ANDEAVOR

Note 13 - Income Taxes

Components of Income Tax Expense (Benefit) from Continuing Operations (in millions)



	Year Ended December 31,
	2017			2016		2015
Current:
Federal	$	107		$	195	$	697
State	34			36		172
Deferred:
Federal	(727		)	167		76
State	26			29		(9		)
Income Tax Expense (Benefit)	$	(560	)	$	427	$	936

We record deferred tax assets and liabilities for future income tax consequences that are attributable to differences between the financial statement carrying amount of assets and liabilities and their income tax bases.

Deferred Tax Assets and Liabilities (in millions)



	December 31,
	2017			2016
Deferred tax assets:
Accrued pension and other postretirement benefits	$	113		$	152
Tax credit carryforwards	63			8
Accrued environmental remediation liabilities	51			79
Accrued employee compensation liabilities	38			90
Other accrued liabilities	38			34
Net operating loss carryforwards	27			23
Stock-based compensation	24			34
Asset retirement obligations	8			6
Other	25			24
Total deferred tax assets	387			450
Less: valuation allowance	(23		)	(26		)
Total deferred tax assets, net	$	364		$	424

Deferred tax liabilities:
Accelerated depreciation and property related items	$	1,234		$	1,357
Investment in partnerships	302			61
Deferred maintenance costs, including refinery turnarounds	204			248
Inventory	116			117
Amortization of intangible assets	65			59
Deferred Income	22			—
Other	12			10
Total deferred tax liabilities	1,955			1,852
Deferred Tax Liabilities, Net (a)	$	1,591		$	1,428


(a)	The benefit associated with the revaluation of our net deferred tax liabilities was offset by increases in deferred tax liabilities primarily related to amounts recognized in conjunction with the Western Refining Acquisition.

With the acquisition of Western Refining, we acquired state net operation loss carryforwards in certain jurisdictions, as well as federal and state tax credit carryforwards. These carryforwards are reflected as deferred tax assets in the table above and have been partially reduced by a valuation allowance for the amounts which we do not expect to realize. The realization of our other deferred tax assets depends on our ability to generate future taxable income. Although realization is not assured, we believe it is more likely than not that we will realize those deferred tax assets.

The Tax Act was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%. As of December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Tax Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances. We recognized a provisional tax benefit of $918 million which is included as a component of income tax expense from continuing operations. This benefit reflects the revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21%. We may make adjustments to the provisional amount during the SAB 118 measurement period, which could result from future changes in interpretation of the Tax Act, changes to estimates made by us and/or issuance of additional regulatory guidance.

Reconciliation of Income Tax Expense (Benefit) from Continuing Operations (in millions)



	Year Ended December 31,
	2017			2016			2015
Income tax expense at U.S. federal statutory rate	$	389		$	447		$	921
Effect of:
State income taxes, net of federal income tax effect	39			45			105
Impact of Tax Act	(918		)	—			—
Manufacturing activities deduction	(6		)	(5		)	(43		)
Earnings attributable to noncontrolling interest	(54		)	(44		)	(53		)
Excess tax benefits from stock-based compensation arrangements	(16		)	(16		)	—
Other	6			—			6
Income Tax Expense (Benefit)	$	(560	)	$	427		$	936

Income Tax Credit and Loss Carryforwards as of December 31, 2017 (in millions)



	Amount		Expiration
Federal
Alternative minimum tax credits	$	43	None
State
Net operating loss carryforwards (tax-effected)	$	34	2023 - 2031
Alternative minimum tax credits	16		None
Other income tax credits	9		2026

We are subject to income taxes in the U.S., multiple state jurisdictions and a few foreign jurisdictions. Our unrecognized tax benefits totaled $217 million and $182 million as of December 31, 2017 and 2016, respectively, of which $35 million and $6 million each year have been recognized as tax liabilities. Included in unrecognized tax benefits as of December 31, 2017 and 2016 are $206 million and $172 million (net of the tax benefit on state issues), which would reduce the effective tax rate if recognized.

It is reasonably possible that unrecognized tax benefits could decrease by as much as $13 million in the next twelve months, related primarily to state apportionment matters, all of which is recognized as a liability. We accrued $7 million and $2 million at both December 31, 2017 and 2016, respectively, for interest and penalties including balances from the Western Refining Acquisition. We did not recognize an increase or reduction in interest and penalties associated with unrecognized tax benefits in the statements of consolidated operations during the years ended December 31, 2017, 2016, or 2015. For interest and penalties relating to income taxes we recognize accrued interest in net interest and financing costs and penalties in general and administrative expenses in the statements of consolidated operations. Andeavor’s tax years 2009 forward remain open to examination by the federal and state taxing authorities, except for California, which remains open from the year 2006. Western and Northern Tier’s tax years 2013 forward remain open to examination by the federal and state taxing authorities, except for New Mexico, which remains open from the year 2011.

Reconciliation of Unrecognized Tax Benefits (in millions)



	Year Ended December 31,
	2017			2016		2015
Balance as of Beginning of Year	$	182		$	181	$	21
Increases related to prior year tax positions	42			—		159
Increases related to current year tax positions	1			1		1
Decreases related to the lapse of applicable statute of limitations	(5		)	—		—
Decreases related to settlements with taxing authorities	(3		)	—		—
Balance as of End of Year	$	217		$	182	$	181

Unrecognized tax benefits increased by $159 million in 2015 for tax positions taken on amended returns filed for 2009-2010. The positions taken exclude certain tax credits for blending biofuels into refined products from taxable income. These tax credits were received from the federal government during the years being amended. However, due to the complex and uncertain nature of the issue, we are unable to conclude that it is more likely than not that we will sustain the claims. Therefore, we have neither recognized a tax benefit, nor recorded a receivable for this item.