Income Taxes

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act, or the 2017 Tax Act. The 2017 Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits and deductions. For businesses, the 2017 Tax Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21%. The provisional effect on deferred tax assets and liabilities of the change in tax rates was recognized in earnings in the period ended December 31, 2017, which was when the change was enacted. As part of the 2017 Tax Act's change to a quasi-territorial system, a transition tax was imposed on our accumulated foreign earnings, partially offset by foreign tax credits, which was also recognized in the period ending December 31, 2017. The 2017 Tax Act made significant changes to how foreign tax credits may be realized to offset future tax liabilities. Further clarity may change our anticipated realization of our foreign tax credits. In addition, we may make an election to forgo the use of net operating losses, or NOLs, to offset the impact of the transition tax as allowed under the 2017 Tax Act.

Due to the timing of the enactment and the complexity involved in applying the provisions of the 2017 Tax Act, we have made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we collect and prepare necessary data, and interpret the 2017 Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts.

The 2017 Tax Act also repealed the corporate alternative minimum tax, or AMT, for tax years beginning January 1, 2018, and provides that existing AMT credit carryovers are refundable beginning in 2018. We have approximately $32 million of AMT credit carryovers, net of our estimate of anticipated sequestration reduction, that are expected to be refunded by 2022. As of December 31, 2017, we recorded a $12 million receivable, which is included in "Income taxes receivable" on our consolidated balance sheet.

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



(millions)	2017		2016		2015
U.S.	$	272	$	201	$	152
Foreign	63		73		84
Total	$	335	$	274	$	236

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



(millions)	2017			2016		2015
Current:
Federal	$	(21	)	$	—	$	—
Foreign	2			5		12
State	2			1		1
Total current	$	(17	)	$	6	$	13
Deferred:
Federal	$	243		$	41	$	(631	)
Foreign	—			2		(4		)
State	12			14		(118		)
Total deferred	$	255		$	57	$	(753	)
Total	$	238		$	63	$	(740	)

For our continuing operations, differences between actual provisions for income taxes and provisions for income taxes at the U.S. federal statutory rate (35%), prior to changes under the 2017 Tax Act, were as follows:



(millions)	2017			2016			2015
Taxes on income from continuing operations at U.S. federal statutory rate	$	117		$	96		$	82
Foreign earnings subject to different tax rates ^(a)	3			(3		)	(3		)
State income tax, net of federal benefit	9			10			8
Change in valuation allowance	—			—			(827		)
Income from equity method investments^(b)	(21		)	(17		)	(16		)
Law changes ^(c)	145			—			—
Prior year return adjustments	(7		)	—			—
Benefits from unrecognized tax positions	—			—			(6		)
Foreign tax credits	—			(21		)	—
Tax expense on distribution of foreign earnings	—			—			20
Other, net	(8		)	(2		)	2
Provision for income tax expense (benefit)	$	238		$	63		$	(740	)
Effective income tax rate	71.0		%	22.9		%	(313.6		)%


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


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

(c)

The impact of the 2017 Tax Act included the transition tax on deferred foreign earnings, net of foreign tax credits, of $9 million, an increase in the valuation allowance related to foreign tax credits of $106 million, an increase in the valuation allowance of our state NOLs due to the change in federal benefit related to those assets of $18 million, anticipated sequestration of our AMT credits of $3 million and the impact of the corporate rate change on deferred tax assets and liabilities of $9 million.

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



	As of December 31,
(millions)	2017			2016
Deferred Tax Assets:
Net operating loss and tax credit carryforwards	$	477		$	599
Pension and postretirement benefits	86			112
Reserves not deductible until paid	14			20
Self insurance	2			2
Capitalized interest	7			13
Inventories	4			6
Share-based compensation	14			28
Other	7			4
Deferred tax assets before valuation allowance	611			784
Valuation allowance	(175		)	(51		)
Total deferred tax assets	$	436		$	733
Deferred Tax Liabilities:
Property, plant and equipment	153			245
Other	—			—
Total deferred tax liabilities	$	153		$	245
Net deferred tax assets	$	283		$	488

During 2017, we recorded an increase in the valuation allowance against our deferred tax assets of $124 million. The increase was primarily related to law changes under the 2017 Tax Act, including the federal rate change, from 35% to 21%, and the ability to realize foreign tax credits.

