Income Taxes



	Years Ended December 31,
	2014			2013		2012
	(Dollars in millions)
Income tax expense was as follows:
Federal
Current	$	18		1		57
Deferred	305			403		361
State
Current	26			62		15
Deferred	(14		)	(8	)	33
Foreign
Current	3			9		7
Deferred	—			(4	)	—
Total income tax expense	$	338		463		473



	Years Ended December 31,
	2014			2013		2012
	(Dollars in millions)
Income tax expense was allocated as follows:
Income tax expense in the consolidated statements of operations:
Attributable to income	$	338		463		473
Stockholders' equity:
Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes	(5		)	(14	)	(18	)
Tax effect of the change in accumulated other comprehensive loss	(744		)	554		(434	)

The following is a reconciliation from the statutory federal income tax rate to our effective income tax rate:



	Years Ended December 31,
	2014		2013		2012
	(Percentage of pre-tax income)
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	2.7	%	2.8	%	2.5	%
Impairment of goodwill	—	%	188.5	%	—	%
Reversal of liability for unrecognized tax position	0.4	%	(24.5	)%	—	%
Foreign income taxes	0.4	%	2.7	%	0.3	%
Nondeductible accounting adjustment for life insurance	—	%	3.1	%	—	%
Release state valuation allowance	—	%	(2.3	)%	—	%
Loss on worthless investment in foreign subsidiary	(5.4	)%	—	%	—	%
Other, net	(2.6	)%	1.4	%	—	%
Effective income tax rate	30.5	%	206.7	%	37.8	%

The 2014 effective tax rate is 30.5% compared to 206.7% for 2013. The 2014 rate reflects a $60 million benefit for a worthless stock deduction for tax basis in a wholly-owned foreign subsidiary as a result of developments in bankruptcy proceedings involving its sole asset and a $13 million tax decrease due to changes in the state taxes caused by apportionment changes, state tax rate changes and the changes in the expected utilization of NOLs. The 2013 rate reflects the tax effect of a $1.092 billion non-deductible goodwill impairment charge, a favorable settlement with the Internal Revenue Service of $33 million, a $22 million reduction due to the reversal of an uncertain tax position and the tax effect of a $17 million unfavorable accounting adjustment for non-deductible life insurance costs. Also in 2013, the tax rate was decreased by a $5 million reduction to the valuation allowance due to the estimated ability to utilize more state NOLs than previously expected. The 2012 rate reflects the $16 million reversal of a valuation allowance related to the auction rate securities we sold in 2012.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:



	As of December 31,
	2014			2013
	(Dollars in millions)
Deferred tax assets
Post-retirement and pension benefit costs	$	2,276		1,618
Net operating loss carryforwards	1,091			1,532
Other employee benefits	214			182
Other	602			782
Gross deferred tax assets	4,183			4,114
Less valuation allowance	(409		)	(435	)
Net deferred tax assets	3,774			3,679
Deferred tax liabilities
Property, plant and equipment, primarily due to depreciation differences	(3,869		)	(3,904	)
Goodwill and other intangible assets	(2,908		)	(3,226	)
Other	(147		)	(137	)
Gross deferred tax liabilities	(6,924		)	(7,267	)
Net deferred tax liability	$	(3,150	)	(3,588	)

Of the $3.150 billion and $3.588 billion net deferred tax liability at December 31, 2014 and 2013, respectively, $4.030 billion and $4.753 billion is reflected as a long-term liability and $880 million and $1.165 billion is reflected as a net current deferred tax asset at December 31, 2014 and 2013, respectively.

At December 31, 2014, we had federal NOLs of $1.6 billion and state NOLs of $12 billion. If unused, the NOLs will expire between 2015 and 2032; however, no significant amounts expire until 2020. At December 31, 2014, we had $51 million ($33 million net of federal income tax) of state investment tax credit carryforwards that will expire between 2015 and 2024 if not utilized. In addition, at December 31, 2014 we had $110 million of federal alternative minimum tax, or AMT, credits. Our acquisitions of Qwest and Savvis caused "ownership changes" within the meaning of Section 382 of the Internal Revenue Code ("Section 382"). As a result, our ability to use these NOLs and AMT credits are subject to annual limits imposed by Section 382. Despite this, we expect to use substantially all of these tax attributes to reduce our future federal tax liabilities, although the timing of that use will depend upon our future earnings and future tax circumstances.

