Income Taxes

Income from continuing operations before income taxes consisted of the following:



(millions)	2015		2014		2013
U.S.	$	178	$	27	$	17
Foreign	84		19		42
Total	$	262	$	46	$	59

Income tax expense (benefit) on continuing operations consisted of the following:



(millions)	2015			2014		2013
Current:
Federal	$	—		$	—	$	—
Foreign	12			2		10
State	1			1		1
	13			3		11
Deferred:
Federal	(621		)	—		(2		)
Foreign	(4		)	4		2
State	(117		)	—		—
	(742		)	4		—
Total	$	(729	)	$	7	$	11

For our continuing operations, differences between actual provisions for income taxes and provisions for income taxes at the U.S. federal statutory rate (35%) were as follows:



(millions)	2015			2014			2013
Taxes on income from continuing operations at U.S. federal statutory rate	$	92		$	16		$	21
Foreign earnings subject to different tax rates ^(a)	(3		)	16			(6		)
State income tax, net of federal benefit	9			1			1
Change in valuation allowance	(827		)	(9		)	(8		)
Income from equity method investments^(b)	(16		)	(12		)	—
Withholding taxes	—			2			6
Other, net	2			(1		)	(3		)
Tax release from AOCI	—			(2		)	—
Gain on deconsolidation	—			(7		)	—
Benefits from unrecognized tax positions	(6		)	—			—
Tax benefit not realized on pension loss	—			3			—
Tax on distribution of foreign earnings	20			—			—
Provision for income tax expense	$	(729	)	$	7		$	11
Effective income tax rate	(277.7		)%	15.3		%	18.6		%


(a)	Foreign earnings subject to different tax rates includes amounts related to impairments and other charges associated with our GTL business.


(b)	Included in income from equity method investments are taxes associated with that income. These taxes, which are predominately foreign statutory rates, are at rates that are lower than the U.S. federal statutory rate.

Significant components of deferred tax assets and liabilities as of December 31 were as follows:



(millions)	2015			2014
Deferred Tax Assets:
Net operating loss and tax credit carryforwards	$	779		$	944
Pension and postretirement benefits	150			196
Goodwill and other intangible assets	24			29
Reserves not deductible until paid	29			47
Self insurance	11			15
Capitalized interest	13			15
Inventories	8			8
Share-based compensation	33			37
Other	5			11
Deferred tax assets before valuation allowance	1,052			1,302
Valuation allowance	(75		)	(1,023		)
Total deferred tax assets	$	977		$	279
Deferred Tax Liabilities:
Property, plant and equipment	254			278
Other	—			—
Total deferred tax liabilities	254			278
Net deferred tax assets	$	723		$	1

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required if, based on all 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 at each reporting period. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more-likely-than-not standard, 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, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused and tax planning strategies.

A history of cumulative losses for a certain threshold period is a significant form of negative evidence used in the assessment, and we are required to have a policy regarding the duration of the threshold period. We have a policy of four years as our threshold period for cumulative losses.

In determining the need for the valuation allowance, we considered all positive and negative evidence. We give more weight to evidence that is objective in nature as compared to subjective evidence. Significant weight is given to evidence that directly relates to our current financial performance. As of December 31, 2015, we emerged from a four-year cumulative pre-tax loss. In addition to meeting this threshold, there have been five consecutive quarters of domestic pre-tax earnings amounting to $194 million. The recent domestic pre-tax operating earnings is a significant, principal piece of positive evidence, which was weighed with the underlying momentum in the business, and generally improved market and economic conditions. Other evidence included strategic actions taken by management to lower costs and our expected utilization of deferred tax assets. All of this positive evidence lead to the determination that December 31, 2015 is the appropriate time to reverse a significant portion of the valuation allowance.

