NOTE 7 - INCOME TAXES

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


2016	UAL		United
Current	$	(92)	$	(92)
Deferred		1,648		1,650

	$	1,556	$	1,558


2015
Current	$	56	$	56
Deferred		(3,177)		(3,136)

	$	(3,121)	$	(3,080)


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

	$	(4)	$	(4)

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


UAL	2016		2015		2014
Income tax provision at statutory rate	$	1,337	$	1,477	$	395
State income taxes, net of federal income tax		38		38		10
Foreign income taxes		3		4		2
Nondeductible employee meals		16		15		15
Income tax adjustment		180		—		—
State rate change		(12)		—		—
Valuation allowance		20		(4,662)		(435)
Other, net		(26)		7		9

	$	1,556	$	(3,121)	$	(4)


United	2016		2015		2014
Income tax provision at statutory rate	$	1,338	$	1,477	$	388
State income taxes, net of federal income tax		38		38		10
Foreign income taxes		3		4		2
Nondeductible employee meals		16		15		15
Derivative market adjustment		—		—		(7)
Income tax adjustment		180		—		—
State rate change		(12)		—		—
Valuation allowance		20		(4,621)		(421)
Other, net		(25)		7		9

	$	1,558	$	(3,080)	$	(4)

The Company’s effective tax rate for the year ended December 31, 2016 differed from the federal statutory rate of 35% primarily because of the non-cash income tax expense of $180 million that was related to losses on fuel derivatives designated for hedge accounting. Subsequent to the release of the valuation allowance in 2015, this deferred income tax expense of $180 million remained in AOCI until all fuel derivatives were settled in December 2016. The change in the effective tax rate each period is impacted by a number of factors, including the relative mix of domestic and state income tax expense in the U.S., adjustments to the valuation allowances and discrete items.

Temporary differences and carryforwards that give rise to deferred tax assets and liabilities at December 31, 2016 and 2015 were as follows (in millions):


	UAL				United
	December 31,				December 31,
	2016		2015		2016		2015
Deferred income tax asset (liability):
Federal and state net operating loss (“NOL”) carryforwards	$	1,613	$	2,897	$	1,571	$	2,855
Deferred revenue		2,096		2,160		2,096		2,160
Employee benefits, including pension, postretirement and medical		1,662		1,662		1,662		1,662
Alternative minimum tax (“AMT”) credit carryforwards		116		232		116		232
Other		523		566		522		566
Less: Valuation allowance		(68)		(48)		(68)		(48)

Total deferred tax assets	$	5,942	$	7,469	$	5,899	$	7,427

Depreciation	$	(3,961)	$	(3,921)	$	(3,961)	$	(3,921)
Intangibles		(1,326)		(1,511)		(1,326)		(1,511)

Total deferred tax liabilities	$	(5,287)	$	(5,432)	$	(5,287)	$	(5,432)

Net deferred tax asset	$	655	$	2,037	$	612	$	1,995

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 Company’s 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 $4.4 billion for UAL. If not utilized these federal pre-tax NOLs will expire as follows (in billions): $0.5 in 2026, $1.4 in 2027 and $2.5 after 2028. In addition, the majority of tax benefits of the state net operating losses of $56 million, net of a valuation allowance of $36 million, for UAL will expire over a five to 20-year period. Additionally, the Company has $108 million of AMT credit carryforwards, net of a valuation allowance of $8 million, which do not expire.

The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets. The Company establishes valuation allowances if it is not likely it will realize its deferred income tax assets. In making this determination, the Company considers all available positive and negative evidence and makes certain assumptions. The Company considers, among other things, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, the Company’s historical financial results and tax planning strategies. In evaluating the likelihood of utilizing the Company’s net deferred income tax assets, the significant factors that the Company considers include (1) the Company’s recent history and forecasted profitability; (2) growth in the U.S. and global economies; and (3) future impact of taxable temporary differences. In 2015, the Company concluded that its deferred income tax assets were more likely than not to be realized and released almost all of its valuation allowance in 2015, resulting in a $3.1 billion benefit in its provision for income taxes. The valuation allowance recorded in AOCI in prior years was released through the income statement.

The Company has a valuation allowance of $68 million for certain state and local NOLs and credit carryforwards. The Company expects these NOLs and credits will expire unused due to limited carryforward periods. The ability to utilize these state NOLs and credits will be evaluated on a quarterly basis to determine if there are any significant events or any prudent and feasible tax planning strategies that would affect the Company’s ability to realize these deferred tax assets.

The Company’s unrecognized tax benefits related to uncertain tax positions were $74 million, $24 million and $9 million at 2016, 2015 and 2014, respectively. Included in the ending balance at 2016 is $20 million that would affect the Company’s effective tax rate if recognized. The changes in unrecognized tax benefits relating to settlements with taxing authorities, unrecognized tax benefits as a result of tax positions taken during a prior period and unrecognized tax benefits relating from a lapse of the statute of limitations were immaterial during 2016, 2015 and 2014. The Company does not expect significant increases or decreases in their unrecognized tax benefits within the next 12 months.

There are no material amounts included in the balance at December 31, 2016 for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

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.