INCOME TAXES

Income (loss) from continuing operations before income taxes consists of the following:



	Year Ended December 31
(in thousands)	2016		2015			2014
U.S.	$	227,457	$	(142,705	)	$	1,025,101
Non-U.S.	23,201		21,815			52,602
	$	250,658	$	(120,890	)	$	1,077,703

The provision for income taxes on income from continuing operations consists of the following:



(in thousands)	Current		Deferred			Total
Year Ended December 31, 2016
U.S. Federal	$	56,342	$	33,959		$	90,301
State and Local	6,325		(5,164		)	1,161
Non-U.S.	8,463		(18,725		)	(10,262		)
	$	71,130	$	10,070		$	81,200
Year Ended December 31, 2015
U.S. Federal	$	5,728	$	20,890		$	26,618
State and Local	402		(10,749		)	(10,347		)
Non-U.S.	2,441		1,788			4,229
	$	8,571	$	11,929		$	20,500
Year Ended December 31, 2014
U.S. Federal	$	215,450	$	38,684		$	254,134
State and Local	23,737		27,257			50,994
Non-U.S.	10,485		(3,313		)	7,172
	$	249,672	$	62,628		$	312,300

The provision for income taxes on continuing operations differs from the amount of income tax determined by applying the U.S. Federal statutory rate of 35% to the income (loss) from continuing operations before taxes as a result of the following:



	Year Ended December 31
(in thousands)	2016			2015			2014
U.S. Federal taxes at statutory rate	$	87,731		$	(42,311	)	$	377,196
State and local taxes, net of U.S. Federal tax	(2,965		)	(3,441		)	38,106
Valuation allowances against state tax benefits, net of U.S. Federal tax	3,196			(3,285		)	(4,960		)
Tax-free stock transactions	—			—			(91,540		)
Tax provided on non-U.S. subsidiary earnings and distributions	1,993			2,688			2,186
Valuation allowances against other non-U.S. income tax benefits	(12,688		)	431			(2,477		)
Goodwill impairments and dispositions	(5,631		)	63,889			—
U.S. Federal Manufacturing Deduction tax benefits	(6,012		)	(625		)	(6,789		)
Write-off of deferred taxes related to intercompany loans	10,965			—			—
Other, net	4,611			3,154			578
Provision for Income Taxes	$	81,200		$	20,500		$	312,300

During 2016, certain intercompany loans were capitalized and other intercompany loans were designated as long-term investments, resulting in the write-off of $11.0 million in U.S. deferred tax assets. Also, the Company benefited from a favorable $5.6 million out of period deferred tax adjustment related to the KHE goodwill impairment recorded in the third quarter of 2015.

During 2015 and 2014, in addition to the income tax provision for continuing operations presented above, the Company also recorded tax expense or benefits on discontinued operations. Income from discontinued operations and net (loss) gain on dispositions of discontinued operations have been reclassified from previously reported income from operations and reported separately as income from discontinued operations, net of tax. Tax expense of $27.8 million and $82.4 million were recorded in discontinued operations in 2015 and 2014, respectively.

Deferred income taxes consist of the following:



	As of December 31
(in thousands)	2016			2015
Accrued postretirement benefits	$	9,444		$	13,763
Other benefit obligations	120,792			108,349
Accounts receivable	10,780			12,840
State income tax loss carryforwards	23,178			19,550
U.S. Federal income tax loss carryforwards	6,212			5,007
U.S. Federal foreign income tax credit carryforwards	1,921			1,374
Non-U.S. income tax loss carryforwards	19,246			26,921
Non-U.S. capital loss carryforwards	1,929			10,055
Other	44,401			44,858
Deferred Tax Assets	237,903			242,717
Valuation allowances	(41,319		)	(69,545		)
Deferred Tax Assets, Net	$	196,584		$	173,172
Property, plant and equipment	13,591			17,465
Prepaid pension cost	349,878			386,916
Unrealized gain on available-for-sale securities	61,964			39,010
Goodwill and other intangible assets	132,997			133,097
Deferred Tax Liabilities	$	558,430		$	576,488
Deferred Income Tax Liabilities, Net	$	361,846		$	403,316

The Company has $455.6 million of state income tax net operating loss carryforwards available to offset future state taxable income. State income tax loss carryforwards, if unutilized, will start to expire approximately as follows:



(in millions)
2017	$	7.3
2018	9.3
2019	2.8
2020	18.3
2021	19.6
2022 and after	398.3
Total	$	455.6

The Company has recorded at December 31, 2016, $23.2 million in deferred state income tax assets, net of U.S. Federal income tax, with respect to these state income tax loss carryforwards. The Company has established $21.0 million in valuation allowances against these deferred state income tax assets, since the Company has determined that it is more likely than not that some state tax losses may not be fully utilized in the future to reduce state taxable income.

