Income Taxes

Accounting Policy

The effect on the income tax provision and deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We have provided a valuation allowance on certain federal, foreign, and state net operating losses (“NOLs”), and other federal, state, and foreign deferred tax assets. NOLs and other federal, state, and foreign deferred tax assets were not deemed realizable based upon near term estimates of future taxable income.

We classify reserves for tax uncertainties within accrued expenses and deferred credits and other in our Consolidated Balance Sheets, separate from any related income tax payable, which is also reported within accrued expenses, or deferred income taxes. Reserve amounts relate to any potential income tax liabilities resulting from uncertain tax positions, as well as potential interest or penalties associated with those liabilities.

We file income tax returns, including returns for our subsidiaries, with federal, state, and foreign jurisdictions, except for CGP LLC, which is filed as part of a separate tax filing group. We are under regular and recurring audit by the Internal Revenue Service (“IRS”) and various state taxing authorities on open tax positions, and it is possible that the amount of the liability for unrecognized tax benefits could change during the next 12 months.

Balances

Components of Income/(Loss) Before Income Taxes from Continuing Operations

	Years Ended December 31,
(In millions)	2014			2013			2012
United States	$	(3,351	)	$	(4,446	)	$	(1,889	)
Outside of the U.S.	134			196			85
	$	(3,217	)	$	(4,250	)	$	(1,804	)

Income Tax (Benefit)/Provision

	Years Ended December 31,
(In millions)	2014			2013			2012
United States
Current
Federal	$	—		$	(7	)	$	(69	)
State	(110		)	(83		)	6
Deferred
Federal	(593		)	(1,388		)	(572		)
State	109			(51		)	(76		)
Outside of the U.S.
Current	56			29			13
Deferred	(5		)	(17		)	(3		)
	$	(543	)	$	(1,517	)	$	(701	)

Allocation of Income Tax (Benefit)/Provision

	Years Ended December 31,
(In millions)	2014			2013			2012
Income tax (benefit)/provision applicable to:
Loss from continuing operations, before income taxes	$	(543	)	$	(1,517	)	$	(701	)
Discontinued operations	(21		)	(32		)	(120		)
Accumulated other comprehensive income/(loss)	—			16			11
Additional paid in capital	—			15			(2		)

Effective Income Tax Rate Reconciliation

	Years Ended December 31,
	2014		2013		2012
Statutory tax rate	35.0	%	35.0	%	35.0	%
Increases/(decreases) in tax resulting from:
State taxes, net of federal tax benefit	1.7		6.6		4.0
Valuation allowance	(5.9	)	(8.9	)	(2.0	)
Foreign income taxes	(0.1	)	0.1		(0.1	)
Goodwill	(9.3	)	(0.4	)	(1.7	)
Stock-based compensation	(0.8	)	(0.2	)	(0.2	)
Officers’ life insurance/insurance proceeds	—		—		0.2
Acquisition and integration costs	(0.4	)	0.1		(0.2	)
Reserves for uncertain tax positions	0.3		—		3.9
Sale of stock of subsidiary	(0.5	)	—		—
Capital loss tax benefit	—		4.2		—
Disallowed losses on sale to related party	(3.9	)	(0.3	)	—
Deferred tax adjustment upon contribution of CIE to CGP LLC	—		(0.5	)	—
Noncontrolling interests	1.0		—		—
Other	(0.2	)	—		—
Effective tax rate	16.9	%	35.7	%	38.9	%

Temporary Differences Resulting in Deferred Tax Assets and Liabilities

(In millions)	2014		2013
Deferred tax assets:
State net operating losses	$	294	$	253
Foreign net operating losses	23		24
Federal net operating loss	1,466		1,281
Compensation programs	145		142
Allowance for doubtful accounts	89		77
Self-insurance reserves	16		17
Accrued expenses	52		45
Federal tax credits	52		35
Federal indirect tax benefits of uncertain state tax positions	1		27
Investment in CGP LLC	—		23
Investments in non-consolidated affiliates	28		39
Capital loss carryover	134		136
Deferred revenue	93		41
Other	—		10
Subtotal	2,393		2,150
Less: valuation allowance	970		740
Total deferred tax assets	1,423		1,410

Deferred tax liabilities:
Depreciation and other property-related items	1,143		1,189
Deferred cancellation of debt income and other debt-related items	1,508		1,834
Investment in CGP LLC	21		—
Intangibles	998		1,118
Prepaid expenses	28		25
Other	2		—
Total deferred tax liabilities	3,700		4,166
Net deferred tax liability	$	2,277	$	2,756

Deferred Tax Assets and Liabilities Presented in our Consolidated Balance Sheets

(In millions)	2014		2013
Assets:
Deferred income taxes (current)	$	5	$	9
Deferred income taxes (non-current)	14		—
Total deferred tax assets	19		9
Liabilities:
Deferred income taxes (current)	$	217	$	289
Deferred income taxes (non-current)	2,079		2,476
Net deferred tax liability	$	2,277	$	2,756

