NOTE 14. INCOME TAXES

The tax effects of principal temporary differences between the carrying amounts of assets and liabilities and their tax bases are summarized in the following table. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income in the appropriate jurisdiction and foreign source income to realize deferred tax assets, net of valuation allowances. In arriving at this conclusion, we considered the profit before tax generated for the years 2014 through 2016, as well as future reversals of existing taxable temporary differences and projections of future profit before tax and foreign source income.

We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed quarterly. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard for all periods, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability and foreign source income, the duration of statutory carryforward periods, and our experience with operating loss and tax credit carryforward expirations. A history of cumulative losses is a significant piece of negative evidence used in our assessment. If a history of cumulative losses is incurred for a tax jurisdiction, forecasts of future profitability are not used as positive evidence related to the realization of the deferred tax assets in the assessment.

As of December 31, 2016 and 2015, we had $760.6 million and $863.1 million, respectively, of state net operating loss (“NOL”) carryforwards expiring between 2017 and 2036. In addition, as of December 31, 2016 and 2015, we had $149.0 million and $202.9 million, respectively, of foreign NOL carryforwards. As of December 31, 2016, $88.4 million of our foreign NOL carryforwards were available for carryforward indefinitely and $60.6 million expire between 2017 and 2034. As of December 31, 2016, we also had U.S. foreign tax credit (“FTC”) carryforwards of $22.1 million on a gross basis, $19.3 million when netted with unrecognized tax benefits that expire between 2017 and 2022. U.S. FTC carryforwards as of December 31, 2015 were $27.1 million on a gross basis, $12.3 million when netted with unrecognized tax benefits.

As of December 31, 2016 and 2015, we had valuation allowances of $60.5 million and $69.1 million, respectively. As of December 31, 2016, our valuation allowance consisted of $0.8 million for federal deferred tax assets related to FTC carryforwards, $16.5 million for state deferred tax assets, primarily operating loss carryforwards, and $43.2 million for foreign deferred tax assets, primarily foreign operating loss carryforwards. The valuation allowance for foreign deferred tax assets of $43.2 million as of December 31, 2016 decreased $12.1 million in comparison to December 31, 2015 primarily a result of additional foreign income in 2016. The valuation allowance for state deferred tax assets of $16.5 million as of December 31, 2016 increased $2.7 million in comparison to December 31, 2015 due to effects from the separation of AFI.

We estimate we will need to generate future federal taxable income of $63.1 million, including foreign source income of $52.9 million, to fully realize the FTCs before they expire in 2022. We estimate we will need to generate future taxable income of approximately $772.7 million for state income tax purposes during the respective realization periods (ranging from 2017 to 2036) in order to fully realize the net deferred income tax assets discussed above.

Our ability to utilize deferred tax assets may be impacted by certain future events, such as changes in tax legislation or insufficient future taxable income prior to expiration of certain deferred tax assets.

	December 31, 2016			December 31, 2015
Deferred income tax assets (liabilities)
Net operating losses	$	71.9		$	83.7
Postretirement benefits		38.1			45.4
Pension benefit liabilities		45.2			74.0
Deferred compensation		17.8			24.2
Foreign exchange unrealized		1.3			18.8
Foreign tax credit carryforwards		19.3			12.3
State tax credit carryforwards		9.1			9.7
Other		16.9			30.4
Total deferred income tax assets		219.6			298.5
Valuation allowances		(60.5	)		(69.1	)
Net deferred income tax assets		159.1			229.4
Intangibles		(211.8	)		(214.3	)
Accumulated depreciation		(51.7	)		(52.5	)
Prepaid pension costs		(18.8	)		-
Inventories		(8.8	)		(7.5	)
Other		(9.1	)		(13.1	)
Total deferred income tax liabilities		(300.2	)		(287.4	)
Net deferred income tax liabilities	$	(141.1	)	$	(58.0	)
Deferred income taxes have been classified in the Consolidated Balance Sheet as:
Deferred income tax assets - current	$	-		$	29.8
Deferred income tax assets - noncurrent		15.4			19.5
Deferred income tax liabilities - current		-			(0.6	)
Deferred income tax liabilities - noncurrent		(156.5	)		(106.7	)
Net deferred income tax liabilities	$	(141.1	)	$	(58.0	)

	2016			2015			2014
Details of taxes
Earnings (loss) from continuing operations before income taxes:
Domestic	$	144.9		$	143.0		$	187.7
Foreign		(18.3	)		(38.2	)		(39.3	)
Elimination of dividends from foreign subsidiaries		17.7			(24.7	)		-
Total	$	144.3		$	80.1		$	148.4