As of December 31, 2017, we had net deferred tax assets of $283 million, which included a valuation allowance of $175 million. The components of the valuation allowance relate to certain state NOL carryforwards and foreign tax credit carryforwards that we anticipate will not be used prior to their expiration. Our ability to realize our deferred tax assets, including our foreign tax credit carryforwards, is subject to further clarification of the 2017 Tax Act. As a result, the actual impact on the realizability of our net deferred tax assets may vary from the estimated amount due to uncertainties in our preliminary assessment and estimate.

As of December 31, 2017, we had federal NOL carryforwards of approximately $477 million that are available to offset future federal taxable income and will expire in the years 2030 through 2032. In addition, as of that date, we had federal AMT credit carryforwards of approximately $20 million that are available to reduce future regular federal income taxes with the full benefit being realized by 2022 as described in the 2017 Tax Act. We have foreign tax credit carryforwards of $223 million that are available to offset future federal taxable income and expire in the years 2022 through 2027. The foreign tax credits are attributable to tax planning strategies to optimize foreign tax credit utilization and management’s intention to amend its tax returns for the tax years 2012-2013 in order to claim credits for previously deducted foreign tax. In 2017, additional foreign tax credits were attributed to the transition tax as enacted by the 2017 Tax Act. The calculation of the foreign tax credit carryforwards and our ability to use them in the future is based on currently available information and is subject to revaluation as further clarification on the new law is available. In order to fully realize the U.S. federal net deferred tax assets, taxable income of approximately $1.663 billion would need to be generated during the period before their expiration based on our current interpretation of the 2017 Tax Act.

As of December 31, 2017, we had a deferred tax asset of $169 million related to state NOLs and tax credit carryforwards. The NOLs will expire if unused in years 2018 through 2036. 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.

In 2016, we recorded a decrease in the valuation allowance against our deferred tax assets of $19 million which was related to the expiration of state Net Operating Loss (NOL) carryforwards.

In 2015, we reversed $731 million of our valuation allowance. We considered all positive and negative evidence and gave more weight to evidence that was objective in nature as compared to subjective evidence. Significant weight was 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 and had five consecutive quarters of domestic pre-tax earnings. The recent domestic pre-tax operating earnings was 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 was the appropriate time to reverse a significant portion of the 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, 2017, our annual U.S. federal NOL utilization would have been limited to approximately $107 million per year.

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



(millions)	2017			2016			2015
Balance as of January 1	$	15		$	18		$	22
Tax positions related to the current period:
Gross increase	—			—			4
Gross decrease	—			—			—
Tax positions related to prior periods:
Gross increase	—			—			—
Gross decrease	(1		)	(3		)	(1		)
Settlements	—			—			(6		)
Lapse of statutes of limitations	(2		)	—			(1		)
Balance as of December 31	$	12		$	15		$	18

We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income taxes (benefit). We do not have amounts related to interest expense and penalties recognized on our consolidated balance sheets as of December 31, 2017 and had $2 million as of December 31, 2016. We recorded no interest and penalties in our consolidated statements of income in each of the three years ended December 31, 2017, 2016 and 2015. The total amounts of unrecognized tax benefit that, if recognized, would affect our effective tax rate were $12 million, $14 million and $17 million for 2017, 2016 and 2015, respectively.

Our federal income tax return for 2014 is currently under examination by the Internal Revenue Service, or IRS. Our federal income tax returns for 2008 and prior years have been examined by the IRS. The U.S. federal statute of limitations remains open for 2006-2012 and 2014 to the present. We are under examination in various U.S. state and foreign jurisdictions. We do not believe our gross unrecognized tax benefits will change as a result of the conclusion of these examinations. There are statutes, however, that are expiring within the next 12 months that could result in recognition of approximately $2 million of tax benefit. 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. It is not practical to calculate the residual income tax which would result if basis differences reversed due to the complexities of the tax law impacted by the 2017 Tax Act and the hypothetical nature of the calculations. Our reevaluation of our permanently reinvested assertion is subject to further clarification of the 2017 Tax Act, the impact of which cannot be estimated at this time.