NOTE 9: INCOME TAXES

The Tax Cuts and Jobs Act (TCJA) was enacted on December 22, 2017. The TCJA, among other changes, (1) reduces the U.S. federal corporate income tax rate from 35% to 21%, (2) allows for the immediate 100% deductibility of certain capital investments, (3) eliminates the alternative minimum tax (though allows for the future use of previously generated alternative minimum tax credits), (4) repeals the domestic production deduction, (5) requires a one-time “transition tax” on earnings of certain foreign subsidiaries that were previously tax deferred, (6) limits the deductibility of interest expense, (7) further limits the deductibility of certain executive compensation and (8) taxes global intangible low taxed income.

The SEC staff issued Staff Accounting Bulletin (SAB) 118 to provide guidance for companies that have not completed their accounting for the income tax effects of the TCJA in the period of enactment. SAB 118 provides a one-year measurement period from the TCJA enactment date for companies to complete their income tax accounting. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the income tax accounting is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but for which it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company is unable to determine a provisional estimate, it should account for its income taxes on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.

The components of earnings from continuing operations before income taxes are as follows:



in thousands	2017	2016	2015
Earnings from Continuing Operations
before Income Taxes
Domestic	$ 346,668	$ 513,721	$ 293,547
Foreign	14,648	33,536	34,310
Total	$ 361,316	$ 547,257	$ 327,857

Income tax expense (benefit) from continuing operations consists of the following:



in thousands	2017	2016	2015
Income Tax Expense (Benefit) from
Continuing Operations
Current
Federal	$ (7,416)	$ 72,506	$ 67,521
State and local	4,661	14,774	14,035
Foreign	3,109	6,974	7,784
Total	$ 354	$ 94,254	$ 89,340
Deferred
Federal	$ (202,184)	$ 37,246	$ 11,192
State and local	(30,052)	(6,647)	(4,888)
Foreign	(193)	(2)	(701)
Total	$ (232,429)	$ 30,597	$ 5,603
Total expense (benefit)	$ (232,075)	$ 124,851	$ 94,943

Income tax expense (benefit) differs from the amount computed by applying the federal statutory income tax rate to earnings from continuing operations before income taxes. The sources and tax effects of the differences are as follows:



dollars in thousands		2017		2016		2015
Income tax expense at the federal
statutory tax rate of 35%	$ 126,461	35.0%	$ 191,540	35.0%	$ 114,750	35.0%
Expense (Benefit) from
Income Tax Differences
Statutory depletion	(28,995)	-8.0%	(32,230)	-5.9%	(27,702)	-8.4%
State and local income taxes, net of federal
income tax benefit	8,115	2.2%	10,074	1.9%	10,600	3.2%
U.S. production deduction	2,452	0.7%	(8,790)	-1.6%	(5,099)	-1.6%
Foreign tax credit carryforward	0	0.0%	(6,513)	-1.2%	6,486	2.0%
Share-based compensation 1	(20,740)	-5.7%	(22,443)	-4.1%	0	0.0%
Permanently reinvested foreign earnings	(2,211)	-0.6%	(4,578)	-0.8%	(6,396)	-2.0%
Foreign repatriation	12,301	3.4%	0	0.0%	0	0.0%
Revaluation - deferred tax balances	(301,567)	-83.5%	0	0.0%	0	0.0%
Al NOL valuation allowance release	(28,827)	-8.0%	(4,791)	-0.9%	(4,655)	-1.4%
Other, net	936	0.3%	2,582	0.4%	6,959	2.2%
Total income tax expense (benefit)/
Effective tax rate	$ (232,075)	-64.2%	$ 124,851	22.8%	$ 94,943	29.0%


1	As discussed in Note 1 (under the caption Share-based Compensation), we early adopted ASU 2016-09 as of December 31, 2016.

We are required to account for the effects of changes in income tax rates on deferred tax balances in the period in which the legislation is enacted. We have completed our accounting for the effects of the U.S. federal corporate income tax rate reduction on our deferred income tax assets and liabilities. Consequently, we have recorded an income tax benefit of $301,567,000 with a corresponding decrease to our net deferred income tax liability.

For various reasons that are discussed more fully below, we have not completed our accounting for the income tax effects of certain elements of the TCJA. If we were able to make reasonable estimates of the effects of elements for which our analysis is not yet compete, we recorded provisional adjustments. If we were not yet able to make reasonable estimates of the impact of certain elements, we have not recorded any adjustments related to those elements and have continued accounting for them in accordance with income tax accounting on the basis of the tax laws in effect before the TCJA.

