NOTE 9 – INCOME TAXES

The Income tax provision reflected in the Consolidated Statements of Operations consists of the following components:


	Year Ended		Year Ended		Year Ended
(In thousands)	December 31, 2016		December 31, 2015		December 31, 2014
Current:
Federal	$	409	$	10,278	$	—
Foreign		1,480		—		—
State		1,992		(2,263)		1,250
Total current		3,881		8,015		1,250
Deferred:
Federal		37,794		46,935		43,869
Foreign		(4,071)		—		—
State		368		4,725		(11,439)
Total deferred		34,091		51,660		32,430
Total provision (benefit)		37,972		59,675		33,680
Tax provision (benefit) from discontinued operations		—		—		(210)
Total provision (benefit) from continuing operations	$	37,972	$	59,675	$	33,470

The Company has recorded no alternative minimum taxes as the consolidated tax group for which it is a member expects no alternative minimum tax liability, due to the utilization of tax credits.

Pre-tax income (losses) consisted of the following:


	Year Ended		Year Ended		Year Ended
(In thousands)	December 31, 2016		December 31, 2015		December 31, 2014
Domestic	$	135,391	$	163,531	$	97,303
Foreign		14,248		—		457
Total	$	149,639	$	163,531	$	97,760

The difference between the effective tax rate on earnings from continuing operations before income taxes and the U.S. federal income tax statutory rate is as follows:


	Year Ended			Year Ended			Year Ended
(In thousands)	December 31, 2016			December 31, 2015			December 31, 2014
Income tax expense at the federal statutory rate	$	52,374		$	57,237		$	34,035
Effect of:
State income taxes		6,460			6,180			195
Increase (decrease) in reserve for uncertain tax positions		(19,152)			(1,031)			1,050
Federal and state credits		(2,690)			(2,686)			(2,985)
Change in net operating loss carryforward for excess tax deductions		—			—			—
Permanent items - transaction costs		5,655			101			1,485
Permanent items - other		4,378
Foreign rate differential		(2,222)			—			—
Change in legislation		(9,856)
Other		265			155			(1,100)
Valuation allowance		2,760			(281)			790
Income tax expense (benefit)	$	37,972		$	59,675		$	33,470
Effective income tax rate		25.4	%		36.5	%		34.4	%

The significant components of deferred income tax assets and liabilities as of December 31, 2016 and December 31, 2015 are as follows:


	December 31, 2016				December 31, 2015
	Deferred Income Tax				Deferred Income Tax
(In thousands)	Assets		Liabilities		Assets		Liabilities
Tangible assets	$	—	$	(374,171)	$	—	$	(131,793)
Accrued liabilities		27,839		—		28,390		—
Intangible assets		—		(159,578)		—		(121,495)
Receivables		—		(4,879)		—		(5,264)
Investments		—		(256,401)		—		(230,568)
Capital loss carryforwards		4,008		—		—		—
Pension, postretirement and deferred compensation		38,218		—		38,183		—
Corporate borrowings		159		—		—		—
Deferred revenue		175,886		—		179,133		—
Lease liabilities		168,091		—		135,215		—
Capital and financing lease obligations		191,110		—		33,130		—
Alternative minimum tax and other credit carryovers		27,950		—		17,520		—
Net operating loss carryforwards		343,416		—		184,256		—
Total	$	976,677	$	(795,029)	$	615,827	$	(489,120)
Less: Valuation allowance		(112,165)		—		(509)		—
Net deferred income taxes	$	864,512	$	(795,029)	$	615,318	$	(489,120)

A rollforward of the Company’s valuation allowance for deferred tax assets is as follows:


			Additions		Charged
	Balance at		Charged	Charged	(Credited) to
	Beginning of		(Credited) to	(Credited) to	Other	Balance at
(In thousands)	Period		Expenses	Goodwill	Accounts(1)	End of Period
Calendar Year 2016
Valuation allowance-deferred income tax assets	$	509	2,760	108,896	—	$	112,165
Calendar Year 2015
Valuation allowance-deferred income tax assets	$	790	(281)	—	—	$	509
Calendar Year 2014
Valuation allowance-deferred income tax assets	$	—	790	—	—	$	790
Calendar Year 2013
Valuation allowance-deferred income tax assets	$	248,420	(265,600)	11,088	6,092	$	—

(1)

Primarily relates to amounts resulting from the Company’s tax sharing arrangement, changes in deferred tax assets and associated valuation allowance that are not related to income statement activity as well as amounts charged to other comprehensive income.

During the year ended December 31, 2015, the Company received a favorable state ruling that resulted in a reduction of uncertain tax positions and, as a result, the Company recorded a net discrete tax benefit of approximately $2,900,000. The $2,900,000 consisted of $2,100,000 net discrete benefit for reduction of uncertain tax positions and $800,000 related to establishing a receivable for amounts previously paid. During the year ended December 31, 2015, the Company received a notice of proposed adjustment from the Internal Revenue Service based upon its ongoing review of the Company’s tax return for the fiscal period ended March 29, 2012. As a result of this notification, the Company recorded a net discrete tax provision of $1,000,000 for interest on the proposed adjustment ($610,000 net of tax), reinstated approximately $9,200,000 of deferred tax assets and recorded current interest and taxes payable of $10,200,000.

