Income Taxes

12 Months Ended

Dec. 31, 2019

On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law. The Act reduces the U.S. corporate income tax rate from a maximum of 35% to 21% for all corporations, effective January 1, 2018, and makes certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items.

As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we re-measured our net deferred tax liabilities at December 31, 2017 and recognized a provisional tax benefit of $555 million in our consolidated statement of operations for the year ended December 31, 2017. Upon completion of our re-measurement during 2018 there was no material change to the provisional amount recorded in 2017.

The components of the income tax expense (benefit) from continuing operations are as follows:



	Years Ended December 31,
	2019		2018		2017
	(Dollars in millions)
Income tax expense (benefit):
Current:
Federal and foreign	$	415	(39	)	777
State and local	126		31		130
Total current	541		(8	)	907
Deferred:
Federal and foreign	95		408		(736	)
State and local	5		94		(37	)
Total deferred	100		502		(773	)
Income tax expense	$	641	494		134

The effective income tax rate for continuing operations differs from the statutory tax rate as follows:



	Years Ended December 31,
	2019		2018		2017
	(in percent)
Effective income tax rate:
Federal statutory income tax rate	21.0	%	21.0	%	35.0	%
State income taxes-net of federal effect	4.1	%	6.1	%	3.4	%
Tax reform	—	%	—	%	(31.0	)%
Accounting method changes	—	%	(3.9	)%	—	%
Other	0.9	%	(0.3	)%	0.1	%
Effective income tax rate	26.0	%	22.9	%	7.5	%

The effective rate for the year ended December 31, 2018, was favorably impacted by a tax benefit of $83 million generated by filing tax accounting method changes that accelerated significant tax deductions. The effective tax rate for the year ended December 31, 2017 reflects the benefit of $555 million from the re-measurement of deferred taxes as noted above.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:



	As of December 31,
	2019			2018
	(Dollars in millions)
Deferred tax assets and liabilities:
Deferred tax liabilities:
Property, plant and equipment	$	(1,256	)	(1,026	)
Intangibles assets	(280		)	(419	)
Total deferred tax liabilities	(1,536		)	(1,445	)
Deferred tax assets:
Payable to affiliate due to post-retirement benefit plan participation	326			297
Other	20			58
Gross deferred tax assets	346			355
Less valuation allowance on deferred tax assets	(8		)	(8	)
Net deferred tax assets	338			347
Net deferred tax liabilities	$	(1,198	)	(1,098	)

At December 31, 2019, we have established a valuation allowance of $8 million as it is not more likely than not that this amount of deferred tax assets will be realized.

With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2012. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carryforwards are available.

A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 to December 31 for 2019 and 2018 are as follows:



	2019			2018
	(Dollars in millions)
Unrecognized tax benefits at January 1,	$	433		—
Increase due to tax positions taken in a prior year	—			433
Decrease due to tax positions taken in a prior year	(19		)	—
Unrecognized tax benefits at December 31,	$	414		433

The total amount of unrecognized tax benefits (including interest and net of federal benefit) that, if recognized, would impact the effective income tax rate was $432 million and $435 million as of December 31, 2019 and 2018, respectively.

Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented before related tax benefits) of approximately $40 million and $21 million as of December 31, 2019 and 2018, respectively.

Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may not change in the next 12 months. The actual amount of changes, if any, will depend on future developments and events, many of which are outside our control.

We paid $539 million and $907 million related to income taxes for the years ended December 31, 2019 and 2017, respectively and received $8 million from QSC related to income taxes in the year ended December 31, 2018.