Income Taxes
Sprint Corporation is the parent corporation of an affiliated group of corporations which join in the filing of a U.S. federal consolidated income tax return. Additionally, we file income tax returns in each state jurisdiction which imposes an income tax. In certain state jurisdictions, Sprint and its subsidiaries filed combined state tax returns with certain other SoftBank affiliates beginning with the year ended March 31, 2016. State tax expense or benefit has been determined utilizing the separate return approach as if Sprint and its subsidiaries file on a stand-alone basis. We also file income tax returns in a number of foreign jurisdictions. However, our foreign income tax activity has been immaterial. Cash paid or received for income tax purposes was insignificant for all periods presented.
Income tax expense consists of the following:
|
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Current income tax (expense) benefit | | | | | |
Federal | $ | 50 |
| | $ | 13 |
| | $ | 5 |
|
State | (50 | ) | | (30 | ) | | (39 | ) |
Total current income tax (expense) benefit | — |
|
| (17 | ) | | (34 | ) |
Deferred income tax (expense) benefit | | | | | |
Federal | (284 | ) | | (206 | ) | | 491 |
|
State | (149 | ) | | 83 |
| | 118 |
|
Total deferred income tax (expense) benefit | (433 | ) |
| (123 | ) | | 609 |
|
Foreign income tax expense | (2 | ) | | (1 | ) | | (1 | ) |
Total income tax (expense) benefit | $ | (435 | ) |
| $ | (141 | ) | | $ | 574 |
|
The differences that caused our effective income tax rates to differ from the 35% U.S. federal statutory rate for income taxes were as follows:
|
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Income tax benefit at the federal statutory rate | $ | 270 |
| | $ | 649 |
| | $ | 1,372 |
|
Effect of: | | | | | |
State income taxes, net of federal income tax effect | 24 |
| | 38 |
| | 124 |
|
State law changes, net of federal income tax effect | 4 |
| | 20 |
| | 4 |
|
(Increase) reduction in liability for unrecognized tax benefits | (14 | ) | | (4 | ) | | 1 |
|
Credit for increasing research activities | 15 |
| | 14 |
| | — |
|
Tax (expense) benefit from organizational restructuring | (118 | ) | | 90 |
| | — |
|
Change in federal and state valuation allowance | (615 | ) | | (939 | ) | | (911 | ) |
Other, net | (1 | ) | | (9 | ) | | (16 | ) |
Income tax (expense) benefit | $ | (435 | ) | | $ | (141 | ) | | $ | 574 |
|
Effective income tax rate | (56.4 | )% | | (7.6 | )% | | 14.6 | % |
Income tax expense allocated to other items was as follows:
|
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Unrecognized net periodic pension and other postretirement benefit cost(1) | $ | (24 | ) | | $ | — |
| | $ | — |
|
_______________
| |
(1) | These amounts have been recognized in accumulated other comprehensive loss. |
Deferred income taxes are recognized for the temporary differences between the carrying amounts of our assets and liabilities for financial statement purposes and their tax bases. Deferred tax assets are also recorded for operating loss, capital loss and tax credit carryforwards. The sources of the differences that give rise to the deferred income tax assets and liabilities as of March 31, 2017 and 2016, along with the income tax effect of each, were as follows:
|
| | | | | | | |
| March 31, |
| 2017 | | 2016 |
| (in millions) |
Deferred tax assets | | | |
Net operating loss carryforwards | $ | 6,812 |
| | $ | 8,057 |
|
Tax credit carryforwards | 340 |
| | 384 |
|
Capital loss carryforwards | 1 |
| | 83 |
|
Property, plant and equipment | 2,192 |
| | 1,230 |
|
Debt obligations | 205 |
| | — |
|
Deferred rent | 402 |
| | 438 |
|
Pension and other postretirement benefits | 332 |
| | 378 |
|
Accruals and other liabilities | 1,454 |
| | 1,376 |
|
| 11,738 |
| | 11,946 |
|
Valuation allowance | (10,477 | ) | | (9,793 | ) |
| 1,261 |
| | 2,153 |
|
Deferred tax liabilities | | | |
FCC licenses | 12,876 |
| | 12,738 |
|
Trademarks | 1,712 |
| | 1,718 |
|
Intangibles | 771 |
| | 1,166 |
|
Debt obligations | — |
| | 58 |
|
Other | 318 |
| | 432 |
|
| 15,677 |
| | 16,112 |
|
| | | |
Long-term deferred tax liability | $ | 14,416 |
| | $ | 13,959 |
|
The realization of deferred tax assets, including net operating loss carryforwards, is dependent on the generation of future taxable income sufficient to realize the tax deductions, carryforwards and credits. However, our history of annual losses reduces our ability to rely on expectations of future income in evaluating the ability to realize our deferred tax assets. Valuation allowances on deferred tax assets are recognized if it is determined that it is more likely than not that the asset will not be realized. As a result, the Company recognized income tax expense to increase the valuation allowance by $615 million, $939 million, and $911 million for the years ended March 31, 2017, 2016, and 2015, respectively. We do not expect to record significant tax benefits on future net operating losses until our circumstances justify the recognition of such benefits.
