Note 12. Income Taxes

Income taxes have been based on the following components of earnings from operations before income taxes for the years ended December 31, 2015, 2014 and 2013:

	2015		2014		2013
U.S.	$	230.6	$	8.5	$	66.7
Foreign		37.2		138.6		142.3
Total	$	267.8	$	147.1	$	209.0

The components of income tax expense (benefit) from operations for the years ended December 31, 2015, 2014 and 2013 were as follows:

	2015			2014			2013
Federal:
Current	$	112.7		$	50.1		$	(15.1	)
Deferred		(34.9	)		(64.3	)		(23.9	)
State:
Current		15.8			13.9			(4.8	)
Deferred		(7.5	)		(3.8	)		(2.6	)
Foreign:
Current		37.0			49.3			51.8
Deferred		6.3			(18.9	)		(14.6	)
Total	$	129.4		$	26.3		$	(9.2	)

The following table outlines the reconciliation of differences between the Federal statutory tax rate and the Company’s effective income tax rate:

	2015			2014			2013
Federal statutory tax rate		35.0	%		35.0	%		35.0	%
Change in valuation allowances		6.0			0.9			3.1
Venezuelan devaluation and sale		4.9			1.3			—
State and local income taxes, net of U.S. federal income tax benefit		3.6			3.1			2.4
Impairment charges		2.3			4.3			—
Acquisition-related expenses		1.6			0.9			0.7
Foreign tax		0.8			1.7			4.0
Adjustment of uncertain tax positions and interest		0.5			(1.8	)		(6.2	)
Reorganization		—			(10.1	)		(32.8	)
Domestic manufacturing deduction		(3.8	)		(3.0	)		(0.1	)
Foreign tax rate differential		(6.9	)		(13.4	)		(11.3	)
Other		4.3			(1.0	)		0.8
Effective income tax rate		48.3	%		17.9	%		(4.4	%)

Included in 2015 is tax expense of $6.0 million related to the receipt of an unfavorable court decision related to payment of prior year taxes in the International segment.

Included in 2014 is a $15.2 million tax benefit related to the decline in value of an entity within the Strategic Services segment.

Included in 2013 is a $58.5 million income tax benefit related to the decline in value and reorganization of certain entities within the Publishing and Retail Services segment and a benefit of $7.2 million for the recognition of previously unrecognized tax benefits related to the expected resolution of certain federal matters.

Deferred income taxes

The significant deferred tax assets and liabilities at December 31, 2015 and 2014 were as follows:

	2015			2014
Deferred tax assets:
Pension and other postretirement benefits plan liabilities	$	293.7		$	349.1
Net operating losses and other tax carryforwards		293.4			341.6
Accrued liabilities		166.0			164.3
Foreign depreciation		36.7			38.7
Other		41.0			34.6
Total deferred tax assets		830.8			928.3
Valuation allowances		(233.5	)		(257.8	)
Net deferred tax assets	$	597.3		$	670.5

Deferred tax liabilities:
Accelerated depreciation	$	(203.4	)	$	(204.8	)
Other intangible assets		(163.4	)		(143.2	)
Inventories		(24.0	)		(24.4	)
Other		(35.8	)		(34.5	)
Total deferred tax liabilities		(426.6	)		(406.9	)

Net deferred tax assets	$	170.7		$	263.6

In the fourth quarter of 2015, the Company adopted Accounting Standards Update No. 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”), which requires all deferred tax liabilities and assets to be classified as noncurrent on the balance sheet. The Company adopted the standard prospectively. Therefore, deferred tax balances above are classified as noncurrent in the Consolidated Balance Sheet as of December 31, 2015, and deferred tax amounts are classified as current or noncurrent in accordance with the asset or liability to which they relate in the Consolidated Balance Sheet as of December 31, 2014.

Transactions affecting the valuation allowances on deferred tax assets during the years ended December 31, 2015, 2014 and 2013 were as follows:

	2015			2014			2013
Balance, beginning of year	$	257.8		$	268.2		$	273.6
Current year expense-net		16.1			1.3			6.4
Write-offs		(20.3	)		(2.8	)		(8.3	)
Foreign exchange and other		(20.1	)		(8.9	)		(3.5	)
Balance, end of year	$	233.5		$	257.8		$	268.2

As of December 31, 2015, the Company had domestic and foreign net operating loss and other tax carryforwards of approximately $88.2 million and $205.2 million ($98.4 million and $243.2 million, respectively, at December 31, 2014), of which $127.0 million expires between 2016 and 2025. Limitations on the utilization of these tax assets may apply. The Company has provided valuation allowances to reduce the carrying value of certain deferred tax assets, as management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized.