Our accounting for the following elements of the TCJA is incomplete. However, we were able to make reasonable estimates of certain effects, and therefore, recorded provisional adjustments as follows:

DEEMED REPATRIATION TRANSITION TAX — The TCJA subjects companies to a one-time Deemed Repatriation Transition Tax (Transition Tax) on previously untaxed foreign accumulated earnings and profits (E&P). To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant foreign subsidiaries, the amount of non-U.S. income taxes paid on such earnings, as well as the amount of E&P held in cash and other specified assets. Although not complete, we were able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $12,301,000. Due to the complexity of the calculation of the Transition Tax, and the information that must be gathered and analyzed, we are continuing to analyze our calculation of the Transition Tax.

DEDUCTIBILITY OF EXECUTIVE COMPENSATION — The TCJA eliminates the performance-based compensation exception from the limitation on covered employee remuneration. The new law includes a transition rule that allows performance-based remuneration paid pursuant to a written binding contract in existence on November 2, 2017 and not modified in any material respect after that date to continue to be exempt from the non-deductibility provisions. We have not yet completed our evaluation of the transition rule’s application to our compensation agreements. At this time, we believe that a portion of the performance-based remuneration accounted for in our deferred taxes will likely not qualify for the transition rule, and therefore, would be non-deductible. As such, we have included a provisional expense of $1,403,000 to reduce certain deferred tax assets associated with executive compensation.

Our accounting for the following elements of the TCJA is incomplete, and we were not yet able to make reasonable estimates of the effects. Therefore, no provisional adjustments were recorded.

OUTSIDE BASIS DIFFERENCE IN FOREIGN SUBSIDIARIES — For U.S. income tax purposes, the Transition Tax will greatly reduce outside basis differences in our foreign subsidiaries. Completing this calculation is dependent on first finalizing the Transition Tax liability. As a result, we are not yet able to reasonably estimate the outside basis difference remaining in our foreign subsidiaries after the Transition Tax, and therefore, will continue to assert that our undistributed earnings from foreign subsidiaries are indefinitely reinvested.

GLOBAL INTANGIBLE LOW TAXED INCOME — Because of the complexity of the new global intangible low taxed income (GILTI) rules, we are continuing to evaluate this provision of the TCJA and its application under income tax accounting. We can make an accounting policy election of either (1) treating taxes due on the future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (period cost method) or (2) factoring such amounts into our measurement of deferred taxes (deferred method). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. As a result, we have not made any adjustments related to potential GILTI tax in our financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI.

Deferred taxes on the balance sheet result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred income tax liability at December 31 are as follows:



in thousands	2017	2016
Deferred Tax Assets Related to
Employee benefits	$ 29,547	$ 85,123
Asset retirement obligations & other reserves	47,116	63,617
Deferred compensation	59,010	103,947
State net operating losses	73,083	54,498
Federal credit carryforwards	51,284	18,139
Other	37,518	44,843
Total gross deferred tax assets	$ 297,558	$ 370,167
Valuation allowance	(29,723)	(44,237)
Total net deferred tax assets	$ 267,835	$ 325,930
Deferred Tax Liabilities Related to
Property, plant & equipment	$ 490,459	$ 664,763
Goodwill/other intangible assets	216,039	327,666
Other	25,418	36,355
Total deferred tax liabilities	$ 731,916	$ 1,028,784
Net deferred tax liability	$ 464,081	$ 702,854

The above net deferred tax liabilities are reflected in the accompanying Consolidated Balance Sheets as noncurrent liabilities.

Each quarter we analyze the likelihood that our deferred tax assets will be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not (a likelihood of more than 50%) that some portion, or all, of a deferred tax asset will not be realized.

At December 31, 2017, we have state net operating loss carryforward deferred tax assets of $73,083,000, against which we have a valuation allowance of $29,698,000. Of these deferred tax assets, $67,455,000 relates to Alabama. The Alabama net operating loss carryforward, if not utilized, would expire between 2023 and 2032.

From 2008 through the second quarter of 2015, we carried a full valuation allowance against the Alabama deferred tax asset for the following reasons:

we had a substantial cumulative loss in Alabama

due to our legal entity structure, we had no expectation of creating sufficient taxable income in Alabama

During the second quarter of 2015, we restructured our legal entities. Among other benefits, we anticipated that the restructuring would generate significant taxable income in Alabama, and therefore, allow for the utilization of some or all of the Alabama deferred tax asset.

Our Alabama cumulative loss is calculated as pretax earnings from continuing operations, discontinued operations and other comprehensive income plus permanent differences over the last three years. While evaluating all available positive and negative evidence, realizing the significance of the restructuring in our Alabama income tax filing, we determined that it was appropriate to adjust our Alabama cumulative loss calculation to consider the restructuring, remove pretax earnings from discontinued operations and other comprehensive income and remove any other significant nonrecurring items. We refer to this calculation as our Alabama adjusted earnings.

