Income Taxes

12 Months Ended

Dec. 31, 2015

10. Income Taxes

The significant components of the income tax provision (benefit) were (in millions):


	Year Ended December 31,
	2015			2014			2013
Current	$	20		$	(16	)	$	(22	)
Deferred		(3,014	)		346			(324	)

Income tax provision (benefit)	$	(2,994	)	$	330		$	(346	)

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


	Year Ended December 31,
	2015			2014			2013
Statutory income tax provision (benefit)	$	1,616		$	1,123		$	(763	)
State income tax provision (benefit), net of federal tax effect		72			75			(8	)
Book expenses (benefits) not deductible for tax purposes		57			(1	)		27
Bankruptcy administration expenses		3			95			83
Interest cutback to net operating loss (NOL)		—			—			141
Alternative minimum tax credit refund		—			(24	)		(22	)
Change in valuation allowance		(4,742	)		(1,323	)		717
Tax provision (benefit) resulting from OCI allocation		—			330			(538	)
Other, net		—			55			17

Income tax provision (benefit)	$	(2,994	)	$	330		$	(346	)

The Company provides a valuation allowance for its deferred tax assets, which includes the NOLs, when it is more likely than not that some portion, or all, of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets. As of December 31, 2015, after considering all positive and negative evidence, including the completion of certain critical merger integration milestones as well as the Company’s financial performance, the Company concluded that substantially all of its deferred income tax assets were more likely than not to be realized. Accordingly, the Company reversed the valuation allowance, which resulted in a special $3.0 billion non-cash tax benefit recorded in the consolidated statement of operations for 2015.

For the year ended December 31, 2014, the Company recorded a $330 million tax provision. During 2014, the Company sold its portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, the Company recorded a special non-cash tax provision of $330 million in the second quarter of 2014 that reversed the non-cash tax provision which was recorded in OCI, a subset of stockholders’ equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of the Company’s fuel hedging contracts. In accordance with GAAP, the Company retained the $330 million tax provision in OCI until the last contract was settled or terminated.

For the year ended December 31, 2013, the Company recorded a $346 million tax benefit. This benefit included a $538 million special non-cash income tax benefit from continuing operations. The Company is required to consider all items (including items recorded in OCI) in determining the amount of tax benefit that results from a loss from continuing operations and that should be allocated to continuing operations. As a result, the Company recorded a tax benefit on the loss from continuing operations for the year, which was exactly offset by income tax expense on OCI. However, while the income tax benefit from continuing operations is reported on the income statement, the income tax expense on OCI is recorded directly to accumulated OCI, which is a component of stockholders’ equity. Because the income tax expense on OCI is equal to the income tax benefit from continuing operations, the Company’s net deferred tax position is not impacted by this tax allocation. The 2013 tax benefit was offset in part by a $214 million special tax provision attributable to additional valuation allowance required to reduce deferred tax assets to the amount the Company believed was more likely than not to be realized.

In addition to the changes in the valuation allowance from operations described in the table above, the valuation allowance was also impacted by the changes in the components of accumulated other comprehensive income (loss), described in Note 14. The total decrease in the valuation allowance was $4.8 billion and $197 million in 2015 and 2014, respectively. The total increase in the valuation allowance was $602 million in 2013.

The components of the Company’s deferred tax assets and liabilities were (in millions):


	December 31,
	2015			2014
Deferred tax assets:
Postretirement benefits other than pensions	$	340		$	386
Rent expense		134			180
Alternative minimum tax credit carryforwards		346			346
Operating loss carryforwards		2,558			3,461
Pensions		2,436			2,403
Loyalty program obligation		590			948
Gains from lease transactions		262			207
Reorganization items		57			64
Other		1,200			1,210

Total deferred tax assets		7,923			9,205
Valuation allowance		(22	)		(4,816	)

Net deferred tax assets		7,901			4,389

Deferred tax liabilities:
Accelerated depreciation and amortization		(5,158	)		(4,829	)
Other		(266	)		(98	)

Total deferred tax liabilities		(5,424	)		(4,927	)

Net deferred tax asset (liability)	$	2,477		$	(538	)