We establish valuation allowances when necessary to reduce the deferred tax assets to amounts we expect to realize. As of December 31, 2014, a valuation allowance of $409 million was established as it is more likely than not that this amount of net operating loss and tax credit carryforwards will not be utilized prior to expiration. Our valuation allowance at December 31, 2014 and 2013 is primarily related to state NOL carryforwards. This valuation allowance decreased by $26 million during 2014.

A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 to December 31 for 2014 and 2013 is as follows:



	2014			2013
	(Dollars in millions)
Unrecognized tax benefits at beginning of year	$	14		78
Increase in tax positions taken in the prior year	9			—
Decrease due to the reversal of tax positions taken in a prior year	(2		)	—
Decrease from the lapse of statute of limitations	(1		)	(36	)
Settlements	(3		)	(28	)
Unrecognized tax benefits at end of year	$	17		14

During 2012, we entered into negotiations with the IRS to resolve a claim that was filed by Qwest for 1999. Based on the status of the negotiations at year end 2012, we partially reversed an unrecognized tax benefit that was assumed as part of the Qwest acquisition. When the negotiations were settled in 2013, we fully reversed the amount of the unrecognized tax position and recorded a receivable for the anticipated refund, which was received in the second quarter of 2014.

The total amount of unrecognized tax benefits that, if recognized, would impact the effective income tax rate was $32 million and $29 million at December 31, 2014 and 2013, respectively.

Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented before related tax benefits) of approximately $30 million at both December 31, 2014 and 2013.

We file income tax returns, including returns for our subsidiaries, with federal, state and local jurisdictions. Our uncertain income tax positions are related to tax years that are currently under or remain subject to examination by the relevant taxing authorities.

In 2012, Qwest filed an amended 2008 federal income tax return primarily to report the carryforward impact of prior year settlements. A refund was received for the amended 2008 federal income tax return in 2013. In 2013, Qwest filed an amended 2009 federal income tax return primarily to report the carryforward impact of prior year settlements. The refund for the 2009 amended return filed in 2013 was received in 2014. In 2014, Qwest filed an amended federal income tax return for 2010. The refund claim filed for 2010 was accepted by the IRS and the refund is expected to be received in 2015. The 2010 amended return released certain general business credits that were required to be carried back to 2009. As a result, a subsequent 2009 federal amended return was filed by Qwest in 2014 to reflect the carrybacks from 2010. The 2009 refund claim filed in 2014 was accepted by the IRS and the refund is expected to be received in 2015.

Beginning with the 2010 tax year, our federal consolidated returns are subject to annual examination by the IRS. Qwest's federal consolidated returns for the 2010 and pre-merger 2011 tax years are open to examination by the IRS. Federal consolidated returns for Savvis for tax years 2010 and pre-merger 2011 are under examination by the IRS.

In years prior to 2011, Qwest filed amended federal income tax returns for 2002-2007 to make protective claims with respect to items reserved in their audit settlements and to correct items not addressed in prior audits. The examination of those amended federal income tax returns by the IRS was completed in 2012.

Our open income tax years by major jurisdiction are as follows at December 31, 2014:



Jurisdiction		Open Tax Years
Federal		2010—current
State
Florida		2010—current
Minnesota		2011—current
Other states		2010—current

Since the period for assessing additional liability typically begins upon the filing of a return, it is possible that certain jurisdictions could assess tax for years prior to the open tax years disclosed above. Additionally, it is possible that certain jurisdictions in which we do not believe we have an income tax filing responsibility, and accordingly did not file a return, may attempt to assess a liability, or that other jurisdictions to which we pay taxes may attempt to assert that we owe additional taxes.

Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may decrease by up to $8 million within the next 12 months. The actual amount of such decrease, if any, will depend on several future developments and events, many of which are outside our control.