The Company has $17.6 million of U.S. Federal income tax loss carryforwards obtained as a result of prior stock acquisitions. U.S. Federal income tax loss carryforwards are expected to be fully utilized as follows:



(in millions)
2017	$	4.1
2018	3.6
2019	3.3
2020	3.3
2021	1.1
2022 and after	2.2
Total	$	17.6

The Company has established at December 31, 2016, $6.2 million in U.S. Federal deferred tax assets with respect to these U.S. Federal income tax loss carryforwards.

For U.S. Federal income tax purposes, the Company has $1.9 million of foreign tax credits available to be credited against future U.S. Federal income tax liabilities. These U.S. Federal foreign tax credits are expected to be fully utilized in the future; if unutilized, $0.7 million of these foreign tax credits will expire in 2024, $0.7 million will expire in 2025, and $0.5 million will expire in 2026. The Company has established at December 31, 2016, $1.9 million of U.S. Federal deferred tax assets with respect to these U.S. Federal foreign tax credit carryforwards.

The Company has $69.3 million of non-U.S. income tax loss carryforwards, as a result of operating losses and carryforwards obtained through prior stock acquisitions that are available to offset future non-U.S. taxable income and has recorded, with respect to these losses, $19.2 million in non-U.S. deferred income tax assets. The Company has established $4.9 million in valuation allowances against the deferred tax assets recorded for the portion of non-U.S. tax losses that may not be fully utilized to reduce future non-U.S. taxable income. The $69.3 million of non-U.S. income tax loss carryforwards consist of $60.3 million in losses that may be carried forward indefinitely; $4.8 million of losses that, if unutilized, will expire in varying amounts through 2021; and $4.2 million of losses that, if unutilized, will start to expire after 2021.

The Company has $6.4 million of non-U.S. capital loss carryfowards that may be carried forward indefinitely and are available to offset future non-U.S. capital gains. The Company recorded a $1.9 million non-U.S. deferred income tax asset and has established a full valuation allowance against this non-U.S. deferred tax asset since the Company has determined that it is more likely than not that the capital loss carryforwards may not be fully utilized to reduce taxable income in the future.

Deferred tax valuation allowances and changes in deferred tax valuation allowances were as follows:



(in thousands)	Balance at Beginning of Period		Tax Expense and Revaluation		Deductions			Balance at End of Period
Year ended
December 31, 2016	$	69,545	$	4,709	$	(32,935	)	$	41,319
December 31, 2015	$	65,521	$	4,024	$	—		$	69,545
December 31, 2014	$	72,767	$	889	$	(8,135	)	$	65,521

The Company has established $31.8 million in valuation allowances against deferred state tax assets recognized, net of U.S. Federal tax. As stated above, approximately $21.0 million of the valuation allowances, net of U.S. Federal income tax, relate to state income tax loss carryforwards. The Company has established valuation allowances against deferred state income tax assets, without considering potentially offsetting deferred tax liabilities established with respect to prepaid pension cost and goodwill. Prepaid pension cost and goodwill have not been considered a source of future taxable income for realizing deferred tax assets recognized since these temporary differences are not likely to reverse in the foreseeable future. The valuation allowances established against deferred state income tax assets are recorded at the parent company, the education division and other businesses and may increase or decrease within the next 12 months, based on operating results or the market value of investment holdings. As a result, the Company is unable to estimate the potential tax impact, given the uncertain operating and market environment. The Company will be monitoring future operating results and projected future operating results on a quarterly basis to determine whether the valuation allowances provided against deferred state tax assets should be increased or decreased, as future circumstances warrant.

The Company has established $9.5 million in valuation allowances against non-U.S. deferred tax assets, and, as stated above, $4.9 million of the non-U.S. valuation allowances relate to non-U.S. income tax loss carryforwards and $1.9 million relate to non-U.S. capital loss carryforwards.