We believe it is more likely than not that our remaining deferred income tax assets, net of the valuation allowance, will be realized based on current income tax laws and expectations of future taxable income stemming from the reversal of existing deferred tax liabilities. Uncertainties surrounding income tax law changes, shifts in operations between state taxing jurisdictions and future operating income levels may, however, affect the ultimate realization of all or some of these deferred income tax assets.
Income tax expense of $435 million for the year ended March 31, 2017 was primarily attributable to taxable temporary differences from the tax amortization of FCC licenses and tax expense of $136 million on pre-tax gains from spectrum license exchanges which increased our deferred tax liability on FCC license temporary differences. In addition, we increased our state income tax valuation allowance by $89 million as a result of a shift in operations among wholly-owned subsidiaries and an organizational restructuring that occurred during the year.
Income tax expense of $141 million for the year ended March 31, 2016 was primarily attributable to tax expense resulting from taxable temporary differences from the tax amortization of FCC licenses, partially offset by tax benefits from the reversal of state income tax valuation allowance on deferred tax assets and changes in state income tax laws enacted during the year. As a result of organizational restructuring, which drove a sustained increase in the profitability of specific legal entities, we revised our estimate regarding the realizability of the involved entities' deferred state tax assets and recorded a state tax benefit of $90 million.
Income tax benefit of $574 million for the year ended March 31, 2015 was primarily attributable to recognition of a tax benefit on the $1.9 billion Sprint trade name impairment loss, partially offset by tax expense on taxable temporary differences from the tax amortization of FCC licenses during the period.
During the years ended March 31, 2017, 2016, and 2015, we generated $204 million, $343 million, and $398 million, respectively, of foreign income, which is included in "Loss before income taxes" on the consolidated statements of operations. We have no material unremitted earnings of foreign subsidiaries.
As of March 31, 2017, we had federal operating loss carryforwards of $16.4 billion, state operating loss carryforwards of $17.5 billion and foreign net operating loss carryforwards of $805 million. Related to these loss carryforwards, we have recorded federal tax benefits of $5.7 billion, net state tax benefits of $863 million and foreign tax benefits of $265 million before consideration of the valuation allowances. Approximately $620 million of the federal net operating loss carryforwards expire between fiscal years 2017 and 2021. The remaining $15.8 billion expire in varying amounts between fiscal years 2022 and 2034. The state operating loss carryforwards expire in varying amounts through fiscal year 2035. Foreign operating loss carryforwards of $446 million do not expire. The remaining foreign operating loss carryforwards expire in varying amounts between fiscal years 2017 and 2035.
We also had available $429 million of federal and state income tax credit carryforwards as of March 31, 2017. Included in this amount are $74 million of income tax credits which expire prior to fiscal year 2018 and $301 million which expire in varying amounts between fiscal years 2018 and 2036. The remaining $54 million do not expire.
Unrecognized tax benefits are established for uncertain tax positions based upon estimates regarding potential future challenges to those positions at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. These estimates are updated at each reporting date based on the facts, circumstances and information available. Interest related to these unrecognized tax benefits is recognized in interest expense. Penalties are recognized as additional income tax expense. The unrecognized tax benefits attributable to uncertain tax positions were $190 million and $166 million, as of the March 31, 2017 and 2016, respectively. As of March 31, 2017, the unrecognized tax benefits included items that would favorably affect the income tax provision by $175 million, if recognized without an offsetting valuation allowance adjustment. The accrued liability for income tax related interest and penalties was insignificant for all periods presented.
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
|
| | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 |
| (in millions) |
Balance at beginning of period | $ | 166 |
| | $ | 163 |
|
Additions based on current year tax positions | 15 |
| | — |
|
Additions based on prior year tax positions | 10 |
| | 5 |
|
Reductions for lapse of statute of limitations | (1 | ) | | (2 | ) |
Balance at end of period | $ | 190 |
| | $ | 166 |
|
As of March 31, 2017, we are under a limited scope federal income tax examination for the tax year ended March 31, 2015 that is being handled by the IRS Exam division. There are not any issues being handled by the IRS Appeals division. We are involved in multiple state income tax examinations related to various years beginning with 1996, which are in various stages of the examination, administrative/judicial review or appellate process. Based on our current knowledge of the examinations, administrative/judicial reviews and appellate processes, we believe it is reasonably possible a number of our uncertain tax positions may be resolved during the next twelve months which could result in a reduction of up to $42 million in our unrecognized tax benefits.
The federal and state statutes of limitations for assessment of tax liability generally lapse three and four years, respectively, after the date the tax returns are filed. However, income tax attributes that are carried forward, such as net operating loss carryforwards, may be challenged and adjusted by taxing authorities at any time prior to the expiration of the statute of limitations for the tax year in which they are utilized.
In March 2016, the FASB issued authoritative guidance on Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting which, in part, eliminates the additional paid-in capital pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. The Company elected to early adopt this guidance effective April 1, 2016. The early adoption of this guidance did not have a material effect on our consolidated financial statements.