NOTE 7 - INCOME TAXES

The significant components of the income tax expense (benefit) are as follows (in millions):


2014	UAL		United
Current	$	(17)	$	(17)
Deferred		13		13

	$	(4)	$	(4)


2013
Current	$	(18)	$	(18)
Deferred		(14)		1

	$	(32)	$	(17)


2012
Current	$	(14)	$	(9)
Deferred		13		13

	$	(1)	$	4

The income tax provision differed from amounts computed at the statutory federal income tax rate, as follows (in millions):


UAL	2014		2013		2012
Income tax provision at statutory rate	$	395	$	189	$	(253)
State income taxes, net of federal income tax		16		5		(15)
Foreign income taxes		2		3		7
Nondeductible employee meals		15		15		12
Nondeductible interest expense		—		—		19
State rate change		—		(33)		—
Valuation allowance		(441)		(219)		234
Other, net		9		8		(5)

	$	(4)	$	(32)	$	(1)


United	2014		2013		2012
Income tax provision at statutory rate	$	388	$	223	$	(230)
State income taxes, net of federal income tax		15		5		(7)
Foreign income taxes		2		3		7
Nondeductible employee meals		15		15		12
Nondeductible interest expense		—		—		19
Derivative market adjustment		(7)		(24)		(15)
State rate change		—		(33)		—
Valuation allowance		(426)		(229)		223
Other, net		9		23		(5)

	$	(4)	$	(17)	$	4

Temporary differences and carryforwards that give rise to deferred tax assets and liabilities at December 31, 2014 and 2013 were as follows (in millions):


	UAL				United
	December 31,				December 31,
	2014		2013		2014		2013
Deferred income tax asset (liability):
Federal and state net operating loss (“NOL”) carryforwards	$	3,491	$	4,006	$	3,423	$	3,943
Frequent flyer deferred revenue		2,287		2,254		2,287		2,254
Employee benefits, including pension, postretirement and medical		1,943		1,701		1,943		1,701
Alternative minimum tax credit carryforwards		214		233		214		233
Other		657		340		659		340
Less: Valuation allowance		(4,751)		(4,591)		(4,721)		(4,561)

Total deferred tax assets	$	3,841	$	3,943	$	3,805	$	3,910


Depreciation, capitalized interest and other	$	(3,212)	$	(3,201)	$	(3,212)	$	(3,201)
Intangibles		(1,545)		(1,585)		(1,545)		(1,585)
Other		(84)		(144)		(48)		(111)

Total deferred tax liabilities	$	(4,841)	$	(4,930)	$	(4,805)	$	(4,897)

Net deferred tax liability	$	(1,000)	$	(987)	$	(1,000)	$	(987)

United and its domestic consolidated subsidiaries file a consolidated federal income tax return with UAL. Under an intercompany tax allocation policy, United and its subsidiaries compute, record and pay UAL for their own tax liability as if they were separate companies filing separate returns. In determining their own tax liabilities, United and each of its subsidiaries take into account all tax credits or benefits generated and utilized as separate companies and they are each compensated for the aforementioned tax benefits only if they would be able to use those benefits on a separate company basis.

The federal and state NOL carryforwards relate to prior years’ NOLs, which may be used to reduce tax liabilities in future years. These tax benefits are mostly attributable to federal pre-tax NOL carryforwards of $9.6 billion for UAL. If not utilized these federal pre-tax NOLs will expire as follows (in billions): $1.1 in 2024, $2.5 in 2025, $2.0 in 2026 and $4.0 after 2026. In addition, the majority of tax benefits of the state net operating losses of $111 million for UAL will expire over a five to 20-year period.

Our effective tax rates are lower than the federal statutory rate of 35% primarily because of the impact of changes to existing valuation allowances. We continue to provide a valuation allowance for our deferred tax assets in excess of deferred tax liabilities because we have concluded that it is more likely than not that such deferred tax assets will ultimately not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including the reversals of deferred tax liabilities) during the periods in which those deferred tax assets will become deductible. The Company’s management assesses available positive and negative evidence regarding the Company’s ability to realize its deferred tax assets and records a valuation allowance when it is more likely than not that deferred tax assets will not be realized. To form a conclusion, management considers positive evidence in the form of reversing temporary differences, projections of future taxable income and tax planning strategies and negative evidence such as historical losses. Although the Company was not in a three-year cumulative loss position at the end of 2014, management determined that the low level of cumulative pretax income, combined with uncertainty about forecasted results, supports the conclusion that the valuation allowance is still necessary. Management will continue to evaluate future financial performance to determine whether such performance is both sustained and significant enough to provide sufficient evidence to support reversal of the valuation allowance.

The December 31, 2014 valuation allowances of $4.8 billion and $4.7 billion for UAL and United, respectively, if reversed in future years will reduce income tax expense. The current valuation allowance reflects increases from December 31, 2013 of $160 million, for both UAL and United, including amounts charged directly to other comprehensive income.

The Company’s unrecognized tax benefits related to uncertain tax positions were $9 million, $14 million and $19 million at 2014, 2013 and 2012, respectively. Included in the ending balance at 2014 is $7 million that would affect the Company’s effective tax rate if recognized. The Company does not expect significant increases or decreases in their unrecognized tax benefits within the next twelve months.

There are no significant amounts included in the balance at December 31, 2014 for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits related to the Company’s uncertain tax positions (in millions):


	2014		2013		2012
Balance at January 1,	$	14	$	19	$	24
Decrease in unrecognized tax benefits relating to settlements with taxing authorities		(5)		—		(12)
Increase in unrecognized tax benefits as a result of tax positions taken during a prior period		—		—		8
Decrease in unrecognized tax benefits relating from a lapse of the statute of limitations		—		(5)		(1)

Balance at December 31,	$	9	$	14	$	19

The Company’s federal income tax returns for tax years after 2002 remain subject to examination by the Internal Revenue Service (“IRS”) and state taxing jurisdictions. Currently, there are no ongoing examinations of the Company’s prior year tax returns being conducted by the IRS.