Income Taxes

The components of the income tax provision (benefit) for each of the periods presented below are as follows:



	Years Ended December 31,
	2013		2012			2011
	($ in millions)
Current
Federal	$	—	$	—		$	—
State	22		47			13
	22		47			13
Deferred
Federal	502		(358		)	1,044
State	24		(69		)	66
	526		(427		)	1,110

Total	$	548	$	(380	)	$	1,123

The effective income tax expense (benefit) differed from the computed "expected" federal income tax expense on earnings before income taxes for the following reasons:



	Years Ended December 31,
	2013		2012			2011
	($ in millions)
Income tax expense (benefit) at the federal statutory rate (35%)	$	505	$	(341	)	$	1,008
State income taxes (net of federal income tax benefit)	38		(38		)	74
Other	5		(1		)	41
Total	$	548	$	(380	)	$	1,123

Deferred income taxes are provided to reflect temporary differences in the basis of net assets for income tax and financial reporting purposes. The tax-effected temporary differences and tax loss carryforwards which comprise deferred taxes are as follows:



	Years Ended December 31,
	2013			2012
	($ in millions)
Deferred tax liabilities:
Natural gas and oil properties	$	(2,631	)	$	(1,999	)
Other property and equipment	(371		)	(436		)
Volumetric production payments	(1,216		)	(1,432		)
Contingent convertible debt	(439		)	(416		)
Deferred tax liabilities	(4,657		)	(4,283		)
Deferred tax assets:
Net operating loss carryforwards	535			711
Derivative instruments	108			172
Asset retirement obligations	153			142
Investments	130			106
Deferred stock compensation	66			47
Accrued liabilities	120			90
Noncontrolling interest liabilities	152			178
Alternative minimum tax credits	317			225
Other	40			55
Deferred tax assets	1,621			1,726
Valuation allowance	(148		)	(160		)
Net deferred tax assets	1,473			1,566
Net deferred tax assets (liabilities)	$	(3,184	)	$	(2,717	)

Reflected in accompanying balance sheets as:
Current deferred income tax asset	$	223		$	90
Non-current deferred income tax liability	(3,407		)	(2,807		)
Total	$	(3,184	)	$	(2,717	)

As of December 31, 2013 and 2012, we classified $223 million and $90 million, respectively, of deferred tax assets as current that were attributable to current temporary differences associated with accrued liabilities, derivative liabilities and other items. As of December 31, 2013 and 2012, non-current deferred tax liabilities on the consolidated balance sheets that were primarily attributable to temporary differences associated with oil and gas properties and volumetric production payments were $3.407 billion and $2.807 billion, respectively.

Deferred tax assets relating to tax benefits of employee share-based compensation have been reduced for stock options exercised and restricted stock that vested in periods in which Chesapeake was in a net operating loss (NOL) position. Some exercises and vestings result in tax deductions in excess of previously recorded benefits based on the stock option or restricted stock value at the time of grant (windfalls). Although these additional tax benefits or windfalls are reflected in NOL carryforwards in the tax return, the additional tax benefit associated with the windfalls is not recognized until the deduction reduces taxes payable pursuant to accounting for stock compensation under U.S. GAAP. Accordingly, since the tax benefit does not reduce Chesapeake's current taxes payable due to NOL carryforwards, these windfall tax benefits are not reflected in Chesapeake's NOLs in deferred tax assets. Windfalls included in NOL carryforwards but not reflected in deferred tax assets as of December 31, 2013 totaled $24 million. Any shortfalls resulting from tax deductions that were less than the previously recorded benefits were recorded as reductions to additional paid-in capital.

