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 4: 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 revalued our deferred tax assets and liabilities and recorded a tax expense of $74 million during 2017, which reduced our net deferred tax asset. We were not required to pay a repatriation tax due to the fact that we had no foreign undistributed earnings at December 31, 2017.

The most significant effects of the Tax Act provisions for 2018 include a reduction to our overall estimated annual effective tax rate primarily due to the reduced corporate tax rate, and new limitations on certain business deductions.

During first quarter 2018, we adopted ASU 2018-02 which allowed for the reclassification of certain income tax effects related to the Tax Act between "Accumulated other comprehensive loss” and “Retained earnings”. Refer to Note 1: Summary of Significant Accounting Policies for further details on this ASU and the related effect on our financial statements.

Pension Contribution Tax Adjustment

At the end of 2017, we revalued our deferred tax assets (including pension) to the 2018 federal tax rate of 21 percent, as a result of the Tax Act, as discussed above. During third quarter 2018, we announced actions intended to reduce the liabilities of our U.S. qualified pension plan while maintaining the plan’s current funded status and made a decision to contribute $300 million to our U.S. qualified pension plan (refer to Note 10: Pension and Other Postretirement Benefit Plans). We were able to deduct this contribution on our 2017 U.S. federal tax return at the 2017 federal tax rate of 35 percent. This resulted in an incremental $41 million tax benefit for the portion attributable to our TRSs during third quarter 2018.

EARNINGS BEFORE INCOME TAXES

Domestic and Foreign Earnings from Continuing Operations Before Income Taxes



DOLLAR AMOUNTS IN MILLIONS
	2018		2017		2016
Domestic earnings	$	556	$	643	$	353
Foreign earnings	251		73		151
Total earnings before income taxes	$	807	$	716	$	504

PROVISION FOR INCOME TAXES

Provision (Benefit) for Income Taxes from Continuing Operations



DOLLAR AMOUNTS IN MILLIONS
	2018			2017			2016
Current:
Federal	$	(69	)	$	10		$	1
State	(5		)	—			1
Foreign	61			82			11
Total current	(13		)	92			13
Deferred:
Federal	45			61			37
State	12			(18		)	(3		)
Foreign	15			(1		)	42
Total deferred	72			42			76
Total income tax provision (benefit)	$	59		$	134		$	89

EFFECTIVE INCOME TAX RATE

Effective Income Tax Rate Applicable to Continuing Operations



DOLLAR AMOUNTS IN MILLIONS
	2018			2017			2016
U.S. federal statutory income tax	$	170		$	250		$	177
State income taxes, net of federal tax benefit	8			(2		)	(3		)
REIT income not subject to federal income tax	(116		)	(198		)	(99		)
SDT settlement	21			—			—
Tax effect of U.S. corporate rate change	—			74			—
Voluntary pension contribution	(41		)	—			—
Foreign taxes	15			54			(4		)
Repatriation of Canadian earnings	—			(22		)	24
Other, net	2			(22		)	(6		)
Total income tax provision (benefit)	$	59		$	134		$	89
Effective income tax rate	7.3		%	18.8		%	17.6		%

DEFERRED TAX ASSETS AND LIABILITIES

Deferred tax assets and liabilities reflect the future tax effect 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, 2018			DECEMBER 31, 2017
Net noncurrent deferred tax asset	$	15		$	268
Net noncurrent deferred tax liability	(43		)	—
Net deferred tax asset (liability)	$	(28	)	$	268

Items Included in Our Deferred Income Tax Assets (Liabilities)



DOLLAR AMOUNTS IN MILLIONS
	DECEMBER 31, 2018			DECEMBER 31, 2017
Deferred tax assets:
Postretirement benefits	$	37		$	50
Pension	75			306
State tax credits	51			56
Other reserves	13			38
Depletion	41			40
Excess interest	30			—
Incentive compensation	20			23
Workers compensation	18			19
Net operating loss carryforwards	19			18
Other	83			70
Gross deferred tax assets	387			620
Valuation allowance	(61		)	(63		)
Net deferred tax assets	326			557
Deferred tax liabilities:
Property, plant and equipment	(197		)	(154		)
Timber installment notes	(116		)	(116		)
Other	(41		)	(19		)
Net deferred tax liabilities	(354		)	(289		)
Net deferred tax asset (liability)	(28		)	268

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 2018 totaled $584 million as follows:


•	U.S. REIT - $223 million, which expire from 2031 through 2036;


•	State - $361 million, which expire from 2019 through 2037; and


•	Foreign - none currently recorded.

Our gross state credit carryforwards at the end of 2018 totaled $65 million, which includes $14 million that expire from 2019 through 2032 and $51 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 $61 million at the end of 2018, related to state credits, state net operating losses and passive foreign tax credits.

Reinvestment of Undistributed Earnings

We have historically asserted it is our intent to reinvest the earnings of our foreign subsidiaries. In fourth quarter 2018, we changed our position regarding the earnings of our Canadian subsidiary. Our change in assertion was based on the company’s review of global cash management and planned capital deployment, taking into consideration the effects of the Tax Act. As of 2018, our assertion is to permanently reinvest approximately 10 percent of our Canadian earnings. We have no other foreign subsidiaries with undistributed earnings. Accordingly, deferred taxes have been provided primarily related to Canadian withholding taxes associated with Canadian earnings no longer considered permanently reinvested.

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, 2018, and 2017, is $3 million and $4 million, of which a net amount of $1 million and $2 million, respectively, would affect our tax rate if recognized.

The net liability recorded in our Consolidated Balance Sheet related to unrecognized tax benefits is $1 million as of December 31, 2018, comprised of the $3 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, 2017, was $2 million, comprised of $4 million gross unrecognized tax benefit amount net of $2 million loss carryforwards available to offset the liability.

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, 2018			DECEMBER 31, 2017
Balance at beginning of year	$	4		$	6
Lapse of statute	(1		)	(2		)
Balance at end of year	$	3		$	4

As of December 31, 2018, none of our U.S. federal income tax returns or foreign jurisdiction income tax returns are under examination. Our U.S. federal income tax returns are open to examination for years 2015 forward and foreign jurisdictions income tax returns are open to examination for years 2010 forward. We are undergoing examinations in state jurisdictions for tax years 2009 through 2017, with tax years 2009 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.

RESOLUTION OF 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 asserted 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 subsequently filed a petition in the U.S. Tax Court to contest this adjustment.

On February 8, 2019, we entered into a closing agreement with the IRS to settle this dispute. Under the terms of the agreement, the company paid approximately $21 million of corporate tax. This amount was recorded as tax expense in fourth quarter 2018. No interest or penalties will be assessed. The parties have filed a stipulated decision with the U.S. Tax Court, pursuant to which the Court will officially close the matter.