NOTE 10: INCOME TAXES

The following table presents a summary of our domestic and foreign income before income taxes:

	Year Ended December 31,
	2016		2015		2014
	(in millions)
Domestic	$	64	$	67	$	146
Foreign		87		172		176
Total	$	151	$	239	$	322

The following table presents a summary of the components of our provision for income taxes:

	Year Ended December 31,
	2016			2015			2014
	(in millions)
Current income tax expense:
Federal	$	38		$	48		$	93
State		2			8			14
Foreign		11			22			6
Current income tax expense		51			78			113
Deferred income tax (benefit) expense:
Federal		(12	)		(29	)		(12	)
State		(3	)		(2	)		(1	)
Foreign		(5	)		(6	)		(4	)
Deferred income tax (benefit) expense:		(20	)		(37	)		(17	)
Provision for income taxes	$	31		$	41		$	96

The Company reduced its current income tax payable by $21 million, $63 million and $32 million for the years ended December 31, 2016, 2015 and 2014, respectively, for tax deductions attributable to stock-based compensation.

The significant components of our deferred tax assets and deferred tax liabilities as of December 31, 2016 and 2015 are as follows:

	December 31,
	2016			2015
	(in millions)
Deferred tax assets:
Stock-based compensation	$	52		$	40
Net operating loss carryforwards		46			31
Provision for accrued expenses		12			12
Deferred rent		5			5
Lease financing obligation		33			33
Foreign advertising spend		10			8
Deferred expense related to cost-sharing arrangement		30			20
Charitable contribution carryforward		20			24
Other		7			4
Total deferred tax assets	$	215		$	177
Less: valuation allowance		(27	)		(17	)
Net deferred tax assets	$	188		$	160
Deferred tax liabilities:
Intangible assets	$	(83	)	$	(81	)
Property and equipment		(28	)		(27	)
Prepaid expenses		(6	)		(4	)
Building – corporate headquarters		(31	)		(31	)
Deferred income related to cost-sharing arrangement		(10	)		(7	)
Total deferred tax liabilities	$	(158	)	$	(150	)
Net deferred tax asset (liability)	$	30		$	10

At December 31, 2016, we had federal, state and foreign net operating loss carryforwards (“NOLs”) of approximately $23 million, $47 million and $124 million. If not utilized, the federal and state NOLs will expire at various times between 2020 and 2036 and the foreign NOLs will expire at various times between 2017 and 2030.

The valuation allowance on deferred tax assets of $27 million at December 31, 2016, includes $17 million related to foreign net operating loss carryforwards and $10 million relating to foreign advertising spend carryforward. This amount represented an overall increase of $10 million over the amount recorded as of December 31, 2015. The increase is primarily related to additional foreign net operating losses. Except for such foreign deferred tax assets, we expect to realize all of our deferred tax assets based on a strong history of earnings in the US and other jurisdictions, as well as future reversals of taxable temporary differences.

We have not provided for deferred U.S. income taxes on undistributed earnings of our foreign subsidiaries that we have or intend to reinvest permanently outside the United States; the total amount of such earnings as of December 31, 2016 was $828 million. Should we distribute or be treated under certain U.S. tax rules as having distributed earnings of foreign subsidiaries in the form of dividends or otherwise, we may be subject to U.S. income taxes. Due to complexities in tax laws and various assumptions that would have to be made, it is not practicable at this time to estimate the amount of unrecognized deferred U.S. taxes on these earnings.

A reconciliation of the provision for income taxes to the amounts computed by applying the statutory federal income tax rate to income before income taxes is as follows:

	Year Ended December 31,
	2016			2015			2014
	(in millions)
Income tax expense at the federal statutory rate of 35%	$	53		$	84		$	113
Foreign rate differential		(35	)		(53	)		(49	)
State income taxes, net of effect of federal tax benefit		4			4			13
Unrecognized tax benefits and related interest		11			12			14
Change in cost-sharing treatment of stock-based compensation		(6	)		(13	)		—
Non-deductible transaction costs		—			1			1
Research tax credit		(10	)		(3	)		(2	)
Stock-based compensation		2			2			2
Change in valuation allowance		9			5			5
Other, net		3			2			(1	)
Provision for income taxes	$	31		$	41		$	96