The Company’s federal income tax loss carryforward of $562,289,000 will begin to expire in 2018 and will completely expire in 2035 and will be limited annually due to certain change in ownership provisions of the Internal Revenue Code. The Company’s foreign net operating losses of $459,800,000 can be used indefinitely except for approximately $13,800,000, which will expire in varying amounts between 2017 and 2028. The Company also has state income tax loss carryforwards of $257,594,000, which may be used over various periods ranging from 1 to 20 years.

From 2008 to 2012, prior to Wanda acquiring Holdings, the Company’s generated significant net deferred tax assets primarily from debt carrying costs and asset impairments combined with reduced operating profitability. At December 31, 2016 and December 31, 2015, the Company recorded net deferred tax assets of $69,483,000 and $126,198,000, respectively. The Company evaluates its deferred tax assets each period to determine if a valuation allowance is required based on whether it is “more likely than not” that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods on a federal, state and foreign jurisdiction basis. The Company conducts its evaluation by considering all available positive and negative evidence. This evaluation considers, among other factors, historical operating results, forecasts of future profitability, the duration of statutory carryforward periods, and the outlooks for the U.S. motion picture and broader economy. Based on the Company’s evaluation through December 31, 2016, the Company continued to reserve a portion of its net deferred tax assets due to uncertainty of their realization and dependence upon future taxable income.

The Company has identified a prudent and feasible tax planning strategy which involves the conversion of NCM units into NCM, Inc. common stock that, when executed, generates significant taxable income. The conversion is within the control of the Company and the Company executes the conversion when it becomes necessary to prevent its net operating loss and / or capital loss carryforwards from expiring unrealized.

On December 30, 2015, the Company converted 200,000 of its NCM units to NCM, Inc. shares and recognized approximately $4,600,000 of capital gain pursuant to the tax planning strategy described above. See Note 5 - Investments for additional information.

The accounting for deferred taxes is based upon an estimate of future results. Differences between estimated and actual results could have a material impact on the Company’s consolidated results of operations, its financial position and the ability to fully realize its deferred tax assets over time. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time. If future results are significantly different from the Company’s estimates and judgments, the Company may be required to record a valuation allowance against some or all of its deferred tax assets prospectively.

As of December 31, 2016, the Company had not provided tax on the cumulative undistributed earnings of its foreign subsidiaries of approximately $14.2 million, because it is the Company’s intention to reinvest these earnings indefinitely. If these earnings were distributed, the Company could be subject to U.S. federal and state income taxes and foreign withholding taxes, net of U.S. foreign tax credits which may be available. The calculation of this unrecognized deferred tax liability is complex and not practicable.

A reconciliation of the change in the amount of unrecognized tax benefits was as follows:


	Year Ended		Year Ended		Year Ended
(In millions)	December 31, 2016		December 31, 2015		December 31, 2014
Balance at beginning of period	$	30.1	$	30.5	$	27.4
Gross increases—current period tax positions		1.7		1.7		1.6
Gross increases—prior period tax positions		0.1		1.1		1.5
Favorable resolutions with authorities		(19.2)		(2.2)		—
Lapse of statute of limitations		—		(1.0)		—
Balance at end of period	$	12.7	$	30.1	$	30.5

The Company recognizes income tax-related interest expense and penalties as income tax expense and general and administrative expense, respectively. The amount of interest expense related to federal uncertain tax positions recognized for the year ended December 31, 2016 was $5,000. The amount of interest related to federal uncertain tax positions recognized for the year ended December 31, 2015 was $1,000,000.

The Company analyzed and reviewed the remaining state uncertain tax positions to determine the necessity of accruing interest and penalties. The amount of interest related to state uncertain tax positions recognized for the year ended December 31, 2016 was $15,000. The total amount of accrued interest and penalties for state uncertain tax positions at December 31, 2016 and December 31, 2015 was $81,000 and $69,000, respectively. The $81,000 represents the total amount of interest and penalties accrued at December 31, 2016 for all uncertain tax positions.

The total amount of net unrecognized tax benefits at December 31, 2016 and December 31, 2015 that would impact the effective tax rate, if recognized, would be $9,327,000 and $27,276,000, respectively. There are currently, unrecognized tax benefits which the Company anticipates will be resolved in the next 12 months; however, the Company is unable at this time to estimate what the impact on its unrecognized tax benefits will be.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. An IRS examination of the tax years February 28, 2002 through December 31, 2003 of the former Loews Cineplex Entertainment Corporation and subsidiaries was concluded during fiscal 2007. An IRS examination for the tax years ended March 31, 2005 and March 30, 2006 was completed during 2009. Generally, tax years beginning after March 28, 2002 are still open to examination by various taxing authorities. Additionally, the Company has net operating loss (“NOL”) carryforwards for tax years ended October 31, 2000 through March 28, 2002 in the U.S. and various state jurisdictions which have carryforwards of varying lengths of time. These NOLs are subject to adjustment based on the statute of limitations applicable to the return in which they are utilized, not the year in which they are generated. Various state, local and foreign income tax returns are also under examination by taxing authorities. The Company does not believe that the outcome of any examination will have a material impact on its financial statements.