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, 2014, 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 $19 million of tax benefits related to credit carryforwards which are partially offset by a valuation allowance. The state credit carryforwards begin to expire in the year 2015.

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, 2014, 2013 and 2012 were $279 million, $433 million and $273 million, respectively.

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

	For the Years Ended December 31,
	2014			2013			2012
	(In thousands)
Current (provision) benefit:
Federal	$	(342,417	)	$	(361,662	)	$	(127,291	)
State	26,163			(13,272		)	10,673
Foreign	(6,990		)	(13,316		)	—
	(323,244		)	(388,250		)	(116,618		)
Deferred (provision) benefit:
Federal	(78,420		)	(65,955		)	(126,561		)
State	(14,011		)	(5,450		)	(42,747		)
Decrease (increase) in valuation allowance	4,844			—			—
	(87,587		)	(71,405		)	(169,308		)
Total benefit (provision)	$	(410,831	)	$	(459,655	)	$	(285,926	)

Our $1.226 billion of “Income (loss) before income taxes” on our Consolidated Statements of Operations and Comprehensive Income (Loss) included a loss of $4 million related to our foreign operations.

The following table shows the principal reasons for the difference between the effective income tax rate and the statutory federal tax rate:

	For the Years Ended December 31,
	2014		2013		2012
	% of pre-tax (income)/loss
Statutory rate	(35.0	)	(35.0	)	(35.0	)
State income taxes, net of Federal benefit	(2.0	)	(1.0	)	(2.7	)
Reversal of uncertain tax positions	3.5		—		—
Other, net	—		0.2		0.6
Total benefit (provision) for income taxes	(33.5	)	(35.8	)	(37.1	)

Deferred taxes arise because of the differences in the book and tax bases of certain assets and liabilities. Significant components of deferred tax assets and liabilities were as follows:

	As of December 31,
	2014			2013
	(In thousands)
Deferred tax assets:
NOL, credit and other carryforwards	$	18,799		$	10,645
Accrued expenses	40,461			48,416
Stock-based compensation	21,193			23,006
Deferred revenue	31,853			54,331
Total deferred tax assets	112,306			136,398
Valuation allowance	(5,214		)	(7,469		)
Deferred tax asset after valuation allowance	107,092			128,929

Deferred tax liabilities:
Depreciation and amortization	(1,155,329		)	(1,272,014		)
Unrealized gains on investments (1)	(109,428		)	(2,204		)
Other liabilities	(30,734		)	(36,629		)
Total deferred tax liabilities	(1,295,491		)	(1,310,847		)
Net deferred tax asset (liability)	$	(1,188,399	)	$	(1,181,918	)

Current portion of net deferred tax asset (liability)	$	37,018		$	65,457
Noncurrent portion of net deferred tax asset (liability)	(1,225,417		)	(1,247,375		)
Total net deferred tax asset (liability)	$	(1,188,399	)	$	(1,181,918	)

(1)

Includes deferred taxes related to the Satellite and Tracking Stock Transaction.

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 NOLs. 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	2014			2013			2012
	(In thousands)
Balance as of beginning of period	$	145,884		$	185,669		$	190,935
Additions based on tax positions related to the current year	69,643			9,533			5,949
Additions based on tax positions related to prior years	58,963			66,307			1,581
Reductions based on tax positions related to prior years	(16,379		)	—			(3,461		)
Reductions based on tax positions related to settlements with taxing authorities	(42,023		)	(103,311		)	—
Reductions based on tax positions related to the lapse of the statute of limitations	(8,413		)	(12,314		)	(9,335		)
Balance as of end of period	$	207,675		$	145,884		$	185,669

We have $173 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 year ended December 31, 2014, we recorded a credit of $3 million in interest and penalty expense to earnings. During the years ended December 31, 2013 and 2012, we recorded $8 million and $6 million in interest and penalty expense to earnings, respectively. Accrued interest and penalties were $10 million and $13 million at December 31, 2014 and 2013, respectively. The above table excludes these amounts.