(12) Income Taxes:

The following is a reconciliation of the provision for income taxes computed at the federal statutory rate to income taxes computed at the effective rates for the years ended December 31, 2016, 2015 and 2014:



	2016		2015		2014

Consolidated tax provision at federal statutory rate	35.0	%	35.0	%	35.0	%
State income tax provisions, net of federal income
tax benefit	(0.1)		8.7		1.6
Tax reserve adjustment	0.6		(0.3)		6.9
Domestic production activities deduction	(1.9)		-		(8.7)
Changes in certain deferred tax balances	5.8		0.8		(14.1)
Federal research and development credit	1.0		1.5		(3.3)
Non-deductible transaction costs	-		0.4		1.0
All other, net	(0.2)		(0.3)		0.3
Effective tax rate	40.2	%	45.8	%	18.7	%

Income taxes for 2016 include the impact of $36 million of tax benefits resulting primarily from the adjustment of deferred tax balances due to the CTF Acquisition, the impact of $6 million in benefits from the Federal research and development credits, along with a $12 million reversal of benefits related to the domestic production activities deduction.

Income taxes for 2015 include the impact of a $3 million benefit arising from the adjustment of deferred tax balances and a $5 million benefit from the federal research and development credit.

Income taxes for 2014 include the impact of a $23 million benefit from the reduction in deferred tax liabilities arising primarily from the inclusion of the Connecticut operations in the state unitary filings, a $14 million benefit from the domestic production activities deduction and a $5 million benefit from federal research and development credits, partially offset by the impact of a charge of $11 million resulting from an increase in tax reserves and a charge of $2 million resulting from non-deductible transaction costs.

As a result of the retrospective implementation of Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, Frontier offset all deferred tax liabilities and assets, as well as any related valuation allowance, and is presenting them as a single non-current amount within Deferred income taxes in the consolidated balance sheet as of December 31, 2016 and 2015.

Amounts pertaining to income tax related accounts of $55 million and $50 million are included in “Income taxes and other current assets” in the consolidated balance sheets as of December 31, 2016 and 2015, respectively.

In 2016, we received federal and state income tax refunds totaling $120 million.

The components of the net deferred income tax liability (asset) at December 31 are as follows:



($ in millions)	2016		2015

Deferred income tax liabilities:
Property, plant and equipment basis differences	$	2,751	$	2,401
Intangibles		878		960
Deferred revenue/expense		14		-
Other, net		12		15
	$	3,655	$	3,376

Deferred income tax assets:
Pension liability		273		222
Tax operating loss carryforward		687		295
Employee benefits		255		262
Accrued expenses		44		50
Lease obligations		75		-
Tax credit		30		-
Allowance for doubtful accounts		44		10
Other, net		2		48
		1,410		887
Less: Valuation allowance		(271)		(177)
Net deferred income tax asset		1,139		710
Net deferred income tax liability	$	2,516	$	2,666

Our federal net operating loss carryforward as of December 31, 2016 is estimated at $1.0 billion. The federal loss carryforward will expire in 2036, unless otherwise used.

Our state tax operating loss carryforward as of December 31, 2016 is estimated at $6.7 billion. A portion of our state loss carryforward will continue to expire annually through 2036, unless otherwise used.

Our federal research and development credit and alternative minimum tax credit as of December 31, 2016 is estimated at $13 million and $4 million, respectively. The federal research and development credit will expire between 2034 and 2036, unless otherwise used.

Our various state credits as of December 31, 2016 are estimated at $19 million. The state credits will expire between 2018 and 2021, unless otherwise used.

As of December 31, 2016, Frontier has a valuation allowance of $271 million to reduce deferred tax assets to an amount more likely than not to be realized. This valuation allowance is related to state net operating losses and state tax credits. In evaluating Frontier’s ability to realize its deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. Management also considered the projected reversal of deferred tax liabilities and projected future taxable income in making this assessment. Based upon this assessment, management believes it is more likely than not Frontier will realize the benefits of these deductible differences, net of valuation allowance. There was a valuation allowance of $177 million recorded as of December 31, 2015.

The provision (benefit) for federal and state income taxes, as well as the taxes charged or credited to equity of Frontier, includes amounts both payable currently and deferred for payment in future periods as indicated below:




($ in millions)	2016		2015		2014

Income tax expense (benefit):
Current:
Federal	$	(52)	$	8	$	98
State		7		(6)		10
Total Current		(45)		2		108

Deferred:
Federal		(145)		(126)		(34)
State		(60)		(41)		(44)
Total Deferred		(205)		(167)		(78)
Total income tax expense (benefit)		(250)		(165)		30

Income taxes charged (credited) to equity of Frontier:
Utilization of the benefits arising from restricted stock		(5)		-		-
Deferred income taxes (benefits) arising from the recognition
of additional pension/OPEB liability		(21)		36		(90)

Total income taxes charged (credited) to equity of Frontier		(26)		36		(90)
Total income taxes	$	(276)	$	(129)	$	(60)

U.S. GAAP requires applying a “more likely than not” threshold to the recognition and derecognition of uncertain tax positions either taken or expected to be taken in Frontier’s income tax returns. The total amount of our gross tax liability for tax positions that may not be sustained under a “more likely than not” threshold amounts to $17 million as of December 31, 2016 including interest of $1 million. The amount of our uncertain tax positions, for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease during the next twelve months, and which would affect our effective tax rate, is $8 million as of December 31, 2016.

Frontier’s policy regarding the classification of interest and penalties is to include these amounts as a component of income tax expense. This treatment of interest and penalties is consistent with prior periods. We are subject to income tax examinations generally for the years 2012 forward for federal and 2008 forward for state filing jurisdictions. We also maintain uncertain tax positions in various state jurisdictions.

The following table sets forth the changes in Frontier’s balance of unrecognized tax benefits for the years ended December 31, 2016 and 2015:



($ in millions)	2016		2015

Unrecognized tax benefits - beginning of year	$	19	$	19
Gross increases - prior year tax positions		3		-
Gross increases - current year tax positions		3		2
Gross decreases - FIN 48 liability release		(9)		-
Gross decreases - expired statute of limitations		-		(2)
Unrecognized tax benefits - end of year	$	16	$	19

The amounts above exclude $1 million of accrued interest as of December 31, 2016 and 2015, respectively, that we have recorded and would be payable should Frontier’s tax positions not be sustained.