NOTE 14. INCOME TAXES

The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the U.S. Federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. For the transition tax for which we were able to determine a reasonable estimate, we recognized a provisional amount of $21 million, which is included as a component of income tax expense from continuing operations with a corresponding reduction of deferred tax asset related to the utilization of gross NOL of approximately $59 million. Accordingly no tax liability will be incurred. Also, we continue to evaluate the method and the impact of accounting for the global intangible low-taxed income (“GILTI”) in accordance with the Act.

Deferred tax assets and liabilities: We re-measured our U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of our deferred tax balance was a tax benefit of $204 million.

Foreign tax effects: The one-time transition tax is based on our total post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. We recorded a provisional amount for our one-time transition tax liability, resulting in an increase in income tax expense of $21 million. We have not yet completed our calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.

We file a federal consolidated income tax return with our eligible subsidiaries. Our federal consolidated income tax return also includes the taxable results of certain grantor trusts described below. The components of income tax expense were as follows (in millions):



	Year Ended December 31,
	2017			2016			2015
Current:
Federal	$	4		$	(2	)	$	(91	)
State	2			6			16
Foreign	(1		)	(2		)	2
Total current	5			2			(73		)
Deferred:
Federal	(204		)	28			7
State	(2		)	(9		)	(11		)
Foreign	10			1			(7		)
Total deferred	(196		)	20			(11		)
Total income tax (benefit) expense	$	(191	)	$	22		$	(84	)

Domestic and foreign pre-tax income (loss) was as follows (in millions):



	Year Ended December 31,
	2017			2016			2015
Domestic	$	(43	)	$	26		$	6
Foreign	(92		)	(12		)	(34		)
Total	$	(135	)	$	14		$	(28	)

The effective income tax rate was 142%, 150%, and 302% for the years ended December 31, 2017, 2016 and 2015, respectively.

The decrease in the effective tax rate for the year ended December 31, 2017, compared to the year ended December 31, 2016 is primarily due to the combined effects of (i) the recognition of tax benefit from the re-measurement of the deferred taxes and the estimated transition tax due to the enactment of the Act and (ii) the change from pre-tax income in 2016 to pre-tax loss in 2017.

The decrease in effective tax rate for the year ended December 31, 2016, compared to the year ended December 31, 2015 is primarily due to the combined effects of (i) the recognition of tax benefit due to the resolution of the IRS audit in 2015 and (ii) the fact that the Company turned from pre-tax loss in 2015 to pre-tax income in 2016, offset by the uncertain tax positions recorded in 2016.

A reconciliation of our income tax expense (benefit) at the federal statutory income tax rate of 35% to income tax expense (benefit) at the effective tax rate is as follows (in millions):



	Year Ended December 31,
	2017			2016			2015
Income tax expense (benefit) at the federal statutory rate	$	(47	)	$	5		$	(10	)
State and other tax expense	(2		)	1			1
Tax rate differential on foreign earnings	10			4			8
Permanent differences	4			4			4
Income from Grantor Trust	(8		)	—			—
Production tax credits/R&E tax credits	—			—			(3		)
State ITC credit	1			(4		)	—
Change in valuation allowance	31			2			(7		)
Liability for uncertain tax positions	—			16			(82		)
Adjustment to deferred tax	(1		)	(5		)	4
Impact of deferred tax re-measurement for federal tax rate change	(204		)	—			—
Tax reform transition tax	21			—			—
Expiration of non-qualified stock options	3			—			—
Other	1			(1		)	1
Total income tax expense (benefit)	$	(191	)	$	22		$	(84	)

We had consolidated federal NOLs estimated to be approximately $240 million for federal income tax purposes as of the end of 2017. These consolidated federal NOLs will expire, if not used, in the following amounts in the following years (in millions):




	Amount of Carryforward Expiring
2028	$	10
2030	29
2031	1
2032	1
2033	197
2035	1
2036	1
	$	240

In addition to the consolidated federal NOLs, as of December 31, 2017, we had state NOL carryforwards of approximately $389 million, which expire between 2028 and 2037, net foreign NOL carryforwards of approximately $287 million with some expiring between 2018 and 2037. The federal tax credit carryforwards include production tax credits of $47 million expiring between 2024 and 2036, and research and experimentation tax credits of $1 million expiring between 2027 and 2033. Additionally, we had state income tax credits of $3 million. The corresponding deferred tax assets are offset by a valuation allowance of approximately $77 million.

