TiVo Corporation

Income Taxes

Deferred Tax Assets and Liabilities

Significant deferred tax assets and deferred tax liabilities were as follows (in thousands):



	December 31, 2017			December 31, 2016
Deferred tax assets:
Federal net operating losses	$	187,003		$	331,365
Tax credit carryforwards	151,707			151,687
State net operating losses and credits	102,077			77,113
Accrued liabilities	22,771			37,163
Deferred revenue	22,699			26,256
Equity-based compensation	6,185			20,892
Capital and other losses	14,300			25,276
Other	10,541			15,876
Gross deferred tax assets	517,283			685,628
Valuation allowance	(390,161		)	(428,778		)
Net deferred tax assets	127,122			256,850
Deferred tax liabilities:
Intangible assets	(175,731		)	(332,892		)
Gross deferred tax liabilities	(175,731		)	(332,892		)
Net deferred tax liabilities	$	(48,609	)	$	(76,042	)

Deferred tax assets and liabilities are presented in the Consolidated Balance Sheets as follows (in thousands):



	December 31, 2017			December 31, 2016
Other long-term assets	$	1,747		$	1,412
Deferred tax liabilities, net	(50,356		)	(77,454		)
Net deferred tax liabilities	$	(48,609	)	$	(76,042	)

As of December 31, 2017, the Company had recorded deferred tax assets for the tax effects of the following gross tax loss carryforwards (in thousands):



	Carryforward Amount		Years of Expiration
Federal	$	1,036,183	2019 - 2035
State	$	1,184,488	2019 - 2035

Utilization of federal and state net operating losses and credit carryforwards may be subject to limitations to due future ownership changes.

As of December 31, 2017, the Company had the following credits available to reduce future income tax expense as follows (in thousands):



	Carryforward Amount		Years of Expiration
Federal research and development credits	$	61,321	2018 - 2036
State research and development credits	$	61,735	Indefinite
Foreign tax credits	$	105,100	2018 - 2024

Deferred Tax Asset Valuation Allowance

During 2010, the Company entered into a closing agreement with the Internal Revenue Service through its Pre-Filing Agreement ("PFA") program confirming that the Company recognized an ordinary tax loss of $2.4 billion from the 2008 sale of its TV Guide Magazine business. In connection with the PFA closing agreement, the Company established a valuation allowance as a result of determining that it was more-likely-than-not that its deferred tax assets would not be realized. While the Company believes that its fundamental business model is robust, there has been no change to the Company's position that it is more-likely-than-not that this deferred tax asset will not be realized.

The deferred tax asset valuation allowance and changes in the deferred tax asset valuation allowance consisted of the following (in thousands):



	Year Ended December 31,
	2017			2016			2015
Balance at beginning of period	$	(428,778	)	$	(449,694	)	$	(409,559	)
Additions	(66,578		)	(12,971		)	(57,902		)
Assumed in acquisition	—			(52,243		)	—
Deductions resulting from business combination	195			86,130			—
Deductions resulting from Tax Act of 2017	105,000			—			—
Other deductions, net	—			—			17,767
Balance at end of period	$	(390,161	)	$	(428,778	)	$	(449,694	)

During the year ended December 31, 2016, the Company recorded an income tax benefit of $86.1 million due to a change in the deferred tax asset valuation allowance resulting from the TiVo Acquisition. In connection with the TiVo Acquisition, a deferred tax liability was recorded for finite-lived intangible assets as described in Note 2. These deferred tax liabilities are considered a source of future taxable income which allowed TiVo Corporation to reduce its pre-acquisition deferred tax asset valuation allowance. The change in the pre-acquisition deferred tax asset valuation allowance is a transaction recognized separate from the business combination and reduces income tax expense in the period of the business combination.

Increases in the deferred tax valuation allowance for the year ended December 31, 2015 primarily related to decreases in liabilities for unrecognized tax benefits which were previously applied against U.S. federal and state deferred tax assets.

Unrecognized Tax Benefits

Unrecognized tax benefits and changes in unrecognized tax benefits were as follows (in thousands):



	Year Ended December 31,
	2017			2016			2015
Balance at beginning of period	$	83,055		$	60,346		$	134,962
Increases:
Assumed in acquisition	365			21,441			—
Tax positions related to the current year	6,263			1,032			963
Tax positions related to prior years	2,091			3,651			1,385
Decreases:
Tax positions related to prior years	(2,232		)	(1,047		)	(2,874		)
Tax Act of 2017	(15,282		)	—			—
Audit settlements	—			(161		)	(69,816		)
Statute of limitations lapses	(1,242		)	(2,072		)	(3,690		)
Foreign currency	62			(135		)	(584		)
Balance at end of period	$	73,080		$	83,055		$	60,346

The amount of unrecognized tax benefits that would affect the Company's effective tax rate, if recognized, was $3.9 million and $4.9 million as of December 31, 2017 and 2016, respectively.

