5. INCOME TAXES

The provision for income taxes for income from continuing operations consists of the following (in millions):



		Year Ended December 31,
	2014		2013		2012
Current:
Federal	$	(29)	$	27	$	99
State		3		6		10
		(26)		33		109
Deferred:
Federal		106		60		58
State		2		11		(3)
		108		71		55
Total provision for income taxes for income from continuing operations	$	82	$	104	$	164

The following table reconciles the differences between the statutory federal income tax rate and the effective tax rate (dollars in millions):



	Year Ended December 31,
	2014				2013				2012
	Amount		%		Amount		%		Amount		%
Provision for income taxes at statutory
federal rate	$	120	35.0	%	$	121	35.0	%	$	183	35.0	%
State income taxes, net of federal
income tax benefit		11	3.2			11	3.1			12	2.4
Release of unrecognized tax benefit		(9)	(2.6)			-	-			-	-
Net income attributable to
noncontrolling interests		(39)	(11.5)			(27)	(7.7)			(28)	(5.4)
Change in valuation allowance		-	-			-	-			(1)	(0.2)
Federal and state tax credits		(4)	(1.2)			(4)	(1.1)			(2)	(0.4)
Nondeductible transaction costs		3	0.9			-	-			-	-
Other		-	-			3	0.7			-	0.1
Provision for income taxes and
effective tax rate for income from
continuing operations	$	82	23.8	%	$	104	30.0	%	$	164	31.5	%

The Company’s effective tax rates were 23.8%, 30.0% and 31.5% for the years ended December 31, 2014, 2013 and 2012, respectively. The decrease in the Company’s effective tax rate for the year ended December 31, 2014 is primarily impacted by the decrease in income from continuing operations before income taxes after adjusting for the increase in net income attributable to noncontrolling interests, which is not tax effected in the statement of income. Adjusting for this impact, the Company’s effective tax rate decreased from 38.5% for the year ended December 31, 2013, to 35.5% for the year ended December 31, 2014, primarily due to the release of unrecognized tax benefit.

Deferred income taxes are based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities under the provisions of the enacted tax laws. Deferred income taxes as of December 31, 2014 and 2013 consist of (in millions):



	December 31,
	2014				2013
	Assets		Liabilities		Assets		Liabilities
Net operating loss and credit carryforwards	$	526	$	-	$	187	$	-
Property and equipment		-		841		-		820
Self-insurance liabilities		176		-		125		-
Prepaid expenses		-		62		-		-
Intangibles		-		312		-		244
Investments in unconsolidated affiliates		-		133		-		60
Other liabilities		-		12		-		24
Long-term debt and interest		-		34		-		21
Accounts receivable		26		-		-		86
Accrued vacation		68		-		-		-
Accrued expenses		-		-		53		-
Other comprehensive income		39		-		47		-
Stock-based compensation		28		-		23		-
Deferred compensation		117		-		73		-
Other		180		-		110		-
		1,160		1,394		618		1,255
Valuation allowance		(280)		-		(171)		-
Total deferred income taxes	$	880	$	1,394	$	447	$	1,255

The Company believes that the net deferred tax assets will ultimately be realized, except as noted below. Its conclusion is based on its estimate of future taxable income and the expected timing of temporary difference reversals. The Company has state net operating loss carry forwards of approximately $4.5 billion, which expire from 2015 to 2034. The Company also has unrecognized deferred tax assets primarily related to interest expense that are included in other comprehensive income. If recognized, additional state net operating losses will be created which the Company does not expect to be able to utilize prior to the expiration of the carryforward period. A valuation allowance of approximately $6 million has been recognized for those items. With respect to the deferred tax liability pertaining to intangibles, as included above, goodwill purchased in connection with certain of the Company’s business acquisitions is amortizable for income tax reporting purposes. However, for financial reporting purposes, there is no corresponding amortization allowed with respect to such purchased goodwill.

The valuation allowance increased by $109 million during the year ended December 31, 2014 and increased by $10 million during the year ended December 31, 2013. In addition to amounts previously discussed, the change in valuation allowance relates to a redetermination of the amount of, and realizability of, net operating losses and credits in certain income tax jurisdictions.

The total amount of unrecognized benefit that would affect the effective tax rate, if recognized, was approximately $5 million as of December 31, 2014. A total of approximately $2 million of interest and penalties is included in the amount of the liability for uncertain tax positions at December 31, 2014. It is the Company’s policy to recognize interest and penalties related to unrecognized benefits in its consolidated statements of income as income tax expense. The liabilities for uncertain tax positions increased by $26 million during the year ended December 31, 2014 as a result of the HMA merger. During the year ended December 31, 2014, the Company decreased liabilities for uncertain tax positions by $15 million.

It is possible the amount of unrecognized tax benefit could change in the next 12 months as a result of a lapse of the statute limitations and settlements with taxing authorities; however, the Company does not anticipate the change will have a material impact on the Company’s consolidated results of operations or consolidated financial position.

The following is a tabular reconciliation of the total amount of unrecognized tax benefit for the years ended December 31, 2014, 2013 and 2012 (in millions):



	Year Ended December 31,
	2014		2013		2012
Unrecognized tax benefit, beginning of year	$	-	$	1	$	1
Gross increases — assumed liability of acquired entity		26		-		2
Reductions — tax positions in prior period		(8)		-		-
Lapse of statute of limitations		(1)		-		-
Settlements		(1)		(1)		(2)
Unrecognized tax benefit, end of year	$	16	$	-	$	1

The Company, or one of its subsidiaries, files income tax returns in the United States federal jurisdiction and various state jurisdictions. The Company has extended the federal statute of limitations through December 31, 2015 for Triad Hospitals, Inc. (“Triad”) for the tax periods ended December 31, 1999, December 31, 2000, April 30, 2001, June 30, 2001, December 31, 2001, December 31, 2002, December 31, 2003, December 31, 2004, December 31, 2005, December 31, 2006 and July 25, 2007. With few exceptions, the Company is no longer subject to state income tax examinations for years prior to 2011. The Company’s federal income tax returns for the 2009 and 2010 tax years are currently under examination by the Internal Revenue Service (“IRS”). The Company believes the results of these examinations will not be material to its consolidated results of operations or consolidated financial position. During the year ended December 31, 2013, the IRS concluded its examination of the federal tax return of Community Health Systems, Inc. for the tax periods ended December 31, 2007 and 2008. The results of these examinations did not have a material effect on the Company’s consolidated results of operations or consolidated financial position. The Company has extended the federal statute of limitations through December 31, 2015 for Community Health Systems, Inc. for the tax periods ended December 31, 2007 and 2008, through June 30, 2016 for the tax periods ended December 31, 2009 and 2010, and through September 6, 2016 for the tax period ended December 31, 2011.

Cash paid for income taxes, net of refunds received, resulted in a net cash refund of $180 million during the year ended December 31, 2014 and net cash paid of $73 million and $56 million during the years ended December 31, 2013 and 2012, respectively.