At the end of the second quarter of 2015, our Alabama adjusted earnings were negative. However, the Alabama adjusted earnings loss was dramatically smaller than our Alabama cumulative loss (of the three adjustments made, the restructuring had the greatest impact). In addition, we considered all other forms of positive and negative evidence, including the four sources of taxable income. The first three sources of taxable income (carryback potential, reversing temporary differences and tax planning strategies) provided very little positive evidence. Because our Alabama adjusted earnings were a loss, we did not project future Alabama taxable income (the fourth source). As a result, during the second quarter of 2015 we continued to carry a full valuation allowance against our Alabama deferred tax asset.

At the end of the third quarter of 2015, our Alabama adjusted earnings turned positive. This development provided sufficient positive evidence such that we determined it was appropriate to use projections of future Alabama taxable income in our assessment for the first time. However, because we had not yet returned to sustained profitability (i.e., an Alabama cumulative gain) we used our Alabama trailing twelve months adjusted earnings as the basis for an objectively verifiable projection of future Alabama taxable income. This projection, in addition to considering all other positive and negative evidence, led us to conclude in the third quarter that it was more likely than not that $4,655,000 of the deferred tax asset was realizable. Therefore, we recognized a deferred tax benefit of $4,655,000 in the third quarter of 2015 by reducing the valuation allowance. Our analysis in each of the four subsequent quarters further confirmed our third quarter of 2015 conclusion but resulted in no further reductions of the valuation allowance.

In the fourth quarter of 2016, we achieved three consecutive years of positive Alabama adjusted earnings. This development together with the projection of future Alabama taxable income (using our most recent trailing twelve months adjusted earnings) warranted an additional partial release of $4,791,000 in the fourth quarter of 2016.

In the fourth quarter of 2017, we no longer have an Alabama cumulative loss. As discussed in previous filings, we believe this development provides sufficient positive evidence to conclude that we have returned to sustained profitability and should no longer limit our estimate of future taxable income to our Alabama trailing twelve months adjusted earnings. Instead, we utilized projections used for other purposes (e.g., goodwill impairment) to develop a reliable estimate of future Alabama taxable income. Based on this analysis, an additional partial release of $28,827,000 was warranted in the fourth quarter of 2017. As of year-end 2017, we have recognized $38,273,000 of the Alabama deferred tax asset and, at this time do not expect any future releases of the valuation allowance.

As of December 31, 2017, income tax receivables of $106,980,000 are included in other accounts and notes receivable in the accompanying Consolidated Balance Sheet. The majority ($106,000,000) of this receivable relates to 2017 federal estimated tax payments we have requested to be refunded. There were similar receivables of $10,201,000 as of December 31, 2016.

Our liability for unrecognized tax benefits is discussed in our accounting policy for income taxes (see Note 1, caption Income Taxes). Changes in our liability for unrecognized tax benefits for the years ended December 31 are as follows:



in thousands	2017	2016	2015
Unrecognized tax benefits as of January 1	$ 10,828	$ 8,447	$ 7,057
Increases for tax positions related to
Prior years	27	1,368	491
Current year	1,039	1,040	942
Decreases for tax positions related to
Prior years	(204)	0	0
Settlements with taxing authorities	0	0	0
Expiration of applicable statute of limitations	(47)	(27)	(43)
Unrecognized tax benefits as of December 31	$ 11,643	$ 10,828	$ 8,447

We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense. Interest and penalties recognized as income tax expense (benefit) were $420,000 in 2017, $266,000 in 2016 and $138,000 in 2015. The balance of accrued interest and penalties included in our liability for unrecognized tax benefits as of December 31 was $1,789,000 in 2017, $1,369,000 in 2016 and $1,103,000 in 2015.

Our liability for unrecognized tax benefits at December 31 in the table above include $10,673,000 in 2017, $9,884,000 in 2016 and $7,614,000 in 2015 that would affect the effective tax rate if recognized.

We are routinely examined by various taxing authorities. We anticipate no single tax position generating a significant increase in our liability for unrecognized tax benefits within 12 months of this reporting date. We anticipate the release of $6,920,000 of our liability for unrecognized tax benefits in the third quarter of 2018 due to expiring statutes of limitation, all of which will impact the effective tax rate when recognized.

We file income tax returns in U.S. federal, various state and foreign jurisdictions. Generally, we are not subject to significant changes in income taxes by any taxing jurisdiction for the years before 2014.