Income Taxes

Caesars’ provision for income taxes during the interim reporting periods has historically been calculated by applying an estimate of the annual effective tax rate for the full year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. We utilized a discrete effective tax rate method, as allowed by ASC 740-270 “Income Taxes, Interim Reporting,” to calculate taxes for the three and nine months ended September 30, 2015. We determined that as small changes in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the three and nine months ended September 30, 2015.

Income Tax Allocation

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)	2016			2015			2016			2015
Income/(loss) from continuing operations, before income taxes	$	(3,261	)	$	(998	)	$	(5,626	)	$	5,937
Income tax benefit/(provision)	$	(27	)	$	206		$	(37	)	$	49
Effective tax rate	(0.8		)%	20.6		%	(0.7		)%	(0.8		)%

Discontinued operations, before income taxes	$	3,973		$	55		$	4,091		$	156
Income tax provision	$	(680	)	$	(19	)	$	(740	)	$	(50	)

We classify reserves for tax uncertainties within accrued expenses and deferred credits and other in the 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 and potential interest or penalties associated with those liabilities.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. We have provided a valuation allowance on certain federal and state deferred tax assets that were not deemed realizable based upon estimates of future taxable income.

The effective tax rates related to the loss from continuing operations for the three and nine months ended September 30, 2016, and the three months ended September 30, 2015, differed from the expected federal tax rate of 35% primarily due to losses from continuing operations not tax benefitted. The effective tax rate benefit related to the income from continuing operations for the nine months ended September 30, 2015, differed from the expected federal tax benefit of 35% primarily due to the nontaxable portion of the gain on deconsolidation of CEOC.

The amounts recorded as tax assets, tax liabilities, tax reserves and tax provision reflect CEC’s conclusion that certain challenged transactions identified in Note 1 were negotiated in good faith and the Caesars tax consolidated group received fair value for assets transferred. These amounts could change if litigation and potential claims related to the challenged transactions are resolved unfavorably. If that occurs, changes may be necessary to reduce tax assets and increase tax liabilities, tax reserves and the tax provision recorded in CEC’s financial statements. Such changes could be material. Management cannot predict the various potential outcomes of pending litigation and other potential claims, thus cannot estimate the reasonably possible amount or range of effects, if any, to the recorded tax accounts.

We file income tax returns, including returns for our subsidiaries, with federal, state, and foreign jurisdictions. We are under regular and recurring audit by the Internal Revenue Service 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.