At December 31, 2015, the Company had approximately $8.0 billion of gross NOL Carryforwards to reduce future federal taxable income, substantially all of which are expected to be available for use in 2016. The federal NOL Carryforwards will expire beginning in 2023 if unused. These NOL Carryforwards include an unrealized tax benefit of $1.2 billion related to share-based compensation that will be recorded in equity when realized. The Company also had approximately $4.0 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2015, which will expire in years 2016 through 2034 if unused. As of December 31, 2015, the amount of NOL Carryforwards for state income tax purposes that will expire, if unused, in 2016 is $136 million. The Company’s ability to deduct its NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred. The Company experienced an ownership change in connection with its emergence from the Chapter 11 Cases, and US Airways Group experienced an ownership change in connection with the Merger. As a result of the Merger, US Airways Group is now included in the AAG consolidated federal and state income tax returns. The general limitation rules of Section 382 for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. The Company elected to be covered by certain special rules for federal income tax purposes that permitted approximately $9.0 billion (with $6.6 billion of unlimited NOL still remaining at December 31, 2015) of its federal NOL Carryforwards to be utilized without regard to the Section 382 annual limitation rules unless a second ownership change occurred on or before December 9, 2015. No second ownership change occurred within that period. Substantially all of the Company’s remaining federal NOL Carryforwards (attributable to US Airways Group) are subject to limitation under Section 382; however, the Company’s ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation. Similar limitations may apply for state income tax purposes. The Company’s ability to utilize any new NOL Carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs. Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three-year period can potentially limit a company’s future use of NOLs and tax credits. See Part I, Item 1A. Risk Factors– “Our ability to utilize our NOL Carryforwards may be limited” for unaudited additional discussion of this risk.

At December 31, 2015, the Company had an Alternative Minimum Tax credit carryforward of approximately $341 million available for federal income tax purposes, which is available for an indefinite period.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company’s 2012 through 2014 tax years are still subject to examination by the Internal Revenue Service. Various state and foreign jurisdiction tax years remain open to examination and the Company is under examination, in administrative appeals, or engaged in tax litigation in certain jurisdictions. The Company believes that the effect of any assessments will be immaterial to its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which changes how deferred taxes are classified on the balance sheet. The update eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent on the balance sheet. Deferred tax liabilities and assets are now required to be classified as noncurrent on the balance sheet. Entities have the choice to apply ASU 2015-17 either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The update is effective for annual and interim periods in fiscal years beginning after December 15, 2016. The Company early adopted this standard during the fourth quarter 2015, utilizing retrospective application as permitted. As such, certain prior period amounts have been reclassified to conform to the current presentation. As a result, the Company reclassified $361 million of current deferred income tax assets within prepaid expenses and other to reduce deferred income taxes within other liabilities on the consolidated balance sheet as of December 31, 2014.

American Airlines, Inc. [Member]

Income Taxes

8. Income Taxes

The significant components of the income tax provision (benefit) were (in millions):


	Year Ended December 31,
	2015			2014			2013
Current	$	15		$	(24	)	$	(30	)
Deferred		(3,467	)		344			(324	)

Income tax provision (benefit)	$	(3,452	)	$	320		$	(354	)

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


	Year Ended December 31,
	2015			2014			2013
Statutory income tax provision (benefit)	$	1,635		$	1,144		$	(725	)
State income tax provision (benefit), net of federal tax effect		71			81			(18	)
Book expenses not deductible for tax purposes		55			4			25
Bankruptcy administration expenses		3			86			82
Interest cutback to net operating loss (NOL)		—			—			53
Alternative minimum tax credit refund		—			(29	)		(30	)
Change in valuation allowance		(5,216	)		(1,285	)		780
Tax provision (benefit) resulting from OCI allocation		—			328			(538	)
Other, net		—			(9	)		17

Income tax provision (benefit)	$	(3,452	)	$	320		$	(354	)

American provides a valuation allowance for its deferred tax assets, which includes the NOLs, when it is more likely than not that some portion, or all, of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. American considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets. As of December 31, 2015, after considering all positive and negative evidence, including the completion of certain critical merger integration milestones as well as American’s financial performance, American concluded that substantially all of its deferred income tax assets were more likely than not to be realized. Accordingly, American reversed the valuation allowance, which resulted in a special $3.5 billion non-cash tax benefit recorded in the consolidated statement of operations for 2015.

For the year ended December 31, 2014, American recorded a $320 million tax provision. During 2014, American sold its portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, American recorded a special non-cash tax provision of $328 million in the second quarter of 2014 that reversed the non-cash tax provision which was recorded in OCI, a subset of stockholder’s equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of American’s fuel hedging contracts. In accordance with GAAP, American retained the $328 million tax provision in OCI until the last contract was settled or terminated.