Income tax expense (benefit):
Current:
Federal	$	2.5		$	25.1		$	26.6
Foreign		11.7			5.6			8.1
State		(0.5	)		0.2			1.4
Total current		13.7			30.9			36.1

Deferred:
Federal		22.5			12.7			21.0
Foreign		(2.2	)		(0.5	)		0.1
State		16.4			10.4			12.1
Total deferred		36.7			22.6			33.2

Total income tax expense	$	50.4		$	53.5		$	69.3

We reviewed our position with regards to foreign unremitted earnings and determined that unremitted earnings would continue to be permanently reinvested. Accordingly we have not recorded U.S. income or foreign withholding taxes on approximately $275.9 million of undistributed earnings of foreign subsidiaries that could be subject to taxation if remitted to the U.S. because we currently plan to keep these amounts permanently invested overseas. It is not practicable to calculate the residual income tax which would result if these basis differences reversed due to the complexities of the tax law and the hypothetical nature of the calculations.

	2016			2015			2014
Reconciliation to U.S. statutory tax rate
Continuing operations tax at statutory rate	$	50.5		$	28.0		$	51.9
Increase in valuation allowances on deferred foreign income tax assets		16.2			19.3			18.7
State income tax expense, net of federal benefit		3.8			4.7			4.8
Separation costs		15.1			2.9			-
Permanent book/tax differences		(2.6	)		3.0			(1.5	)
Increase in valuation allowances on deferred domestic income tax assets		0.8			4.1			3.0
Domestic production activities		(3.1	)		(5.1	)		(5.8	)
Tax on foreign and foreign-source income		(3.4	)		-			(0.7	)
Federal statute closure		(15.2	)		-			-
Benefit from write-off of historical tax basis of foreign subsidiary		(13.7	)		-			-
Other		2.0			(3.4	)		(1.1	)
Tax expense at effective rate	$	50.4		$	53.5		$	69.3

As a result of the separation of AFI we incurred costs directly related to the separation transaction. Certain costs incurred to facilitate the transaction are not deductible for federal income tax purposes and result in a permanent difference.

We recognize the tax benefits of an uncertain tax position only if those benefits are more likely than not to be sustained based on existing tax law. Additionally, we establish a reserve for tax positions that are more likely than not to be sustained based on existing tax law, but uncertain in the ultimate benefit to be sustained upon examination by the relevant taxing authorities. Unrecognized tax benefits are subsequently recognized at the time the more likely than not recognition threshold is met, the tax matter is effectively settled or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, whichever is earlier.

We have $86.9 million of Unrecognized Tax Benefits (“UTB”) as of December 31, 2016, $63.1 million ($61.6 million, net of federal benefit) of this amount, if recognized in future periods, would impact the reported effective tax rate.

It is reasonably possible that certain UTB’s may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities. Over the next twelve months we estimate that UTB’s may decrease by $0.1 million related to state statutes expiring and increase by $3.7 million due to uncertain tax positions expected to be taken on domestic tax returns.

We account for all interest and penalties on uncertain income tax positions as income tax expense. We reported $4.0 million of interest and penalty exposure as noncurrent income tax payable in the Consolidated Balance Sheet as of December 31, 2016.

We had the following activity for UTB’s for the years ended December 31, 2016, 2015 and 2014:

	2016			2015			2014
Unrecognized tax benefits balance at January 1,	$	150.6		$	142.6		$	145.2
Gross change for current year positions		2.3			10.4			10.5
Increases for prior period positions		0.2			1.9			2.9
Decrease for prior period positions		(12.8	)		(4.1	)		(14.1	)
Decrease due to settlements and payments		-			-			(1.2	)
Decrease due to statute expirations		(53.4	)		(0.2	)		(0.7	)
Unrecognized tax benefits balance at December 31,	$	86.9		$	150.6		$	142.6

We conduct business globally, and as a result, we file income tax returns in the U.S., various states and international jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world in such major jurisdictions as Australia, Canada, Germany, India, the Netherlands, the United Kingdom and the United States. Generally, we have open tax years subject to tax audit on average of between three years and six years. The audit of our 2009 U.S. income tax return was finalized by the IRS in 2015. The statute of limitations is no longer open for U.S. federal returns before 2013. With few exceptions, the statute of limitations is no longer open for state or non-U.S. income tax examinations for the years before 2011. We have not significantly extended any open statutes of limitation for any major jurisdiction and have reviewed and accrued for, where necessary, tax liabilities for open periods.

	2016		2015		2014
Other taxes
Payroll taxes	$	26.5	$	27.4	$	30.6
Property, franchise and capital stock taxes		6.2		6.4		6.4