INCOME TAXES

This note provides details about our income taxes applicable to continuing operations:


•	earnings before income taxes,


•	provision for income taxes,


•	effective income tax rate,


•	deferred tax assets and liabilities,


•	unrecognized tax benefits and


•	our ongoing IRS tax matter.

Income taxes related to discontinued operations are discussed in Note 3: Discontinued Operations and Other Divestitures.

The Income Taxes section of Note 1: Summary of Significant Accounting Policies provides details about how we account for our income taxes.

Tax Legislation

On December 22, 2017, H.R. 1, commonly known as the Tax Cuts and Jobs Act (the "Tax Act"), was enacted. The Tax Act contains significant changes to corporate taxation, including the reduction of the corporate tax rate from 35 percent to 21 percent. As a result of the reduction in the corporate tax rate, we have revalued our deferred tax assets and liabilities and have recorded a tax expense of $74 million during 2017, which reduced our net deferred tax asset. The deemed repatriation on deferred foreign income provisions does not impact our operations due to the fact that we have no foreign undistributed earnings.

EARNINGS BEFORE INCOME TAXES

Domestic and Foreign Earnings from Continuing Operations Before Income Taxes



DOLLAR AMOUNTS IN MILLIONS
	2017		2016		2015
Domestic earnings	$	643	$	353	$	326
Foreign earnings	73		151		27
Total earnings before income taxes	$	716	$	504	$	353

PROVISION FOR INCOME TAXES

Provision (Benefit) for Income Taxes from Continuing Operations



DOLLAR AMOUNTS IN MILLIONS
	2017			2016			2015
Current:
Federal	$	10		$	1		$	7
State	—			1			(2		)
Foreign	82			11			(5		)
Total current	92			13			—
Deferred:
Federal	61			37			(69		)
State	(18		)	(3		)	(3		)
Foreign	(1		)	42			14
Total deferred	42			76			(58		)
Total income tax provision (benefit)	$	134		$	89		$	(58	)

EFFECTIVE INCOME TAX RATE

Effective Income Tax Rate Applicable to Continuing Operations



DOLLAR AMOUNTS IN MILLIONS
	2017			2016			2015
U.S. federal statutory income tax	$	250		$	177		$	123
State income taxes, net of federal tax benefit	(2		)	(3		)	(5		)
REIT income not subject to federal income tax	(198		)	(99		)	(158		)
REIT benefit from change to tax law	—			—			(13		)
Tax affect of U.S. corporate rate change	74			—			—
Foreign taxes	54			(4		)	4
Provision for unrecognized tax benefits	(2		)	—			(7		)
Repatriation of Canadian earnings	(22		)	24			—
Other, net	(20		)	(6		)	(2		)
Total income tax provision (benefit)	$	134		$	89		$	(58	)
Effective income tax rate	18.8		%	17.6		%	(16.4		)%

DEFERRED TAX ASSETS AND LIABILITIES

Deferred tax assets and liabilities reflect the future tax impact created by differences between the timing of when income or deductions are recognized for pretax financial book reporting purposes versus income tax purposes. Deferred tax assets represent a future tax benefit (or reduction to income taxes in a future period), while deferred tax liabilities represent a future tax obligation (or increase to income taxes in a future period). Our deferred tax assets and liabilities have been revalued for the reduction in the U.S. corporate tax rate.

Balance Sheet Classification of Deferred Income Tax Assets (Liabilities) Related to Continuing Operations



DOLLAR AMOUNTS IN MILLIONS
	DECEMBER 31, 2017		DECEMBER 31, 2016
Net noncurrent deferred tax asset	$	268	$	293
Net noncurrent deferred tax liability	—		—
Net deferred tax asset (liability)	$	268	$	293

Items Included in Our Deferred Income Tax Assets (Liabilities)



DOLLAR AMOUNTS IN MILLIONS
	DECEMBER 31, 2017			DECEMBER 31, 2016
Postretirement benefits	$	50		$	76
Pension	306			395
State tax credits	56			46
Other reserves	38			14
Net operating loss carryforwards	18			25
Other	152			218
Gross deferred tax assets	620			774
Valuation allowance	(63		)	(56		)
Net deferred tax assets	557			718
Property, plant and equipment	(154		)	(214		)
Timber installment notes	(116		)	(180		)
Other	(19		)	(31		)
Deferred tax liabilities	(289		)	(425		)
Net deferred tax asset (liability)	$	268		$	293

Other Information About Our Deferred Income Tax Assets (Liabilities)

Other information about our deferred income tax assets (liabilities) include:


•	net operating loss and credit carryforwards,


•	valuation allowances and


•	reinvestment of undistributed earnings.