Deferred income taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in those foreign subsidiaries for which such excess is considered to be permanently reinvested in those operations. The Company has recognized deferred tax liabilities of $4.3 million and $2.6 million as of December 31, 2015 and December 31, 2014, respectively, related to local taxes on certain foreign earnings which are not considered to be permanently reinvested. Undistributed earnings of foreign subsidiaries that are considered indefinitely reinvested outside of the U.S. were approximately $1.6 billion as of December 31, 2015. Upon repatriation of these earnings to the U.S. in the form of dividends or otherwise, the Company may be subject to U.S. income taxes and foreign taxes. The tax cost would depend on income tax laws and circumstances at the time of distribution.

Cash payments for income taxes were $134.0 million, $125.5 million and $99.0 million in 2015, 2014 and 2013, respectively. Cash refunds for income taxes were $19.9 million, $13.9 million and $12.1 million in 2015, 2014 and 2013, respectively.

The Company’s income taxes payable for federal and state purposes has been reduced by the tax benefits associated with the exercise of employee stock options and the vesting of restricted stock units. A component of the income tax benefit, calculated as the tax effect of the difference between the fair market value at the time stock options are exercised or restricted stock units vest and the grant date fair market value, directly increases or reduces RR Donnelley shareholders’ equity. For the years ended December 31, 2015, 2014 and 2013, the tax expense recognized as a reduction of RR Donnelley’s shareholders’ equity was $3.2 million, $2.9 million and $0.9 million, respectively.

See Note 16 for details of the income tax expense or benefit allocated to each component of other comprehensive income.

Uncertain tax positions

Changes in the Company’s unrecognized tax benefits at December 31, 2015, 2014 and 2013 were as follows:

	2015			2014			2013
Balance at beginning of year	$	58.5		$	33.8		$	47.9
Acquisitions		—			30.9			—
Additions for tax positions of the current year		1.8			1.9			2.1
Additions for tax positions of prior years		4.6			0.4			3.7
Reductions for tax positions of prior years		(5.3	)		(1.4	)		(16.2	)
Settlements during the year		(0.3	)		(2.9	)		(0.7	)
Lapses of applicable statutes of limitations		(3.0	)		(4.2	)		(3.0	)
Balance at end of year	$	56.3		$	58.5		$	33.8

As of December 31, 2015, 2014 and 2013, the Company had $56.3 million, $58.5 million and $33.8 million, respectively, of unrecognized tax benefits. Unrecognized tax benefits of $37.7 million as of December 31, 2015, if recognized, would have decreased income taxes and the corresponding effective income tax rate and increased net earnings. This potential impact on net earnings reflects the reduction of these unrecognized tax benefits, net of certain deferred tax assets and the federal tax benefit of state income tax items.

As of December 31, 2015, it is reasonably possible that the total amount of unrecognized tax benefits will decrease within twelve months by as much as $16.5 million due to the resolution of audits or expirations of statutes of limitations related to U.S. federal, state and international tax positions.

The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. The total interest expense, net of tax benefits, related to tax uncertainties recognized in the Consolidated Statements of Operations was expense of $1.1 million and $0.1 million for the years ended December 31, 2015 and 2014, respectively, and a benefit of $1.8 million for the year ended December 31, 2013 due to the reversal of interest accrued on previously unrecognized tax benefits that were recognized during the respective year. There were no benefits from the reversal of accrued penalties for the year ended December 31, 2015. Benefits of $0.1 million and $2.6 million were recognized for the years ended December 31, 2014 and 2013, respectively, from the reversal of accrued penalties. Accrued interest of $7.0 million and $5.6 million related to income tax uncertainties were reported as a component of other noncurrent liabilities in the Consolidated Balance Sheets at December 31, 2015 and 2014, respectively. There were no accrued penalties related to income tax uncertainties for the years ended December 31, 2015 and 2014.

The Company has tax years from 2010 that remain open and subject to examination by the IRS, certain state taxing authorities or certain foreign tax jurisdictions.