As of December 31, 2014 and 2013, we had federal NOL carryforwards of $4.2 billion and $3.7 billion, respectively. These NOLs will begin to expire in 2029. The federal NOL carryforwards per the income tax returns filed included unrecognized tax benefits taken in prior years. In accordance with US GAAP, the federal NOL carryforwards reflected in the income tax returns, as filed, are larger than the NOLs for which a deferred tax asset is recognized for financial statement purposes. In addition, we had federal general business tax credits and research tax credit carryforwards of $39 million which will begin to expire in 2029. We believe that it is more likely than not that the benefit from the federal NOL and tax credit carryforwards for the CEC tax consolidated group will not be realized. As a result, a valuation allowance has been established for our federal NOL carryforwards and tax credits carryforwards deferred tax assets as of December 31, 2014. No federal valuation allowance has been established for CGP LLC’s federal NOL and tax credits carryforwards.

As of December 31, 2014, we had a federal capital loss carryforward of $364 million, which will expire in 2018. We do not project having sufficient capital gains in future years in order to utilize these capital loss carryovers. As such, a full valuation allowance has been provided for the capital loss carryover as of December 31, 2014.

NOL carryforwards for our domestic subsidiaries for state income taxes were $8.2 billion and $6.5 billion as of December 31, 2014 and 2013, respectively. We believe that it is more likely than not that the benefit from certain state NOL carryforwards will not be realized. Accordingly, we have provided a full valuation allowance on the deferred tax assets relating to these NOL carryforwards and other state deferred tax assets which will not more likely than not be realized. We anticipate that state NOLs in the amount of $17 million will expire in 2015. The remainder of the state NOLs will expire between 2016 and 2034.

NOL carryforwards of our foreign subsidiaries were $110 million and $119 million as of December 31, 2014 and 2013, respectively. The majority of these foreign NOLs have an indefinite carryforward period, but are subject to a full valuation allowance as we do not believe these assets meet the “more likely than not” criteria for recognition.

As of December 31, 2014 and 2013, we had foreign tax credit carryforwards of $14 million and $7 million, respectively. Foreign tax credit carryforwards of $2 million are projected to expire unused in 2015 as we do not project to have sufficient future foreign source income to utilize this carryforward. As such, we have provided a valuation allowance against this foreign tax credit carryforward deferred tax asset of $2 million. The additional $12 million of foreign tax credit carryforwards are from amounts generated in 2014 by CGP LLC and we project to have sufficient future foreign source income to utilize this carryforward.

We do not provide for deferred taxes on the excess of the financial reporting over the tax basis in our investments in foreign subsidiaries that are essentially permanent in duration. That excess is estimated to total $118 million as of December 31, 2014. The additional deferred taxes, including foreign withholding taxes, that have not been provided is estimated at $13 million as of December 31, 2014.

Reconciliation of Unrecognized Tax Benefits

	Years Ended December 31,
(In millions)	2014			2013			2012
Balance at beginning of year	$	142		$	333		$	532
Additions based on tax positions related to the current year	20			1			10
Additions for tax positions of prior years	—			7			3
Reductions for tax positions for prior years	(2		)	(50		)	(204		)
Settlements	—			(82		)	(8		)
Expiration of statutes	(80		)	(67		)	—
Balance at end of year	$	80		$	142		$	333

We classify reserves for tax uncertainties within accrued expenses and deferred credits and other in our Consolidated Balance Sheets, separate from any related income tax payable or deferred income taxes. Reserve amounts relate to any potential income tax liabilities resulting from uncertain tax positions as well as potential interest or penalties associated with those liabilities. The reduction related to the expiration of statutes primarily relates to state statute of limitations for numerous tax years. We recognized tax benefits through the reduction of tax expense of approximately $80 million related to the movement in uncertain tax positions.

We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense. We reduced our accrual by approximately $62 million, $10 million and $8 million during 2014, 2013 and 2012, respectively. In total, we have accrued balances of approximately $1 million, $63 million, and $73 million for the payment of interest and penalties at December 31, 2014, 2013 and 2012, respectively. Included in the balances of unrecognized tax benefits as of December 31, 2014, 2013 and 2012, are approximately $48 million, $91 million, and $219 million, respectively, of unrecognized tax benefits that, if recognized, would impact the effective tax rate.

We file income tax returns, including returns for our subsidiaries, with federal, state, and foreign jurisdictions. We are subject to exam by various state and foreign tax authorities. As of December 31, 2014, the tax years prior to 2010 are not subject to examination for U.S. tax purposes. As of December 31, 2014, the tax years prior to 2010 are no longer subject to examination for foreign and state income tax purposes as the statutes of limitations have lapsed.

We believe that it is reasonably possible that the unrecognized tax benefits liability will not materially change within the next 12 months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a favorable impact on earnings.