred tax assets, net of the valuation allowance, will be realized based on current income tax laws, including those modified by the Tax Act, 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.

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 net 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 March 31, 2018 and 2017, along with the income tax effect of each, were as follows:



	March 31,
	2018			2017
	(in millions)
Deferred tax assets
Net operating loss carryforwards	$	4,116		$	6,812
Tax credit carryforwards	244			340
Capital loss carryforwards	—			1
Property, plant and equipment	2,192			2,192
Debt obligations	64			205
Deferred rent	231			402
Pension and other postretirement benefits	219			332
Accruals and other liabilities	913			1,454
	7,979			11,738
Valuation allowance	(4,745		)	(10,477		)
	3,234			1,261
Deferred tax liabilities
FCC licenses	8,877			12,876
Trademarks	1,131			1,712
Intangibles	298			771
Other	222			318
	10,528			15,677

Long-term deferred tax liability	$	7,294		$	14,416

On December 22, 2017 the SEC issued Staff Accounting Bulletin No. 118 (SAB 118) which addresses income tax accounting implications of the Tax Act. The purpose of SAB 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, Income Taxes in the reporting period in which the Tax Act was enacted. SAB 118 addresses situations where the accounting is incomplete for certain income tax effects of the Tax Act upon issuance of a company’s financial statements for the reporting period which included the enactment date. SAB 118 allows for a provisional estimate to be recorded if it is a reasonable estimate of the impact of the Tax Act. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the Tax Act, not to extend beyond one year from the date of enactment.

Estimates were used in determining the balance of deferred tax assets and liabilities subject to changes in tax laws included in the Tax Act. In addition, estimates were used in determining the timing of reversals of deferred tax assets and liabilities in assessing the ability to realize certain deferred tax assets, which impacted the valuation allowance adjustment we recorded as part of the effects of the Tax Act. Additional information and analysis is required to accurately determine the deferred tax assets and liabilities effected by the Tax Act as well as determine the reversal pattern of such deferred tax assets and liabilities in assessing the ability to realize deferred tax assets.

In accordance with SAB 118, we recorded, as a provisional estimate, a $7.1 billion non-cash tax benefit through income from continuing operations in our consolidated statements of operations. This amount is a reasonable estimate of the tax effects of the Tax Act on our financial statements. We will continue to analyze the effects of the Tax Act on the financial statements and operations and record any additional impacts as they are identified during the measurement period provided for in SAB 118.

Income tax benefit of $7.1 billion for the year ended March 31, 2018 was primarily attributable to the impact of the Tax Act as previously discussed.

Income tax expense of $435 million for the year ended March 31, 2017 was primarily attributable to taxable temporary differences from the tax amortization of FCC licenses and tax expense of $136 million on pre-tax gains from spectrum license exchanges which increased our deferred tax liability on FCC license temporary differences. In addition, we increased our state income tax valuation allowance by $89 million as a result of a shift in operations among wholly-owned subsidiaries and an organizational restructuring that occurred during the year.

Income tax expense of $141 million for the year ended March 31, 2016 was primarily attributable to tax expense resulting from taxable temporary differences from the tax amortization of FCC licenses, partially offset by tax benefits from the reversal of state income tax valuation allowance on deferred tax assets and changes in state income tax laws enacted during the year. As a result of organizational restructuring, which drove a sustained increase in the profitability of specific legal entities, we revised our estimate regarding the ability to realize of the involved entities' deferred state tax assets and recorded a state tax benefit of $90 million.

During the years ended March 31, 2018, 2017, and 2016, we generated $(109) million, $204 million, and $343 million, respectively, of foreign income (loss), which is included in "Income (loss) before income taxes" in the consolidated statements of operations. We have no material unremitted earnings of foreign subsidiaries.

As of March 31, 2018, we had federal net operating loss carryforwards of $13.9 billion, state net operating loss carryforwards of $16.0 billion and foreign net operating loss carryforwards of $953 million. Related to these loss carryforwards, we have recorded federal tax benefits of $2.9 billion, net state tax benefits of $952 million and foreign tax benefits of $297 million before consideration of the valuation allowances. Approximately $703 million of the federal net operating loss carryforwards expire between fiscal years 2018 and 2022. The remaining $13.2 billion expire in varying amounts between fiscal years 2023 and 2034. The state net operating loss carryforwards expire in varying amounts through fiscal year 2036. Foreign net operating loss carryforwards of $550 million do not expire. The remaining foreign net operating loss carryforwards expire in varying amounts between fiscal years 2018 and 2036.

We also had available $353 million of federal and state income tax credit carryforwards as of March 31, 2018. Included in this amount are $12 million of income tax credits which expire prior to fiscal year 2019 and $306 million which expire in varying amounts between fiscal years 2019 and 2037. The remaining $35 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 unrecognized tax benefits attributable to uncertain tax positions were $239 million and $190 million, as of the March 31, 2018 and 2017, respectively. As of March 31, 2018, the unrecognized tax benefits included items that would favorably affect the income tax provision by $217 million, if recognized without an offsetting valuation allowance adjustment. The accrued liability for income tax related interest and penalties was insignificant for all periods presented.

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



	Year Ended March 31,
	2018			2017
	(in millions)
Balance at beginning of period	$	190		$	166
Additions based on current year tax positions	21			15
Additions based on prior year tax positions	53			10
Reductions for prior year tax positions	(24		)	—
Reductions for lapse of statute of limitations	(1		)	(1		)
Balance at end of period	$	239		$	190

We are not currently under examination by the U.S. Internal Revenue Service. 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/judicial review or appellate process. Based on our current knowledge of the examinations, administrative/judicial reviews and appellate processes, we believe it is reasonably possible uncertain tax positions may be resolved during the next twelve months which could result in a reduction of up to $34 million in our unrecognized tax benefits.

The federal and state statutes of limitations for assessment of tax liability generally lapse three and four years, respectively, after the date the tax returns are filed. However, income tax attributes that are carried forward, such as net operating loss carryforwards, may be challenged and adjusted by taxing authorities at any time prior to the expiration of the statute of limitations for the tax year in which they are utilized.