Net Operating Loss and Credit Carryforwards

Our gross federal, state and foreign net operating loss carryforwards as of the end of 2017 totaled $1.0 billion as follows:


•	U.S. REIT - $684 million, which expire from 2030 through 2036;


•	State - $349 million, which expire from 2018 through 2037; and


•	Foreign - none.

Our gross state credit carryforwards at the end of 2017 totaled $70 million, which includes $22 million that expire from 2018 through 2031 and $48 million that do not expire. Our U.S. TRS has $6 million in foreign tax credit carryforwards that expire in 2027.

Valuation Allowances

With the exception of the valuation allowance discussed below, we believe it is more likely than not that we will have sufficient future taxable income to realize our deferred tax assets.

Our valuation allowance on our deferred tax assets was $63 million at the end of 2017, related to state credits, state net operating losses and passive foreign tax credits.

Reinvestment of Undistributed Earnings

It is our practice and intention to reinvest the earnings of our foreign subsidiaries into those respective operations. As such, we have not made a provision for U.S. income taxes or additional foreign withholding taxes for potential distribution of future earnings of our foreign subsidiaries which are permanently reinvested. As of December 31, 2017, we had no foreign undistributed earnings.

UNRECOGNIZED TAX BENEFITS

Unrecognized tax benefits represent potential future obligations to taxing authorities if uncertain tax positions we have taken on previously filed tax returns are not sustained. The total gross amount of unrecognized tax benefits as of December 31, 2017, and 2016, is $4 million and $6 million, of which a net amount of $2 million and $5 million, respectively, would affect our tax rate if recognized.

The net liability recorded in our Consolidated Balance Sheet related to unrecognized tax benefits is $2 million as of December 31, 2017, comprised of the $4 million gross unrecognized tax benefit amount net of $2 million in loss carryforwards available to offset the liability. The net liability as of December 31, 2016 was $5 million, comprised of $6 million gross unrecognized tax benefit amount net of $2 million loss carryforwards available to offset the liability and includes $1 million of interest.

In accordance with our accounting policy, we accrue interest and penalties related to unrecognized tax benefits as a component of income tax expense. See Note 1: Summary of Significant Accounting Policies.

Reconciliation of the Beginning and Ending Amount of Unrecognized Tax Benefits



DOLLAR AMOUNTS IN MILLIONS
	DECEMBER 31, 2017			DECEMBER 31, 2016
Balance at beginning of year	$	6		$	6
Lapse of statute	(2		)	—
Balance at end of year	$	4		$	6

As of December 31, 2017, none of our U.S. federal income tax returns are under examination, with years 2013 forward open to examination. We are undergoing examinations in state jurisdictions for tax years 2013 through 2016, with tax years 2009 forward open to examination. We are also undergoing examinations in foreign jurisdictions for tax years 2013 through 2014, with tax years 2010 forward open to examination. We do not expect that the outcome of any examination will have a material effect on our consolidated financial statements; however, audit outcomes and the timing of audit settlements are subject to significant uncertainty.

In the next 12 months, we estimate a decrease of $1 million in unrecognized tax benefits due to the lapse of applicable statutes of limitation.

ONGOING IRS MATTER

In connection with the merger with Plum Creek, we acquired equity interests in Southern Diversified Timber, LLC, a timberland joint venture (Timberland Venture) with an affiliate of Campbell Global LLC (TCG Member). On August 31, 2016, the Timberland Venture redeemed TCG Member's interest and became a fully consolidated, wholly-owned subsidiary of Weyerhaeuser.

We received a Notice of Final Partnership Administrative Adjustment (FPAA), dated July 20, 2016, from the Internal Revenue Service (IRS) in regard to Plum Creek's 2008 U.S. federal income tax treatment of the transaction forming the Timberland Venture. The IRS is asserting that the transfer of the timberlands to the Timberland Venture was a taxable transaction to Plum Creek at the time of the transfer rather than a nontaxable capital contribution. We have filed a petition in the U.S. Tax Court and will vigorously contest this adjustment.

In the event that we are unsuccessful in this tax litigation, we could be required to recognize and distribute gain to shareholders of approximately $600 million and pay built-in gains tax of approximately $100 million. We would also be required to pay interest on both of those amounts, which would be substantial. As much as 80 percent of any such gain distribution could be made with our common stock, and shareholders would be subject to tax on the distribution at the applicable capital gains tax rate. Alternatively, we could elect to retain the gain and pay corporate-level tax to minimize interest costs to the company.

Although the outcome of this process cannot be predicted with certainty, we are confident in our position based on U.S. tax law and believe we will be successful in defending it. Accordingly, no reserve has been recorded related to this matter.