SunCoke Energy, Inc.

5. Income Taxes

The components of income before income tax (benefit) expense and loss from equity method investment are as follows:



	Years Ended December 31,
	2017		2016		2015
	(Dollars in millions)
Domestic	$	4.3	$	52.5	$	8.6
Foreign	17.6		15.6		14.5
Total	$	21.9	$	68.1	$	23.1

The components of income tax (benefit) expense are as follows:



	Years Ended December 31,
	2017			2016			2015
	(Dollars in millions)
Income taxes currently payable (receivable):
U.S. federal	$	1.7		$	2.7		$	(3.1	)
State	(1.0		)	(2.2		)	(3.3		)
Foreign	4.9			5.0			3.2
Total taxes currently payable (receivable)	5.6			5.5			(3.2		)

Deferred tax (benefit) expense:
U.S. federal	(99.7		)	(1.5		)	(12.7		)
State	12.5			4.6			7.1
Total deferred tax (benefit) expense	(87.2		)	3.1			(5.6		)
Total	$	(81.6	)	$	8.6		$	(8.8	)

The reconciliation of income tax expense at the U.S. statutory rate to income tax (benefit) expense is as follows:



	Years Ended December 31,
	2017					2016					2015
	(Dollars in millions)
Income tax expense at 35 percent U.S. statutory rate	$	7.7		35.0	%	$	23.8		35.0	%	$	8.0		35.0	%
Increase (reduction) in income taxes resulting from:
Impact of Final Regulations⁽¹⁾	64.2			293.2	%	—			—	%	—			—	%
Impact of Tax Legislation⁽²⁾	(154.7		)	(706.4	)%	—			—	%	—			—	%
Income attributable to noncontrolling interests in partnerships⁽³⁾	(5.4		)	(24.7	)%	(15.6		)	(23.0	)%	(11.2		)	(48.3	)%
State and other income taxes, net of federal income tax effects	2.0			9.1	%	1.1			1.7	%	1.8			7.7	%
Change in valuation allowance⁽⁴⁾⁽⁵⁾	3.9			17.8	%	0.4			0.6	%	(8.8		)	(38.0	)%
Investment in subsidiary⁽⁵⁾	—			—	%	—			—	%	1.0			4.4	%
Other	0.7			3.2	%	(1.1		)	(1.6	)%	0.4			1.2	%
Income tax (benefit) expense at effective tax rate	$	(81.6	)	(372.8	)%	$	8.6		12.7	%	$	(8.8	)	(38.0	)%

(1)

In January 2017, the Internal Revenue Service ("IRS") announced its decision to exclude cokemaking as a qualifying income generating activity in its final regulations (the "Final Regulations") issued under section 7704(d)(1)(E) of the Internal Revenue Code relating to the qualifying income exception for publicly traded partnerships. Subsequent to the 10-year transition period, certain cokemaking entities in the Partnership will become taxable as corporations. As a result, the Partnership recorded deferred income tax expense of $148.6 million to set up its initial deferred income tax liability during 2017, primarily related to differences in the book and tax basis of fixed assets, which are expected to exist at the end of the 10-year transition period when the cokemaking operations become taxable. However, the Company had previously recorded $84.4 million of the deferred income tax liability in its financial statements related to the Company's share of the deferred tax liability for the book and tax differences in its investment in the Partnership. As such, the Company's 2017 financial statements reflect the $64.2 million incremental impact from the Final Regulations solely attributable to the Partnership’s public unitholders, which was also recorded as an equal reduction to noncontrolling interest. As a result, the Final Regulations have no impact to net income attributable to the Company.

(2)

On December 22, 2017, the Tax Legislation was enacted. The Tax Legislation significantly revises the U.S. corporate income tax structure, including lowering corporate income tax rates. In addition, the SEC staff released Staff Accounting Bulletin 118 on December 23, 2017, which provides for companies to record a provisional impact of the Tax Legislation during a measurement period, not to exceed one year, in situations where companies do not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting under ASC 740 for certain income tax effects of the Tax Legislation for the reporting period which includes enactment.

