Income Taxes

Tax Cuts and Jobs Act (the “Act”)

On December 22, 2017, the Act was signed into law resulting in significant changes from previous tax law. Some of the more meaningful provisions which will affect us are:


•	a reduction in the U.S. federal corporate tax rate from 35% to 21%;


•	limitation on the deduction of certain interest expense;


•	full expense deduction for certain business capital expenditures;


•	limitation on the utilization of NOLs arising after December 31, 2017; and


•	a system of taxing foreign-sourced income from multinational corporations.

Because of the complexity of the new Global Intangible Low Taxed Income (“GILTI”) rules in the Act, we are continuing to evaluate this provision and its application under U.S. GAAP and have recorded a reasonable estimate of the effect of this provision of the Act in our Consolidated Condensed Financial Statements. We have not made a policy decision regarding whether to record deferred taxes on GILTI.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118 “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”) which allows a company up to one year to finalize and record the tax effects of the Act. We are currently in the process of finalizing and quantifying the tax effects of the Act, but have recorded provisional amounts based on reasonable estimates for the measurement and accounting of certain effects of the Act in our Consolidated Condensed Financial Statements for the three months ended March 31, 2018. Under SAB 118, we will complete the required analyses and accounting during the year ended December 31, 2018.

Comprehensive Income — In February 2018, the FASB issued Accounting Standards Update 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The standard allows an entity to reclassify the income tax effects of the Act on items within AOCI to retained earnings and also requires additional disclosures. The standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We do not anticipate a material effect on our financial condition, results of operations or cash flows as a result of adopting this standard.

Income Tax Expense (Benefit)

The table below shows our consolidated income tax expense (benefit) and our effective tax rates for the periods indicated (in millions):



	Three Months Ended March 31,
	2018			2017
Income tax expense (benefit)	$	108		$	(61	)
Effective tax rate	(22		)%	52		%

Our income tax rates do not bear a customary relationship to statutory income tax rates primarily as a result of the effect of our NOLs, changes in unrecognized tax benefits and valuation allowances. For the three months ended March 31, 2018 and 2017, our income tax expense (benefit) is largely comprised of discrete tax items and estimated state and foreign income taxes in jurisdictions where we do not have NOLs or valuation allowances. As a result of the Merger, an increase of approximately $62 million in the valuation allowance and a related charge to deferred tax expense was recorded during the three months ended March 31, 2018, due to our Canadian NOLs being fully limited and not available to offset future income.

NOL Carryforwards — As of December 31, 2017, our NOL carryforwards consisted primarily of federal NOL carryforwards of approximately $6.6 billion, which expire between 2024 and 2037, and NOL carryforwards in 27 states and the District of Columbia totaling approximately $3.5 billion, which expire between 2018 and 2037. Substantially all of the federal and state NOLs are offset with a full valuation allowance. Certain of the state NOL carryforwards may be subject to limitations on their annual usage. As a result of the ownership change, our ability to utilize the NOL carryforwards will be limited. This reduction will be offset by an adjustment to the existing valuation allowance for an equal and offsetting amount. Additionally, our state NOLs available to offset future state income could similarly materially decrease which would also be offset by an equal and offsetting adjustment to the existing valuation allowance. Given the offsetting adjustments to the existing valuation allowance, the ownership change is not expected to have a material adverse effect on our Consolidated Condensed Financial Statements.

As of December 31, 2017, we had approximately $659 million in foreign NOLs, which expire between 2026 and 2037, and the associated deferred tax asset of approximately $165 million is partially offset by a valuation allowance of $106 million. As a result of the Merger, an increase of approximately $62 million in the valuation allowance and a related charge to deferred tax expense occurred, which resulted in our Canadian NOLs being fully limited and not available to offset future income.

Income Tax Audits — We remain subject to periodic audits and reviews by taxing authorities; however, we do not expect these audits will have a material effect on our tax provision. Any NOLs we claim in future years to reduce taxable income could be subject to IRS examination regardless of when the NOLs were generated. Any adjustment of state or federal returns could result in a reduction of deferred tax assets rather than a cash payment of income taxes in tax jurisdictions where we have NOLs. We have concluded our U.S. federal income tax examination for the year ended December 31, 2015 with no adjustments. We are currently under various state income tax audits for various periods. Our Canadian subsidiaries are currently under examination by the Canada Revenue Agency for the years ended December 31, 2013 through 2016.

Valuation Allowance — U.S. GAAP requires that we consider all available evidence, both positive and negative, and tax planning strategies to determine whether, based on the weight of that evidence, a valuation allowance is needed to reduce the value of deferred tax assets. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward periods available under the tax law. Due to our history of losses, we were unable to assume future profits; however, we are able to consider available tax planning strategies.

Unrecognized Tax Benefits — At March 31, 2018, we had unrecognized tax benefits of $35 million. If recognized, $15 million of our unrecognized tax benefits could affect the annual effective tax rate and $20 million, related to deferred tax assets, could be offset against the recorded valuation allowance resulting in no effect on our effective tax rate. We had accrued interest and penalties of $2 million for income tax matters at March 31, 2018. We recognize interest and penalties related to unrecognized tax benefits in income tax expense (benefit) on our Consolidated Condensed Statements of Operations and recorded a $1 million tax benefit for the three months ended March 31, 2018. We believe that it is reasonably possible that a decrease within the range of nil and $9 million in unrecognized tax benefits could occur within the next twelve months primarily related to federal tax issues.