INCOME TAXES
Income Tax Benefit (Provision)
Our income tax benefit (provision) consisted of the following:
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| | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2013 | 2012 | 2011 |
Current tax benefit (provision): |
|
|
|
|
|
|
Federal | $ | 24 |
| $ | — |
| $ | 91 |
|
State and local | (3 | ) | 15 |
| (6 | ) |
International | 1 |
| (14 | ) | (2 | ) |
Deferred tax provision: |
|
|
|
|
|
|
Federal | 7,197 |
| (4 | ) | 2 |
|
State and local | 794 |
| (13 | ) | — |
|
Income tax benefit (provision) | $ | 8,013 |
| $ | (16 | ) | $ | 85 |
|
The following table presents the principal reasons for the difference between the effective tax rate and the U.S. federal statutory income tax rate:
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| | | | | | |
| Year Ended December 31, |
| 2013 | 2012 | 2011 |
U.S. federal statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % |
State taxes | 3.0 |
| 3.3 |
| 3.4 |
|
Other | (0.4 | ) | 4.0 |
| (3.7 | ) |
| 37.6 |
| 42.3 |
| 34.7 |
|
Decrease in valuation allowance | (367.5 | ) | (40.8 | ) | (45.7 | ) |
Income tax allocation | 12.7 |
| — |
| — |
|
Effective income tax rate | (317.2 | )% | 1.5 | % | (11.0 | )% |
Deferred Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The following table shows significant components of our deferred tax assets and liabilities: |
| | | | | | |
| December 31, |
(in millions) | 2013 | 2012 |
Deferred tax assets: | | |
Net operating loss carryforwards | $ | 6,024 |
| $ | 6,414 |
|
Pension, postretirement and other benefits | 4,982 |
| 6,415 |
|
AMT credit carryforward | 378 |
| 402 |
|
Deferred revenue | 1,965 |
| 2,133 |
|
Other | 698 |
| 881 |
|
Valuation allowance | (177 | ) | (10,963 | ) |
Total deferred tax assets | $ | 13,870 |
| $ | 5,282 |
|
Deferred tax liabilities: | | |
Depreciation | $ | 4,799 |
| $ | 4,851 |
|
Intangible assets | 1,704 |
| 1,730 |
|
Other | 639 |
| 285 |
|
Total deferred tax liabilities | $ | 7,142 |
| $ | 6,866 |
|
The following table shows the current and noncurrent deferred tax assets (liabilities):
|
| | | | | | |
| December 31, |
(in millions) | 2013 | 2012 |
Current deferred tax assets, net | $ | 1,736 |
| $ | 463 |
|
Noncurrent deferred tax assets (liabilities), net | 4,992 |
| (2,047 | ) |
Total deferred tax assets (liabilities), net | $ | 6,728 |
| $ | (1,584 | ) |
The current and noncurrent components of our deferred tax balances are generally based on the balance sheet classification of the asset or liability creating the temporary difference. If the deferred tax asset or liability is not based on a component of our balance sheet, such as our net operating loss (“NOL”) carryforwards, the classification is presented based on the expected reversal date of the temporary difference. Our valuation allowance has been allocated between current or noncurrent based on the percentages of current and noncurrent deferred tax assets to total deferred tax assets.
At December 31, 2013, we had (1) $378 million of federal alternative minimum tax (“AMT”) credit carryforwards, which do not expire and (2) $15.3 billion of federal pretax NOL carryforwards, which will not begin to expire until 2023.
Valuation Allowance
We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. We establish valuation allowances if it is not likely we will realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, our future projections of sustained profitability, deferred income tax liabilities, the overall business environment, our historical financial results, our industry's historically cyclical financial results and potential current and future tax planning strategies. We recorded a full valuation allowance in 2004 due to our cumulative loss position at that time, compounded by the negative industry-wide business trends and outlook. At December 31, 2012, we had an $11.0 billion valuation allowance established against our deferred income tax assets, which represented a full valuation allowance against our net deferred income tax assets.