Deferred U.S. Federal and state income taxes are recorded with respect to undistributed earnings of investments in non-U.S. subsidiaries to the extent taxable dividend income would be recognized if such earnings were distributed. Deferred income taxes recorded with respect to undistributed earnings of investments in non-U.S. subsidiaries are recorded net of foreign tax credits with respect to such undistributed earnings estimated to be creditable against future U.S. Federal tax liabilities. At December 31, 2016 and 2015, net U.S. Federal and state deferred income tax liabilities of about $23.8 million and $17.5 million, respectively, were recorded with respect to undistributed earnings of investments in non-U.S. subsidiaries based on the year-end position.

Deferred U.S. Federal and state income taxes have not been recorded for the full book value and tax basis differences related to investments in non-U.S. subsidiaries because such investments are expected to be indefinitely held. The book value exceeded the tax basis of investments in non-U.S. subsidiaries by approximately $103.3 million and $71.8 million at December 31, 2016 and 2015, respectively; these differences would result in approximately $0.3 million of net additional U.S. Federal and state deferred tax liabilities, net of foreign tax credits related to undistributed earnings and estimated to be creditable against future U.S. Federal tax liabilities, at December 31, 2016, and would not result in any additional U.S. Federal and state deferred tax liabilities at December 31, 2015. If investments in non-U.S. subsidiaries were held for sale instead of expected to be held indefinitely, additional U.S. Federal and state deferred tax liabilities would be required to be recorded, and such deferred tax liabilities, if recorded, may exceed the above estimates.

The Company does not currently anticipate that within the next 12 months there will be any events requiring the establishment of any valuation allowances against U.S. Federal net deferred tax assets.

In the third quarter of 2016, the Company released $19.3 million of valuation allowance previously recorded on its operations in Australia, as the Company determined that it was more likely than not that the benefit of the net deferred tax assets would be realized, based on improved operating results that have recently generated positive ordinary income. The remaining valuation allowances established against non-U.S. deferred tax assets are recorded at the education division and other businesses. The remaining non-U.S. valuation allowances may increase or decrease within the next 12 months, based on operating results. As a result, the Company is unable to estimate the potential tax impact, given the uncertain operating environment. The Company will be monitoring future education division and other businesses' operating results and projected future operating results on a quarterly basis to determine whether the valuation allowances provided against non-U.S. deferred tax assets should be increased or decreased, as future circumstances warrant.

The Company recorded a $10.5 million U.S. Federal income tax receivable with respect to capital loss carryforwards to the 2013 tax year and is currently under examination by the Internal Revenue Service. The Company files income tax returns with the U.S. Federal government and in various state, local and non-U.S. governmental jurisdictions, with the consolidated U.S. Federal tax return filing considered the only major tax jurisdiction. The statute of limitations has expired on all consolidated U.S. Federal corporate income tax returns filed through 2012, though any carryforward adjustment to the 2013 tax year is still subject to examination.

The Company endeavors to comply with tax laws and regulations where it does business, but cannot guarantee that, if challenged, the Company’s interpretation of all relevant tax laws and regulations will prevail and that all tax benefits recorded in the financial statements will ultimately be recognized in full.

The following summarizes the Company’s unrecognized tax benefits, excluding interest and penalties, for the respective periods:



	Year Ended December 31
(in thousands)	2016		2015			2014
Beginning unrecognized tax benefits	$	17,331	$	19,817		$	—
Increases related to current year tax positions	—		—			19,817
Increases related to prior year tax positions	—		—			—
Decreases related to prior year tax positions	—		(2,486		)	—
Decreases related to settlement with tax authorities	—		—			—
Decreases due to lapse of applicable statutes of limitations	—		—			—
Ending unrecognized tax benefits	$	17,331	$	17,331		$	19,817

The unrecognized tax benefits mainly relate to state income tax filing positions applicable to the 2014 tax period. In making these determinations, the Company presumes that taxing authorities pursuing examinations of the Company’s compliance with tax law filing requirements will have full knowledge of all relevant information, and, if necessary, the Company will pursue resolution of disputed tax positions by appeals or litigation. Although the Company cannot predict the timing of resolution with tax authorities, the Company estimates that no portion of unrecognized tax benefits will be reduced in the next 12 months due to settlement with the tax authorities. The Company expects that a $5.1 million state tax benefit, net of $1.8 million federal tax expense, will reduce the effective tax rate in the future if recognized.

The Company classifies interest and penalties related to uncertain tax positions as a component of interest and other expenses, respectively. As of December 31, 2016, the Company has accrued $0.7 million of interest related to the unrecognized tax benefits. The Company has not accrued any penalties related to the unrecognized tax benefits.