At December 31, 2013, Chesapeake had federal income tax NOL carryforwards of approximately $592 million and state NOL carryforwards of approximately $7.0 billion (deferred tax assets related to these state NOL carryforwards were $328 million), which excludes the NOL carryforwards related to unrecognized tax benefits and stock compensation windfalls that have not been recognized under U.S. GAAP. Additionally, we had $51 million of alternative minimum tax (AMT) NOL carryforwards, net of unrecognized tax benefits, available as a deduction against future AMT income and $599 million of AMT NOL carrybacks to be used against prior year AMT income. The NOL carryforwards expire from 2025 through 2033. The value of these carryforwards depends on the ability of Chesapeake to generate taxable income. As of December 31, 2013 and 2012, we had deferred tax assets of $1.621 billion and $1.726 billion, respectively, upon which we had a valuation allowance of $148 million and $160 million, respectively, for certain state NOL carryforwards that we have concluded are not more likely than not to be utilized prior to expiration. The net decrease in the valuation allowance of $12 million is reflected as a reduction to the 2013 income tax provision and is due to changes in judgment regarding the future realizability of our state NOL carryforwards.

The ability of Chesapeake to utilize NOL carryforwards to reduce future federal taxable income and federal income tax is subject to various limitations under the Internal Revenue Code of 1986, as amended (the Code). The utilization of such carryforwards may be limited upon the occurrence of certain ownership changes, including the issuance or exercise of rights to acquire stock, the purchase or sale of stock by 5% stockholders, as defined in the Treasury regulations, and the offering of stock by us during any three-year period resulting in an aggregate change of more than 50% in the beneficial ownership of Chesapeake.

In the event of an ownership change (as defined for income tax purposes), Section 382 of the Code imposes an annual limitation on the amount of a corporation's taxable income that can be offset by these carryforwards. The limitation is generally equal to the product of (i) the fair market value of the equity of the corporation multiplied by (ii) a percentage approximately equivalent to the yield on long-term tax exempt bonds during the month in which an ownership change occurs. In addition, the limitation is increased if there are recognized built-in gains during any post-change year, but only to the extent of any net unrealized built-in gains (as defined in the Code) inherent in the assets at the time of the ownership change. Certain NOLs acquired through various acquisitions are also subject to limitations.

The following table summarizes our federal and AMT NOLs as of December 31, 2013 and any related limitations:



	Total		Total Limitation		Annual Limitation
	($ in millions)
Federal net operating loss	$	592	$	49	$	15
AMT net operating loss	$	650	$	35	$	15

As of December 31, 2013, we do not believe that an ownership change has occurred. Future equity transactions by Chesapeake or by 5% stockholders (including relatively small transactions and transactions beyond our control) could cause an ownership change and therefore a limitation on the annual utilization of NOLs.

Accounting guidance for recognizing and measuring uncertain tax positions prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Guidance is also provided regarding de-recognition, classification and disclosure of these uncertain tax positions. As of December 31, 2013 and 2012, the amount of unrecognized tax benefits related to NOL carryforwards and state tax liabilities associated with uncertain tax positions was $644 million and $599 million, respectively. Of these amounts, $4 million and $1 million, respectively, are related to state tax liabilities while the remainder is related to NOL carryforwards. If these unrecognized tax benefits are disallowed and our NOL carryforwards are reduced, the reduction will be offset by additional tax basis that will generate future deductions. The uncertain tax positions identified would not have a material effect on the effective tax rate. No material changes to the current uncertain tax positions are expected within the next 12 months. As of December 31, 2013 and 2012, we had accrued liabilities of $13 million and $6 million, respectively, for interest related to these uncertain tax positions. Chesapeake recognizes interest related to uncertain tax positions in interest expense. Penalties, if any, related to uncertain tax positions would be recorded in other expenses.

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



	2013		2012		2011
	($ in millions)
Unrecognized tax benefits at beginning of period	$	599	$	369	$	34
Additions based on tax positions related to the current year	15		134		135
Additions to tax positions of prior years	30		96		200
Settlements	—		—		—
Unrecognized tax benefits at end of period	$	644	$	599	$	369

Chesapeake's federal and state income tax returns are routinely audited by federal and state fiscal authorities. The Internal Revenue Service (IRS) is currently auditing our federal income tax returns for 2007 through 2011. The federal tax returns for 1999 through 2006 remain subject to examination for the purpose of determining the amount of remaining tax NOL and other carryforwards. The 2007 through 2013 years remain open for all purposes of examination by the IRS and other taxing authorities in material jurisdictions.