8. 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.

As of December 31, 2013, we had no net operating loss carryforwards (“NOLs”) for federal income tax purposes and $5 million of NOL benefit for state income tax purposes. The state NOLs begin to expire in the year 2017. In addition, there are $11 million of tax benefits related to credit carryforwards which are partially offset by a valuation allowance. The credit carryforwards begin to expire in the year 2022.

DISH DBS and its domestic subsidiaries join with DISH Network in filing U.S. consolidated federal income tax returns and, in some states, combined or consolidated returns. The federal and state income tax provisions or benefits recorded by DISH DBS are generally those that would have been recorded if DISH DBS and its domestic subsidiaries had filed returns as a consolidated group independent of DISH Network. Cash is due and paid to DISH Network based on amounts that would be payable based on DISH DBS consolidated or combined group filings. Amounts are receivable from DISH Network on a basis similar to when they would be receivable from the IRS or other state taxing authorities. The amounts paid to DISH Network during the years ended December 31, 2013, 2012 and 2011 were $433 million, $273 million and $384 million, respectively.

The components of the (provision for) benefit from income taxes were as follows:

	For the Years Ended December 31,
	2013			2012			2011
	(In thousands)
Current (provision) benefit:
Federal	$	(361,662	)	$	(127,291	)	$	(277,920	)
State	(13,272		)	10,673			(36,408		)
Foreign	(13,316		)	—			—
	(388,250		)	(116,618		)	(314,328		)
Deferred (provision) benefit:
Federal	(65,955		)	(126,561		)	(553,393		)
State	(5,450		)	(42,747		)	(35,887		)
Decrease (increase) in valuation allowance	—			—			6,761
	(71,405		)	(169,308		)	(582,519		)
Total benefit (provision)	$	(459,655	)	$	(285,926	)	$	(896,847	)

The actual tax provisions for 2013, 2012 and 2011 reconcile to the amounts computed by applying the statutory Federal tax rate to income before taxes as follows:

	For the Years Ended December 31,
	2013		2012		2011
	% of pre-tax (income)/loss
Statutory rate	(35.0	)	(35.0	)	(35.0	)
State income taxes, net of Federal benefit	(1.0	)	(2.7	)	(2.0	)
Other	0.2		0.6		(0.3	)
Decrease (increase) in valuation allowance	—		—		0.3
Total benefit (provision) for income taxes	(35.8	)	(37.1	)	(37.0	)

The temporary differences, which give rise to deferred tax assets and liabilities as of December 31, 2013 and 2012, were as follows:

	As of December 31,
	2013			2012
	(In thousands)
Deferred tax assets:
NOL, credit and other carryforwards	$	10,645		$	9,565
Accrued expenses	48,416			75,996
Stock-based compensation	23,006			26,351
Deferred revenue	54,331			67,023
Total deferred tax assets	136,398			178,935
Valuation allowance	(7,469		)	(7,656		)
Deferred tax asset after valuation allowance	128,929			171,279

Deferred tax liabilities:
Depreciation and amortization	(1,272,014		)	(1,234,003		)
Unrealized gains on investments	(2,204		)	(773		)
Other liabilities	(36,629		)	(29,130		)
Total deferred tax liabilities	(1,310,847		)	(1,263,906		)
Net deferred tax asset (liability)	$	(1,181,918	)	$	(1,092,627	)

Current portion of net deferred tax asset	$	65,457		$	91,722
Noncurrent portion of net deferred tax asset (liability)	(1,247,375		)	(1,184,349		)
Total net deferred tax asset (liability)	$	(1,181,918	)	$	(1,092,627	)

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 2002 due to the carryover of previously incurred net operating losses. 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	2013			2012			2011
	(In thousands)
Balance as of beginning of period	$	185,669		$	190,935		$	170,226
Additions based on tax positions related to the current year	9,533			5,949			9,836
Reductions based on tax positions related to current years	—			—			(1,170		)
Additions based on tax positions related to prior years	66,307			1,581			16,610
Reductions based on tax positions related to prior years	—			(3,461		)	—
Reductions based on tax positions related to settlements with taxing authorities	(103,311		)	—			(1,185		)
Reductions based on tax positions related to the lapse of the statute of limitations	(12,314		)	(9,335		)	(3,382		)
Balance as of end of period	$	145,884		$	185,669		$	190,935

We have $146 million in unrecognized tax benefits that, if recognized, could favorably affect our effective tax rate. We do not expect any 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 “Other, net” on our Consolidated Statements of Operations and Comprehensive Income (Loss). During the years ended December 31, 2013 and 2012, we recorded $8 million and $6 million in interest and penalty expense to earnings, respectively. During the year ended December 31, 2011, we recorded $1 million in interest and penalty benefit to earnings. Accrued interest and penalties were $13 million and $15 million at December 31, 2013 and 2012, respectively. The above table excludes these amounts.