For 2012, we recorded a pre-tax profit of $1.0 billion and during 2012 we moved from a three-year cumulative loss position to a cumulative income position for the first time since we established the full valuation allowance. However given the industry's recent history of significant losses, we concluded as of December 31, 2012 that another year of significant profitability was needed to support a release of valuation allowance.
During 2013, we continued our trend of sustained profitability, recording a pre-tax profit of $2.5 billion for the year. During the December 2013 quarter, after considering all relevant factors, we concluded that our deferred income tax assets are more likely than not to be realized. In evaluating the likelihood of utilizing our net deferred net assets, the significant relevant factors that we considered are: (1) our recent history of profitability; (2) growth in the U.S. and global economies; (3) forecast of airline revenue trends; (4) estimate of future fuel prices; and (5) future impact of taxable temporary differences. Accordingly, at December 31, 2013, we released almost all of our valuation allowance against our net deferred income tax assets, resulting in an $8.3 billion benefit in our provision for income taxes. We have retained a valuation allowance of $107 million against capital loss carryforwards, as well as $70 million against certain state and local operating loss and credit carryforwards, due to limited carryforward periods. In addition to tax valuation allowance release of $8.3 billion, we recorded an income tax expense of $321 million related to an income tax allocation as discussed below, resulting in a net income tax benefit of $8.0 billion in 2013.
The following table shows the balance of our valuation allowance and the associated activity:
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| | | | | | | | | |
(in millions) | 2013 | 2012 | 2011 |
Valuation allowance at beginning of period | $ | 10,963 |
| $ | 10,705 |
| $ | 9,632 |
|
Income tax provision | (975 | ) | (432 | ) | (351 | ) |
Other comprehensive income tax benefit | (1,186 | ) | 690 |
| 1,241 |
|
Release(1) | (8,310 | ) | — |
| — |
|
Other | (315 | ) | — |
| 183 |
|
Valuation allowance at end of period(2) | $ | 177 |
| $ | 10,963 |
| $ | 10,705 |
|
| |
(1) | In addition to tax valuation allowance release of $8.3 billion, we recorded an income tax expense of $321 million related to an income tax allocation as discussed below, resulting in a net income tax benefit of $8.0 billion in 2013. |
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(2) | At December 31, 2013, 2012 and 2011, $13 million, $3.1 billion and $2.5 billion of deferred income tax expense was recorded in AOCI on our Consolidated Balance Sheets, respectively. |
Income Tax Allocation
We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations (the "Income Tax Allocation"). At the end of 2013, we released our tax valuation allowance, as discussed above. GAAP requires that the release of a valuation allowance be recognized in current earnings, even when a portion of the related deferred tax asset originated through amounts recognized in AOCI. As a result, $1.9 billion of income tax expense remains in AOCI, primarily related to pension obligations, and will not be recognized in net income until the pension obligations are fully extinguished, which will not occur for approximately 25 years.
During 2009, as a result of the Income Tax Allocation, we recorded a non-cash deferred income tax expense of $321 million on other comprehensive income as a result of hedge gains on fuel derivatives and an offsetting non-cash income tax benefit of $321 million. This deferred income tax expense remained in AOCI until all amounts in AOCI that related to fuel derivatives which were designated as accounting hedges were recognized in the Consolidated Statement of Operations. All of the remaining amounts held in AOCI for fuel derivatives previously designated as hedges were reclassified to earnings during 2013. As a result, an income tax expense of $321 million was recognized in 2013 upon the settlement of the fuel derivative contracts designated as accounting hedges.
Uncertain Tax Positions
The amount of and changes to our uncertain tax positions were not material in any of the years presented. The amount of unrecognized tax benefits at the end of 2013, 2012 and 2011 was $37 million, $44 million and $22 million, respectively. We accrue interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively. Interest and penalties are not material in any period presented.
We are currently under audit by the IRS for the 2013 and 2012 tax years.
