5. INCOME TAXES
The terms of the i-units provide that the units owned by us will not be allocated income, gain, loss or deductions of the Partnership for tax purposes until such time that we dispose of our investment in the Partnership. As a result, actual realization of any long-term deferred income tax asset or liability would only occur upon liquidation of our investment in the Partnership.
During the third quarter of 2015, we updated our forecasts and concurrently reevaluated the reversal of our temporary difference related to the investment in the Partnership. As a result of this revision to our forecast, we determined that Class A and Class B common units would continue to be cured primarily from income allocations of the i-units into the foreseeable future. Based on the estimates of our future operating income included in our forecasts, including curing impacts, we concluded that it is not more likely than not that our deferred tax assets will be realized. As a result, we recognized a full valuation allowance on the net deferred tax asset during the third quarter of 2015. The recognition of the valuation allowance resulted in additional tax expense of $275 million for the year ended December 31, 2015. We considered our disclosure of the valuation allowance as shown in the effective rate reconciliation as compared to the table of deferred taxes, and noted that this is consistent with our application of the intraperiod allocation of the valuation allowance between the loss in continuing operations and other comprehensive income.
The tax effects of significant temporary differences representing deferred tax assets and (liabilities) are as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Investment in Partnership | $ | 199 |
| | $ | 321 |
|
Valuation allowance on investment in Partnership | (199 | ) | | (321 | ) |
Net deferred tax asset (liability) | $ | — |
| | $ | — |
|
Our tax years are generally open to examination by the Internal Revenue Service and state revenue authorities for the calendar years ended 2016, 2015 and 2014. There were no cash payments for income taxes during the years ended December 31, 2017, 2016 and 2015.
INCOME TAX RATE RECONCILIATION
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in millions of dollars) |
Loss before income tax benefit (expense) | $ | (43 | ) | | $ | (122 | ) | | $ | (380 | ) |
Federal Income tax benefit | 15 |
| | 43 |
| | 133 |
|
State Income tax benefit | 1 |
| | 2 |
| | 10 |
|
Adjustment to AOCI unwind tax | (2 | ) | | — |
| | — |
|
Tax Rate change | (122 | ) | | (4 | ) | | — |
|
Valuation allowance | 122 |
| | (39 | ) | | (275 | ) |
Total income tax benefit (expense)(1) | $ | 14 |
| | $ | 2 |
| | $ | (132 | ) |
Effective income tax rate(2) | 32.6 | % | | 1.6 | % | | (34.7 | )% |
| |
(1) | Amortization of accumulated other comprehensive income into earnings is recorded before tax to recognize the related tax benefit. Recognition of the tax benefit in earnings does not impact the balance of the deferred tax asset and associated full valuation allowance, which were previously recorded when the losses were reflected in Other Comprehensive Income. |
| |
(2) | For the year ended December 31, 2015, the effective income tax rate is negative as we had tax expense on a pre-tax book loss. The tax expense is a result of the valuation allowance as noted above, which resulted in a tax expense instead of a tax benefit on the pre-tax book loss for the year ended December 31, 2015. |
2017 TAX REFORM
On December 22, 2017, United States legislation referred to as the "Tax Cuts and Jobs Act" (the TCJA) was signed into law. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the Internal Revenue Code of 1986 (as amended, the Code), including amendments which significantly change the taxation of individual and business entities. Changes in the Code from the TCJA did not have a material impact on our financial statements in 2017.