The tax effects of temporary differences that give rise to the deferred tax assets and liabilities are presented as follows (in millions):



	As of December 31,
	2017			2016
Deferred tax assets:
Net operating loss carryforwards	$	119		$	143
Accrued expenses	15			20
Prepaid and other costs	48			71
Deferred tax assets attributable to pass-through entities	10			17
Retirement benefits	2			3
Other	3			4
AMT and other credit carryforwards	48			55
Total gross deferred tax asset	245			313
Less: valuation allowance	(77		)	(71		)
Total deferred tax asset	168			242
Deferred tax liabilities:
Unbilled accounts receivable	3			3
Property, plant and equipment	538			780
Intangible assets	33			36
Deferred tax liabilities attributable to pass-through entities	8			22
Deferred gain on convertible debt	4			13
Swap income	—			—
Prepaid expenses	—			—
Other, net	1			5
Total gross deferred tax liability	587			859
Net deferred tax liability, including deferred tax liability held for sale	419			617
Less: Deferred tax liability held for sale⁽¹⁾	7			—
Net deferred tax liability	$	412		$	617


(1)	As of December 31, 2017, assets and liabilities related to our Dublin EfW facility met the criteria to be classified as held for sale on our consolidated balance sheet. For further information see Note 4. Dispositions and Assets Held for Sale and Note 18. Subsequent Events.

Cumulative undistributed foreign earnings for which United States taxes were not provided were included in consolidated retained earnings in the amount of approximately zero and $257 million as of December 31, 2017 and 2016, respectively. This is due to the one time transition tax on the cumulative undistributed foreign earnings as of December 31, 2017 that was included in the tax provision as the result of the Act. Such amounts were considered permanently invested, therefore no provision for U.S. income taxes was accrued in 2016.

Deferred tax assets relating to employee stock based compensation deductions were reduced to reflect exercises of non-qualified stock option grants and vesting of restricted stock. Some exercises of non-qualified stock option grants and vesting of restricted stock resulted in tax deductions in excess of previously recorded benefits resulting in a "windfall". Although these additional deductions were reported on the corporate tax returns and increased NOLs, the related tax benefits were not previously recognized for financial reporting purposes. The Company adopted ASU 2016-09 in 2017, as a result, the related tax benefits, if applicable, will now be recognized for financial statement purposes. The historical benefit of $11 million was recorded as a decrease to Accumulated deficit and an an increase to our deferred tax asset balance as of January 1, 2017 to recognize the cumulative effect of adoption of the new standard.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):



Balance at December 31, 2014	$	133
Additions based on tax positions related to the current year	12
Reductions for tax positions of prior years	(109		)
Balance at December 31, 2015	36
Additions based on tax positions related to the current year	16
Additions for tax positions of prior years	4
Reductions for lapse in applicable statute of limitations	(3		)
Reductions for tax positions of prior years	(4		)
Payment	(6		)
Balance at December 31, 2016	43
Additions based on tax positions related to the current year	1
Additions for tax positions of prior years	6
Reductions for lapse in applicable statute of limitations	(1		)
Reductions for tax positions of prior years	(2		)
Additions due to acquisitions	1
Balance at December 31, 2017	$	48

The uncertain tax positions, exclusive of interest and penalties, were $48 million and $43 million as of December 31, 2017 and 2016, respectively, which also represent potential tax benefits that if recognized, would impact the effective tax rate.

We record interest accrued on liabilities for uncertain tax positions and penalties as part of the tax provision. As of December 31, 2017 and 2016, we had accrued interest and penalties associated with liabilities for uncertain tax positions of $5 million and $3 million, respectively. We continue to reflect interest accrued and penalties on uncertain tax positions as part of the tax provision.

Audits for federal income tax returns are closed for the years through 2010. However, the Internal Revenue Service ("IRS") can audit the NOL's generated during those years in the years that the NOL's are utilized.

State income tax returns are generally subject to examination for a period of three to six years after the filing of the respective tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. We have various state income tax returns in the process of examination, administrative appeals or litigation.

Our NOLs predominantly arose from our predecessor insurance entities, formerly named Mission Insurance Group, Inc., (“Mission”). These Mission insurance entities have been in state insolvency proceedings in California and Missouri since the late 1980's. The amount of NOLs available to us will be reduced by any taxable income or increased by any taxable losses generated by current members of our consolidated tax group, which include grantor trusts associated with the Mission insurance entities.

While we cannot predict what amounts, if any, may be includable in taxable income as a result of the final administration of these grantor trusts, substantial actions toward such final administration have been taken and we believe that neither arrangements with the California Commissioner of Insurance nor the final administration by the Missouri Director will result in a material reduction in available NOLs.