The Company recorded a benefit of $0.1 million, $0.2 million and $1.0 million for interest and penalties related to unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015, respectively. Accrued interest and penalties related to unrecognized tax benefits were $0.7 million and $0.8 million at December 31, 2017 and 2016.

In the normal course of business, the Company conducts business globally and, as a result, files U.S. federal, state and foreign income tax returns in various jurisdictions and therefore is subject to examination by taxing authorities throughout the world. With few exceptions, the Company is no longer subject to income tax examinations for years prior to 2010. During the year ended December 31, 2015, the Company closed its audits with the California tax authorities through December 31, 2010. The closing of the California audits resulted in a reduction of unrecognized tax benefits, which was substantially offset by a change in the deferred tax asset valuation allowance. Based on the status of U.S. federal, state and foreign tax audits, the Company does not believe it is reasonably possible that a significant change in unrecognized tax benefits will occur in the next twelve months.

The Company believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from U.S. federal, state and foreign tax audits. The Company regularly assesses potential outcomes of these audits in order to determine the appropriateness of its tax provision. Adjustments to accruals for unrecognized tax benefits are made to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular income tax audit. However, income tax audits are inherently unpredictable and there can be no assurance that the Company will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously recognized, and therefore the resolution of one or more of these uncertainties in any particular period could have a material adverse impact on the Consolidated Financial Statements.

Income tax (benefit) expense

The components of (Loss) income from continuing operations before income taxes consist of the following (in thousands):



	Year Ended December 31,
	2017			2016			2015
United States	$	(55,846	)	$	(32,843	)	$	(2,456	)
Rest of the world	7,611			8,407			11,919
(Loss) income from continuing operations before income taxes	$	(48,235	)	$	(24,436	)	$	9,463

Income tax (benefit) expense consisted of the following (in thousands):



	Year Ended December 31,
	2017			2016			2015
Current:
Federal	$	—		$	—		$	—
State	906			3,380			(1,998		)
Foreign	16,329			20,952			11,132
Total current income tax expense	17,235			24,332			9,134
Deferred:
Federal	(24,579		)	(83,059		)	2,081
State	(1,947		)	(2,875		)	2,127
Foreign	(988		)	(83		)	413
Total deferred income tax benefit (expense)	(27,514		)	(86,017		)	4,621
Income tax (benefit) expense	$	(10,279	)	$	(61,685	)	$	13,755

For the years ended December 31, 2017, 2016 and 2015, the Company utilized U.S. federal net operating loss carryforwards of $235.8 million, $65.1 million and $99.5 million, respectively. For the years ended December 31, 2017, 2016 and 2015, the Company utilized state net operating loss carryforwards of $35.2 million, $13.5 million and $20.1 million, respectively.

Income tax (benefit) expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% to (Loss) income from continuing operations before income taxes as a result of the following (in thousands):



	Year Ended December 31,
	2017			2016			2015
Federal income tax	$	(16,882	)	$	(8,553	)	$	3,312
State income tax, net of federal benefit	(397		)	434			4,029
Foreign income tax rate differential	(748		)	(1,713		)	(2,992		)
Foreign withholding tax	13,849			20,571			9,724
Repatriation of foreign income, deemed and actual	1,526			4,573			477
Change in unrecognized tax benefits	(704		)	(1,203		)	(4,515		)
Change in valuation allowance	12,511			(81,614		)	5,463
Equity-based compensation	(976		)	2,696			1,972
Tax settlements	—			166			(3,437		)
Transaction-related costs	5,724			2,753			—
Entity rationalization	2,369			—			—
Tax Act of 2017	(26,551		)	—			—
Other, net	—			205			(278		)
Income tax (benefit) expense	$	(10,279	)	$	(61,685	)	$	13,755

Due to the fact that the Company has significant net operating loss carryforwards and has recorded a valuation allowance against a significant portion of its deferred tax assets, foreign withholding taxes are the primary driver of Income tax (benefit) expense. Luxembourg is the main contributor to the Company’s foreign income tax rate differential. For the years ended December 31, 2017, 2016 and 2015, Luxembourg had gains. An audit settlement with the California tax authorities related to the Company's 2008 state tax return during the year ended December 31, 2015 resulted in an income tax benefit of $4.0 million.

Tax Act of 2017

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act of 2017”) was signed into law. The Tax Act of 2017 enacted comprehensive tax reform that made broad and complex changes to the U.S. federal income tax code which affect 2017, including, but not limited to requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years (the “Transition Tax”). The Tax Act of 2017 also establishes new tax laws which affect 2018 and later years, including, but not limited to, a reduction of the U.S. federal corporate income tax rate from 35% to 21%, a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries and a new provision designed to tax global intangible low-taxed income (“GILTI”), a limitation of the deductibility of interest expense, a limitation of the deduction for newly generated net operating losses to 80% of current year taxable income and the elimination of net operating loss carrybacks.

