Income Taxes

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 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, 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.

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

	Years Ended December 31,
(In millions)	2015		2014			2013
United States	$	5,779	$	(3,351	)	$	(4,446	)
Outside of the U.S.	225		134			196
	$	6,004	$	(3,217	)	$	(4,250	)

Income Tax Benefit/(Provision)

	Years Ended December 31,
(In millions)	2015			2014			2013
United States
Current
Federal	$	—		$	—		$	7
State	—			110			83
Deferred
Federal	135			593			1,388
State	(10		)	(109		)	51
Outside of the U.S.
Current	(78		)	(56		)	(29		)
Deferred	8			5			17
	$	55		$	543		$	1,517

Allocation of Income Tax Benefit/(Provision)

	Years Ended December 31,
(In millions)	2015		2014		2013
Income tax benefit/(provision) applicable to:
Loss from continuing operations	$	55	$	543	$	1,517
Loss from discontinued operations	—		21		32
Accumulated other comprehensive income/(loss)	—		—		(16		)
Deconsolidation and restructuring of CEOC and other	1,176		—		—
Additional paid-in capital	—		—		(15		)

Effective Income Tax Rate Reconciliation

	Years Ended December 31,
	2015		2014		2013
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
Valuation allowance	3.4		(5.9	)	(8.9	)
Foreign income taxes	(0.3	)	(0.1	)	0.1
Goodwill	—		(9.3	)	(0.4	)
Deconsolidation of CEOC	(38.6	)	—		—
Stock-based compensation	0.3		(0.8	)	(0.2	)
Acquisition and integration costs	—		(0.4	)	0.1
Reserves for uncertain tax positions	—		0.3		—
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	—		—		(0.5	)
Noncontrolling interests	(0.6	)	1.0		—
Other	(0.1	)	(0.2	)	—
Effective tax rate	(0.9	)%	16.9	%	35.7	%

Temporary Differences Resulting in Deferred Tax Assets and Liabilities

	As of December 31,
(In millions)	2015		2014
Deferred tax assets:
State net operating losses	$	5	$	294
Foreign net operating losses	2		23
Federal net operating loss	44		1,466
Compensation programs	56		145
Allowance for doubtful accounts	10		89
Self-insurance reserves	7		16
Accrued restructuring and support expenses	317		—
Accrued expenses	6		52
Federal tax credits	35		52
Federal indirect tax benefits of uncertain state tax positions	—		1
Investment in CGP LLC	115		—
Investments in non-consolidated affiliates	—		28
Capital loss carryover	15		134
Deferred revenue	1		93
Subtotal	613		2,393
Less: valuation allowance	207		970
Total deferred tax assets	406		1,423
Deferred tax liabilities:
Depreciation and other property-related items	922		1,143
Deferred cancellation of debt income and other debt-related items	152		1,508
Investment in CGP	—		21
Investment in non-consolidated affiliates	170		—
Intangibles	111		998
Prepaid expenses	10		28
Other	4		2
Total deferred tax liabilities	1,369		3,700
Net deferred tax liability	$	963	$	2,277

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, requiring deferred tax assets and liabilities, along with any related valuation allowance, to be classified as noncurrent in a classified statement of financial position. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The amendments in this guidance are effective for annual periods beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted as of the beginning of an interim or annual reporting period. The guidance may be applied either prospectively, for all deferred tax liabilities and assets, or retrospectively to all periods presented. We have early adopted ASU No. 2015-17 during the quarter ended December 31, 2015 and retrospectively applied the amendments. We reclassified $212 million of net deferred tax liabilities from current assets/liabilities to noncurrent assets/liabilities in our balance sheet as of December 31, 2014.

As of December 31, 2015 and 2014, we had federal NOL carryforwards of $134 million and $4.2 billion, respectively. These net operating losses are different from the net operating losses that are reflected in our federal and certain state tax returns as they do not include net operating losses that are attributable to our deconsolidated subsidiary, CEOC. The decrease in the federal NOL carryforwards from 2014 to 2015 is primarily the result of the deconsolidation of CEOC. These NOLs will begin to expire in 2031. In addition, we had federal general business tax credits and research tax credit carryforwards of $14 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, 2015. As of December 31, 2015 and 2014, we had foreign tax credit carryforwards of $19 million and $14 million, respectively. These foreign tax credit carryforwards will begin to expire in 2034. No federal valuation allowance has been established for CGP’s foreign tax credits carryforwards or research tax credits carryforwards.

As of December 31, 2015, we had a federal capital loss carryforward of $42 million, which will expire in 2019. 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, 2015.

NOL carryforwards for our domestic subsidiaries for state income taxes were $85 million and $8.2 billion as of December 31, 2015 and 2014, respectively. The decrease in the state NOL carryforwards from 2014 to 2015 is primarily the result of the deconsolidation of CEOC. 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 which will not more likely than not be realized. These state NOLs will begin to expire in 2034.

NOL carryforwards of our foreign subsidiaries were $6 million and $110 million as of December 31, 2015 and 2014, respectively. The decrease in the foreign NOL carryforwards from 2014 to 2015 is primarily the result of the deconsolidation of CEOC. 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.

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 $46 million as of December 31, 2015. The additional deferred taxes, including foreign withholding taxes, that have not been provided is estimated at $11 million as of December 31, 2015.

Reconciliation of Unrecognized Tax Benefits

	Years Ended December 31,
(In millions)	2015			2014			2013
Balance at beginning of year	$	80		$	142		$	333
Additions based on tax positions related to the current year	3			20			1
Additions for tax positions of prior years	2			—			7
Reductions for tax positions for prior years	—			(2		)	(50		)
Deconsolidation of CEOC	(78		)	—			—
Settlements	—			—			(82		)
Expiration of statutes	—			(80		)	(67		)
Balance at end of year	$	7		$	80		$	142

We classify reserves for tax uncertainties within accrued expenses and deferred credits and other in our 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.

We accrue interest and penalties related to unrecognized tax benefits in income tax expense. There was no adjustment to our accrual during 2015. We reduced our accrual by $62 million and $10 million during 2014 and 2013, respectively. There was no accrual for interest and penalties as of December 31, 2015. We accrued $1 million and $63 million for the payment of interest and penalties as of December 31, 2014 and 2013, respectively. Included in the balances of unrecognized tax benefits as of December 31, 2015, 2014 and 2013, are approximately $1 million, $48 million, and $91 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, 2015, the tax years prior to 2011, with the exception of 2007, are not subject to examination for U.S. tax purposes. As of December 31, 2015, the tax years prior to 2011 are no longer subject to examination for most of the foreign and state income tax jurisdictions as the statutes of limitations have lapsed.

CIE’s Israeli subsidiary, Playtika Ltd, has been granted a beneficial tax status by Israel for fiscal years 2010 through 2017. Playtika expects to reapply for beneficial tax status for periods after expiration. The Israel tax savings from this beneficial tax status had no material impact on 2013, 2014, or 2015 earnings per share.

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.