For the year ended December 31, 2013, American recorded a $354 million tax benefit. This benefit included a $538 million special non-cash income tax benefit from continuing operations. American is required to consider all items (including items recorded in OCI) in determining the amount of tax benefit that results from a loss from continuing operations and that should be allocated to continuing operations. As a result, American recorded a tax benefit on the loss from continuing operations for the year, which was exactly offset by income tax expense on OCI. However, while the income tax benefit from continuing operations is reported on the income statement, the income tax expense on OCI is recorded directly to accumulated OCI, which is a component of stockholder’s equity. Because the income tax expense on OCI is equal to the income tax benefit from continuing operations, American’s net deferred tax position is not impacted by this tax allocation. The 2013 tax benefit was offset in part by a $214 million special tax provision attributable to additional valuation allowance required to reduce deferred tax assets to the amount American believed was more likely than not to be realized.

In addition to the changes in the valuation allowance from operations described in the table above, the valuation allowance was also impacted by the changes in the components of accumulated other comprehensive income (loss), described in Note 12. The total decrease in the valuation allowance was $5.2 billion and $525 million in 2015 and 2014, respectively. The total increase in the valuation allowance was $221 million in 2013.

The components of American’s deferred tax assets and liabilities were (in millions):


	December 31,
	2015			2014
Deferred tax assets:
Postretirement benefits other than pensions	$	340		$	379
Rent expense		134			121
Alternative minimum tax credit carryforwards		458			458
Operating loss carryforwards		2,818			3,737
Pensions		2,420			2,394
Loyalty program obligation		590			948
Gains from lease transactions		261			208
Reorganization items		57			64
Other		1,123			1,172

Total deferred tax assets		8,201			9,481
Valuation allowance		(14	)		(5,196	)

Net deferred tax assets		8,187			4,285

Deferred tax liabilities:
Accelerated depreciation and amortization		(5,011	)		(4,579	)
Other		(244	)		(242	)

Total deferred tax liabilities		(5,255	)		(4,821	)

Net deferred tax asset (liability)	$	2,932		$	(536	)

At December 31, 2015, American had approximately $8.8 billion of gross NOL Carryforwards to reduce future federal taxable income, substantially all of which are expected to be available for use in 2016. American is a member of AAG’s consolidated federal and certain state income tax returns. The amount of federal NOL Carryforwards available in those returns is $8.0 billion, substantially all of which is expected to be available for use in 2016. The federal NOL Carryforwards will expire beginning in 2023 if unused. These NOL Carryforwards include an unrealized tax benefit of $1.2 billion related to share-based compensation that will be recorded in equity when realized. American also had approximately $3.7 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2015, which will expire in years 2016 through 2034 if unused. As of December 31, 2015, the amount of NOL Carryforwards for state income tax purposes that will expire, if unused, in 2016 is $106 million. American’s ability to deduct its NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred. American experienced an ownership change in connection with its emergence from the Chapter 11 Cases, and US Airways Group experienced an ownership change in connection with the Merger. As a result of the Merger, US Airways Group is now included in the AAG consolidated federal and state income tax returns. The general limitation rules of Section 382 for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. American elected to be covered by certain special rules for federal income tax purposes that permitted approximately $9.5 billion (with $7.3 billion of unlimited NOL still remaining at December 31, 2015) of its federal NOL Carryforwards to be utilized without regard to the Section 382 annual limitation rules unless a second ownership change occurred on or before December 9, 2015. No second ownership change occurred within that period. Substantially all of American’s remaining federal NOL Carryforwards (attributable to US Airways Group) are subject to limitation under Section 382; however, American’s ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation. Similar limitations may apply for state income tax purposes. American’s ability to utilize any new NOL Carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs. Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three-year period can potentially limit a company’s future use of NOLs and tax credits. See Part I, Item 1A. Risk Factors – “Our ability to utilize our NOL Carryforwards may be limited” for unaudited additional discussion of this risk.

At December 31, 2015, American had an Alternative Minimum Tax credit carryforward of approximately $458 million available for federal income tax purposes, which is available for an indefinite period.

American files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. American’s 2012 through 2014 tax years are still subject to examination by the Internal Revenue Service. Various state and foreign jurisdiction tax years remain open to examination and American is under examination, in administrative appeals, or engaged in tax litigation in certain jurisdictions. American believes that the effect of any assessments will be immaterial to its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which changes how deferred taxes are classified on the balance sheet. The update eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent on the balance sheet. Deferred tax liabilities and assets are now required to be classified as noncurrent on the balance sheet. Entities have the choice to apply ASU 2015-17 either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The update is effective for annual and interim periods in fiscal years beginning after December 15, 2016. American early adopted this standard during the fourth quarter 2015, utilizing retrospective application as permitted. As such, certain prior period amounts have been reclassified to conform to the current presentation. As a result, American reclassified $314 million of current deferred income tax assets within prepaid expenses and other to reduce deferred income taxes within other liabilities on the consolidated balance sheet as of December 31, 2014.