The Company has not completed its accounting for the income tax effects of the Tax Act of 2017. On December 22, 2017, the SEC Staff issued guidance to address the application of U.S. GAAP in situations when a registrant does not have the necessary information to complete the accounting for certain income tax effects of the Tax Act of 2017. Where the Company has been able to make reasonable estimates of the effect for which its analysis is not yet complete, the Company has recorded provisional amounts. Where the Company has not been able to make reasonable estimates of the effect the Tax Act of 2017, no amounts have been recognized and the Company has continued accounting for those items based on the tax laws in effect immediately prior to the enactment of the Tax Act of 2017.

The Company was able to make reasonable estimates of certain effects and, therefore, has recorded provisional amounts as follows:

•

Revaluation of deferred tax assets and liabilities: The Tax Act of 2017 reduces the U.S. federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. In addition, the Tax Act of 2017 makes certain changes to the depreciation rules and implements new limits on the deductibility of certain executive compensation. The Company has evaluated these changes and recognized a provisional decrease to its net deferred tax assets of $105.0 million with a corresponding decrease to the deferred tax asset valuation allowance. The Company also recognized a provisional decrease to its deferred tax liabilities associated with indefinite-lived intangible assets of $26.6 million with a corresponding tax benefit. The Company is still completing its calculation of the impact of these changes on its deferred tax balances.

•

Transition Tax on unrepatriated foreign earnings: The Transition Tax on unrepatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of the Company’s foreign subsidiaries. Based on the amount of post-1986 E&P of the Company's foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings, the Company estimates its Transition Tax to be $33.8 million, which is fully offset by net operating losses resulting in no estimated net Transition Tax expense. To complete its estimate of the Transition Tax, the Company must complete its calculation of E&P, complete its calculation of the effects on U.S. states whose laws conform with the Internal Revenue Code, determine whether to offset the Transition Tax with foreign tax credits, and make a final determination of historical non-U.S. income taxes paid and/or accrued.

•

Limits on executive compensation: The Tax Act of 2017 imposes new limits on the deductibility of executive stock-based compensation. To determine the effect of the new limits, the Company must determine whether compensation resulting from agreements executed before the effective date of the Tax Act of 2017 are grandfathered by the Tax Act of 2017. The Company estimates the effect of the new limits was not material; however, the Company has not completed its analysis of state conformity with respect to these provisions of the Tax Act of 2017, including any effect on the apportionment of taxable income among the states in which it conducts business.

•

Valuation allowance: The Company must assess whether its deferred tax asset valuation allowance is affected by various aspects of the Tax Act of 2017 (e.g., deemed repatriation of deferred foreign income, future GILTI inclusions, new categories of foreign tax credits). As the Company has recorded provisional amounts related to certain portions of the Tax Act of 2017, any corresponding change in the deferred tax asset valuation allowance is also provisional. However, the Company was able to determine that the Tax Act of 2017 does not change its assertion that its U.S. federal deferred tax assets are not more likely than not to be realized, thus the Company has maintained its deferred tax asset valuation allowance for U.S. federal deferred tax assets.

No provisional amounts were recorded for the following elements of the Tax Act of 2017 as the Company was not able to make reasonable estimates of their effects:

•

Global intangible low taxed income (“GILTI”): The Tax Act of 2017 creates a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Due to the complexity of the GILTI rules, the Company continues to evaluate its accounting implications. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into the Company’s measurement of its deferred taxes. The Company has not yet completed its analysis of the GILTI rules and has not made an accounting policy election with respect to the treatment of the GILTI tax.

•

Indefinite reinvestment assertion: Beginning in 2018, the Tax Act provides a 100% deduction for dividends received from 10-percent owned foreign corporations by U.S. corporate shareholders, subject to a one-year holding period. Although dividend income is now exempt from U.S. federal income tax, U.S. GAAP requires companies to account for the tax consequences of outside basis differences and other tax impacts of investments in non-U.S. subsidiaries. The Company accrued a liability for U.S. federal and certain state income taxes on its non-U.S. subsidiaries’ previously undistributed foreign earnings. While the Company has accrued the Transition Tax on the deemed repatriated earnings that were previously asserted to be indefinitely reinvested, additional outside basis differences likely exist, which could result in additional state income tax, foreign income tax and foreign withholding taxes if the amount equal to the outside basis difference were repatriated. Therefore, the Company was unable to determine a reasonable estimate of the remaining tax liability, if any, under the Tax Act of 2017 for its remaining outside basis differences or evaluate how the Tax Act of 2017 affects the Company’s existing accounting position to indefinitely reinvest unremitted foreign earnings.

The provisional amounts are estimated based on information available as of December 31, 2017. The items described above, including the provisional items, are subject to change as additional information becomes available, but no later than one year from enactment of the Tax Act of 2017.