During 2011, the Singapore Economic Development Board accepted our application to receive a tax incentive under the International Headquarters Award. This incentive provides for a reduced tax rate on qualifying income of 5% as compared to Singapore’s statutory tax rate of 17% and is conditional upon our meeting certain employment and investment thresholds. This agreement has been extended until June 30, 2021 as we have met certain employment and investment thresholds. This benefit resulted in a decrease to our 2016 provision for income tax expense of $2 million, adding an incremental $0.01 to our Diluted EPS for the year ended December 31, 2016.

By virtue of previously filed consolidated income tax returns filed with Expedia, we are currently under an IRS audit for the 2009, 2010, and 2011 tax years, and have various ongoing state income tax audits. We are separately under examination by the IRS for the 2012 and 2013 tax years and have commenced an employment tax audit with the IRS for the 2013 and 2014 tax years. These audits include questioning of the timing and the amount of income and deductions and the allocation of income among various tax jurisdictions. These examinations may lead to proposed or ordinary course adjustments to our taxes. We are no longer subject to tax examinations by tax authorities for years prior to 2008. As of December 31, 2016, no material assessments have resulted, except as noted below regarding our 2009 and 2010 IRS audit with Expedia.

In January 2017, as part of the Company’s IRS audit of Expedia, we received Notices of Proposed Adjustment from the IRS for the 2009 and 2010 tax years. These proposed adjustments are related to certain transfer pricing arrangements with our foreign subsidiaries, and would result in an increase to our worldwide income tax expense in an estimated range of $10 million to $14 million after consideration of competent authority relief, exclusive of interest and penalties. We disagree with the proposed adjustments and we intend to defend our position through applicable administrative and, if necessary, judicial remedies. Our policy is to review and update tax reserves as facts and circumstances change. Based on our interpretation of the regulations and available case law, we believe the position we have taken with regard to transfer pricing with our foreign subsidiaries is sustainable. In addition to the risk of additional tax for 2009 and 2010 transactions, if the IRS were to seek transfer pricing adjustments of a similar nature for transactions in subsequent years, we would be subject to significant additional tax liabilities.

In July 2015, the United States Tax Court (the “Court”) issued an opinion favorable to Altera Corporation (“Altera”) with respect to Altera’s litigation with the IRS. This opinion was submitted as a final decision under Tax Court Rule 155 during December 2015. The litigation relates to the treatment of stock-based compensation expense in an inter-company cost-sharing arrangement with Altera’s foreign subsidiary. In its opinion, the Court accepted Altera’s position of excluding stock based compensation from its inter-company cost-sharing arrangement. The IRS appealed the Court decision on February 19, 2016. At this time, the U.S. Department of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation in intercompany cost-sharing arrangements. The Company recorded a tax benefit of $6 million and $13 million in its consolidated statement of operations for the years ended December 31, 2016 and 2015, respectively. The Company will continue to monitor this matter and related potential impacts to its consolidated financial statements.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (excluding interest and penalties) is as follows:

	December 31,
	2016			2015		2014
	(in millions)
Balance, beginning of year	$	89		$	67	$	36
Increases to tax positions related to the current year		16			15		13
Increases to tax positions related to the prior year		1			7		18
Reductions due to lapsed statute of limitations		(1	)		—		—
Decreases to tax positions related to the prior year		—			—		—
Settlements during current year		—			—		—
Balance, end of year	$	105		$	89	$	67

As of December 31, 2016, we had $105 million of unrecognized tax benefits, net of interest, which is classified as long-term and included in other long-term liabilities on our consolidated balance sheet. The amount of unrecognized tax benefits, if recognized, would reduce income tax expense by $63 million, due to correlative adjustments in other tax jurisdictions. We recognize interest and penalties related to unrecognized tax benefits in income tax expense on our consolidated statement of operations. As of December 31, 2016 and 2015, total gross interest accrued was $9 million and $6 million, respectively. We do not anticipate any material changes in the next fiscal year.