Income Taxes

The components of the Company’s provision (benefit) for income taxes for the years ended December 31, 2013, 2012 and 2011 are shown in the table below.



	Years Ended December 31,
	2013			2012			2011
Current	(in millions)
Federal	$	(22	)	$	(5	)	$	(19	)
State and local	(3		)	5			3
	(25		)	—			(16		)
Deferred
Federal	(319		)	4			(74		)
State and local	(32		)	2			(35		)
	(351		)	6			(109		)
Total provision (benefit) for income taxes	$	(376	)	$	6		$	(125	)

The following table shows the principal reasons for the differences between the effective income tax rate and the statutory federal income tax rate for the years ended December 31, 2013, 2012 and 2011.



	Years Ended December 31,
	2013		2012		2011
Statutory federal tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal tax benefit	2.2		4.3		3.6
Non-deductible interest expenses	(0.4	)	11.8		—
Non-deductible goodwill impairment charge	(2.2	)	—		(27.5	)
Tax attribution reduction	(0.1	)	(4.3	)	—
Subsidiary basis adjustment	1.3		19.1		12.6
Change in valuation allowance	(5.9	)	(63.8	)	(8.0	)
Change in unrecognized tax benefits	2.4		—		2.9
Change in state tax laws	(0.2	)	4.3		—
Other, net	(0.6	)	6.4		0.8
Effective tax rate	31.5	%	12.8	%	19.4	%

The effective tax rate for 2013 is primarily impacted by the increase in recorded valuation allowances, the non-deductible component of the goodwill impairment charge, and the lapsing of various uncertain tax positions due to expiration of the statute of limitations in federal and various state jurisdictions.

The lower 2012 effective tax rate is primarily due to changes in recorded valuation allowances, changes in certain deferred tax liabilities associated with subsidiary basis adjustments, the impact of a non-deductible component of interest expense related to our debt obligations, and the impact of state income taxes.

The lower 2011 effective tax rate is primarily due to the non-deductible component of the goodwill impairment charge, changes in recorded valuation allowances, changes in certain deferred tax liabilities associated with subsidiary basis adjustments, and the impact of state income taxes.

Deferred Taxes

Deferred taxes arise because of differences in the book and tax basis of certain assets and liabilities. A valuation allowance is recognized to reduce gross deferred tax assets to the amount that will more likely than not be realized. Significant components of deferred income tax assets and liabilities as of December 31, 2013 and 2012 are shown in the following table.



	At December 31,
	2013			2012
	(in millions)
Deferred tax assets
Deferred revenue	$	4		$	9
Allowance for doubtful accounts	7			14
Deferred and other compensation	13			9
Capital investments	6			6
Debt and other interest	148			1
Pension and other post-employment benefits	34			29
Net operating loss and credit carryforwards	341			434
Other, net	21			7
Total deferred tax assets	574			509
Valuation allowance	(208		)	(133		)
Net deferred tax assets	$	366		$	376
Deferred tax liabilities
Fixed assets and capitalized software	$	(33	)	$	(33	)
Goodwill and intangible assets	(285		)	(337		)
Deferred directory costs	(35		)	(2		)
Investment in subsidiaries	(10		)	(18		)
Gain on debt retirement	(22		)	—
Total deferred tax liabilities	$	(385	)	$	(390	)
Net deferred tax liability	$	(19	)	$	(14	)

The bankruptcy related plan of reorganization associated with the merger of Dex One and SuperMedia resulted in a significant modification of certain debt for tax purposes. This resulted in a deemed exchange of debt which created cancellation of indebtedness income (“CODI”) of $428 million, representing the excess of debt face value over its fair value. Generally, CODI must be included in the Company’s taxable income; however, provisions of the Internal Revenue Code allowed the Company to exclude this CODI from taxation. This CODI created a deferred tax asset related to additional original issue discount (“OID”) for tax purposes which was primarily offset by the required tax attribute reductions associated with the non-taxable CODI. The above increase in the debt and other interest deferred tax assets is primarily the deferred tax benefit associated with the additional OID for tax purposes. The reductions to net operating loss deferred tax assets and intangible deferred tax liabilities were primarily attributable to tax attribute reductions along with the book related impairment of intangible assets. The Company also repurchased and retired a portion of our debt at below par in the year ended December 31, 2013, which created $3 million of CODI and related tax attribute reductions.

After assessing the amount of deferred tax assets that are more likely than not to be realized, the Company established a valuation allowance for years ending December 31, 2013 and 2012 of $208 million and $133 million respectively, representing the extent to which deferred tax assets are not supported by future reversals of existing deferred tax liabilities.

At December 31, 2013, the Company had pre-tax net operating loss carryforwards, of $762 million for federal income tax purposes and $1,756 million for state income tax purposes, which will begin to expire in 2029 and 2014, respectively.

The Company files its income tax returns with federal and various state jurisdictions within the United States. Tax years 2010 through 2012 are subject to examination by the Internal Revenue Service. State tax returns are open for examination for an average of three years; however, certain jurisdictions remain open to examination longer than three years due to the existence of net operating loss carryforwards. The Company currently does not have any significant federal, state or local examinations in process.

Unrecognized Tax Benefits

The Company records unrecognized tax benefits for the estimated risk associated with tax positions taken on tax returns. The following table shows changes to and balances of unrecognized tax benefits for the years ended December 31, 2013 and 2012.



	Years Ended December 31,
	2013			2012
	(in millions)
Balance at beginning of period	$	6		$	6
Additions for tax positions related to SuperMedia acquisition	45			—
Additions for tax positions related to the current year	1			—
Reductions for tax positions related to the current year	—			—
Reductions for tax positions related to prior years	—			—
Gross reductions for tax positions related to the lapse of applicable statute of limitations	(33		)	—
Settlements	—			—
Balance at end of period	$	19		$	6

As a result of the merger, the Company recorded $45 million of additional unrecognized tax benefits related to various SuperMedia federal and state tax issues. During the second half of 2013, the statute of limitations expired in various jurisdictions and the Company released $33 million of unrecognized tax benefits, most of which related to federal tax issues.

The majority of unrecognized tax benefits including interest accruals, if recognized, would impact the effective tax rate. The Company recorded interest and penalties related to unrecognized tax benefits as part of the provision (benefit) for income taxes on the Company’s consolidated statements of comprehensive income (loss). During the tax years ended December 31, 2013 and 2011, the Company recognized $3 million, and $5 million in interest benefit, net, respectively, on the Company’s consolidated statements of comprehensive income (loss). Unrecognized tax benefits include $1 million of accrued interest as of December 31, 2013.

It is reasonably possible that a majority of unrecognized tax benefits could decrease within the next twelve months, due to expiration of the statute of limitations in various jurisdictions.

Deferred Income Tax Asset Valuation Allowance



	Years Ended December 31,
	2013		2012			2011
	(in millions)
Balance at beginning of period	$	133	157			$	98
Net additions charged to revenue and expense	75		(24		)	59
Net charges to other balance sheet accounts	—		—			—
Write-offs and other deductions	—		—			—
Balance at end of period	$	208	$	133		$	157