During 2017, SunCoke recorded a provisional net income tax benefit of $154.7 million, of which $125.0 million was attributable to the Company, for the impact of this Tax Legislation. These benefits were primarily due to the $169.0 million impact resulting from the remeasurement of U.S. deferred income tax liabilities and assets at the lower enacted corporate tax rates. Based on information currently available, the Company has recorded a provisional income tax expense of $14.3 million for a valuation allowance against $19.0 million of foreign tax credit carryforwards that the Company believes will not be realized prior to their expiration as a result of the Tax Legislation. The final impact of the Tax Legislation may differ from the estimate recorded this period, possibly materially, due to changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Legislation.


(3)	Excludes the 2017 impact of the Final Regulations on qualifying income discussed above. No income tax expense is reflected in the Consolidated Statements of Operations for income attributable to noncontrolling interests in partnership entities.


(4)	In 2017, the Company recorded a valuation allowance as a result of changes in future state allocation assumptions.

(5)

On December 22, 2014, SunCoke executed a definitive agreement to sell 100 percent of its interest in the entities that made up the Harold Keene Coal Companies. This required SunCoke to record a deferred tax asset of $11.9 million related to the outside basis difference on the Harold Keene investment. This deferred tax asset was offset by a $9.8 million valuation allowance. SunCoke canceled the definitive agreement during the third quarter of 2015. Due to the cancellation of the agreement, the deferred tax asset and the valuation allowance recorded during 2014 were reversed during 2015. The reversal of the deferred tax asset during 2015 was largely offset by a related current income tax deduction due to the determination of insolvency of the subsidiary, resulting in the net income tax benefit of $1.0 million in the investment in subsidiary line. The actual sale of the coal business, which was completed in the second quarter of 2016, had no material impact on the effective tax rate.

The tax effects of temporary differences that comprise the net deferred income tax liability from operations are as follows:



	December 31,
	2017			2016
	(Dollars in millions)
Deferred tax assets:
Retirement benefit liabilities	$	7.1		$	12.2
Black lung benefit liabilities	11.6			18.9
Share-based compensation	6.1			8.6
Federal tax credit carryforward⁽¹⁾	23.2			23.2
Foreign tax credit carryforward⁽²⁾	19.0			14.0
Federal net operating loss	2.5			17.2
State tax credit carryforward, net of federal income tax effects⁽³⁾	4.0			5.5
State net operating loss carryforward, net of federal income tax effects⁽⁴⁾	13.9			8.4
Other liabilities not yet deductible	4.3			7.8
Total deferred tax assets	91.7			115.8
Less valuation allowance⁽⁵⁾	(26.2		)	(5.9		)
Deferred tax asset, net	65.5			109.9
Deferred tax liabilities:
Properties, plants and equipment⁽⁶⁾	(114.9		)	(0.3		)
Investment in partnerships⁽⁶⁾	(208.4		)	(462.1		)
Total deferred tax liabilities	(323.3		)	(462.4		)
Net deferred tax liability	$	(257.8	)	$	(352.5	)


(1)	Federal tax credit carryforward expires in 2032 through 2033.


(2)	Foreign tax credit carryforward expires in 2022 through 2027.


(3)	State tax credit carryforward, net of federal income tax effects expires in 2017 through 2022.


(4)	State net operating loss carryforward, net of federal income tax effects expires in 2017 through 2035.


(5)	Primarily related to state tax credit carryforward and the $14.3 million allowance against the foreign tax credit carryforward as a result of the Tax Legislation in 2017.


(6)	As a result of the Final Regulations discussed above, deferred tax liabilities associated with properties, plants and equipment increased and investment in partnerships decreased.

The Company's consolidated federal income tax returns have been examined by the IRS for all years through the year ended December 31, 2014. SunCoke is currently open to examination by the IRS for tax years ended December 31, 2014 and forward.

State and foreign income tax returns are generally subject to examination for a period of three to five years after the filing of the respective returns. The state impact of any amended federal returns remains subject to examination by various states for a period of up to one year after formal notification of such amendments to the states.

There were no uncertain tax positions at December 31, 2017 and 2016, and there were no interest or penalties recognized during the years ended December 31, 2017, 2016 and 2015. The Company does not expect that any unrecognized tax benefits pertaining to income tax matters will be required in the next twelve months.