During the current year, we recorded a decrease in the valuation allowance against our deferred tax assets of $948 million as of December 31, 2015. Of this decrease, $731 million was related to our evaluation for the need for a valuation allowance against our deferred tax assets and determination that it was more likely than not that most of our deferred tax assets would be realized. In addition, the remaining $217 million decrease included the decrease in the underlying deferred tax assets based upon current earnings and the use of NOL carryforwards offsetting those earnings, the planned repatriation of undistributed foreign earnings for our shipping operations and equity method investment in the Knauf-USG joint venture, the expiration of certain deferred tax assets, the decrease in our deferred tax assets for postretirement liabilities due to changes in AOCI and changes in the federal impact of our state deferred tax assets.

As of December 31, 2015, our deferred tax assets of $723 million were offset by a valuation allowance of $75 million, consisting of $74 million for state deferred tax assets and $1 million for foreign deferred tax assets. The components of the valuation allowance remaining primarily relate to certain state Net Operating Loss (“NOL”) carryforwards that we anticipate will not be used prior to their expiration.

As of December 31, 2015, we had federal NOL carryforwards of approximately $1.755 billion that are available to offset future federal taxable income and will expire in the years 2026 through 2032. In addition, as of that date, we had federal alternative minimum tax credit carryforwards of approximately $40 million that are available to reduce future regular federal income taxes over an indefinite period. In order to fully realize the U.S. federal net deferred tax assets, taxable income of approximately $1.870 billion would need to be generated during the period before their expiration.

As of December 31, 2015, we had a gross deferred tax asset of $230 million related to state NOLs and tax credit carryforwards, of which $27 million will expire in 2016. The remainder will expire if unused in years 2017 through 2035. To the extent that we do not generate sufficient state taxable income within the statutory carryforward periods to utilize the NOL and tax credit carryforwards in these states, they will expire unused. See previous discussion above on the valuation allowance.

We also had NOL and tax credit carryforwards in various foreign jurisdictions in the amount of $1 million as of December 31, 2015, against which we have maintained a valuation allowance.

The Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs if it experiences an “ownership change” which can result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. If we were to experience an ownership change, utilization of our NOLs would be subject to an annual limitation that may be carried over to later years within the allowed NOL carryforward period. Over the entire carryforward period, we may not be able to use all our NOLs due to the aforementioned annual limitation. If an ownership change had occurred as of December 31, 2015, our annual U.S. federal NOL utilization would have been limited to approximately $92 million per year.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



(millions)	2015			2014			2013
Balance as of January 1	$	22		$	22		$	16
Tax positions related to the current period:
Gross increase	4			2			4
Gross decrease	—			—			—
Tax positions related to prior periods:
Gross increase	—			—			2
Gross decrease	(1		)	—			—
Settlements	(6		)	(2		)	—
Lapse of statutes of limitations	(1		)	—			—
Balance as of December 31	$	18		$	22		$	22

We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income taxes (benefit). The total amounts of interest expense and penalties recognized on our consolidated balance sheets were $1 million and $3 million, respectively, as of December 31, 2015 and 2014. The total amounts of interest and penalties recognized in our consolidated statements of operations was zero in 2015, zero for 2014 and zero for 2013. The total amounts of unrecognized tax benefit that, if recognized, would affect our effective tax rate were $17 million for 2015, $5 million for 2014 and $7 million for 2013.

Our federal income tax returns for 2008 and prior years have been examined by the Internal Revenue Service. The U.S. federal statute of limitations remains open for 2006 and later years. We are under examination in various U.S. state and foreign jurisdictions. It is possible that these examinations may be resolved within the next 12 months. We do not believe our gross unrecognized tax benefits will change as a result. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years.

We do not provide for U.S. income taxes on the portion of undistributed earnings of foreign subsidiaries that is intended to be permanently reinvested. The cumulative amount of such undistributed earnings totaled approximately $682 million as of December 31, 2015. These earnings could become taxable in the United States upon the sale or liquidation of these foreign subsidiaries or upon the remittance of dividends. It is not practical 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.