Income Taxes
 12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The provision for federal and foreign income taxes consisted of the following: 
(In millions)
2018

 
2017

 
2016

Current income tax expense (benefit)
 
 
 
 
 
Federal
$
245

 
$
822

 
$
713

Foreign
43

 
40

 
38

State
—

 
—

 
(3
)
Deferred income tax expense (benefit)
 
 
 
 
 
Federal
(42
)
 
235

 
118

Foreign
15

 
18

 
6

State
3

 
(1
)
 
1

Total
$
264

 
$
1,114

 
$
873


 
The expense for income taxes differed from the U.S. statutory rate due to the following: 
 
2018

 
2017

 
2016

Statutory tax rate
21.0
 %
 
35.0
 %
 
35.0
 %
Foreign derived intangible income (FDII)
(4.2
)
 
—

 
—

Research and development tax credit (R&D tax credit)
(2.4
)
 
(1.5
)
 
(1.3
)
Equity compensation
(1.0
)
 
(1.2
)
 
(1.6
)
Foreign income tax rate differential
1.3

 
0.2

 
—

Prior year true-up
(1.1
)
 
0.1

 
—

Tax benefit related to discretionary pension contributions
(3.0
)
 
—

 
—

R&D tax credit claims related to the 2014-2017 tax years
(2.1
)
 
—

 
—

Irish restructuring
(2.0
)
 
—

 
—

Change in valuation allowance
2.0

 
—

 
—

Domestic manufacturing deduction benefit
—

 
(2.5
)
 
(2.7
)
Remeasurement of deferred taxes
—

 
3.2

 
—

One-time transition tax on previously undistributed foreign earnings
—

 
2.3

 
—

TRS SAS tax-free gain
—

 
—

 
(1.8
)
Other items, net
(0.1
)
 
0.2

 
0.7

Effective tax rate
8.4
 %
 
35.8
 %
 
28.3
 %


In 2017, the Tax Cuts and Jobs Act of 2017 (2017 Act) was enacted, which reduced the U.S. corporate tax rate to 21% effective in 2018. See below for a detailed discussion of the 2017 Act.

In the fourth quarter of 2018, Forcepoint completed an Irish restructuring transaction resulting in a deferred tax asset of approximately $63 million. We have evaluated both the positive and negative evidence to support our ability to realize the deferred tax asset associated with the restructuring. We believe it is more likely than not that the benefit from this restructuring transaction will not be realized. Accordingly, we have provided a valuation allowance of $63 million on the deferred tax asset related to this transaction.

In the third quarter of 2018, the Company recognized a net tax benefit of $110 million related to the completion of the 2017 tax return and additional amended research and development tax credit (R&D tax credit) claims related to the 2014-2016 tax years.

Also in the third quarter of 2018, we made a discretionary contribution to our pension plans of $1.25 billion. In the second quarter of 2018, we determined we would make this contribution and as a result recorded a net tax benefit of $95 million in the second quarter of 2018. This was primarily due to the remeasurement of the related deferred tax asset balance at the 2017 tax rate of 35% versus the 2018 tax rate of 21% since the discretionary contribution was deductible on our 2017 tax return.

In 2016, the Company recorded a tax benefit of approximately $55 million as a result of the tax-free gain from the sale of our equity method investment in TRS SAS as discussed in “Note 4: Thales-Raytheon Systems Co. Ltd. (TRS) Joint Venture.”

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. In August 2018, we received a full acceptance letter from the IRS that finalized their review of the 2016 tax year with no proposed changes. With the exception of one matter related to the 2015 tax year, all IRS examinations related to originally filed returns are closed through the 2016 tax year. In December 2017, we received the IRS Revenue Agent’s Report for the 2015 tax year which proposed approximately $41 million in adjustments related to the Forcepoint transaction and a U.K. share redemption transaction. We disagree and have protested the proposed adjustments with the IRS Appeals division. In the second quarter of 2018, the IRS agreed to withdraw the issue involving the U.K. share redemption transaction, which reduced the proposed adjustment to $32 million. Except for the issue appealed for the 2015 tax year, we have no proposed adjustments for any tax year prior to 2018. No amount related to the remaining proposed IRS adjustment is reflected in unrecognized tax benefits as of December 31, 2018. The amended
tax returns for tax years 2014-2016 which reflect refund claims related to the increased R&D tax credits will be subject to audit. The schedule for that audit has yet to be proposed by the IRS. We are also under audit by multiple state and foreign tax authorities.

(In millions)
2018

 
2017

 
2016

Domestic income from continuing operations before taxes
$
2,937

 
$
3,027

 
$
2,964

Foreign income from continuing operations before taxes
210

 
86

 
121



The Company will generally be free of additional U.S. federal tax consequences due to a dividends received deduction implemented as part of the move to a territorial tax system on distributed foreign subsidiary earnings. No provision has been made for deferred taxes related to any remaining historical outside basis differences in our non-U.S. subsidiaries. Determination of the amount of unrecognized deferred tax liability on outside basis differences is not practicable because these differences primarily relate to non-earnings and profits (E&P) book tax differences, such as acquisition accounting, and could be recognized upon a sale or other transactions of a subsidiary. The Company continues to assert indefinite reinvestment on these outside basis differences generated on or before December 31, 2017.

We made (received) the following net tax payments (refunds) during the years ended December 31:
(In millions)
2018

 
2017

 
2016

Federal
$
(69
)
 
$
765

 
$
710

Foreign
63

 
77

 
47

State
23

 
36

 
22



We believe that our income tax reserves are adequate; however, amounts asserted by taxing authorities could be greater or less than amounts accrued and reflected in our consolidated balance sheets. Accordingly, we could record adjustments to the amounts for federal, foreign and state tax-related liabilities in the future as we revise estimates or as we settle or otherwise resolve the underlying matters. In the ordinary course of business, we may take new positions that could increase or decrease our unrecognized tax benefits in future periods.

The balance of our unrecognized tax benefits, exclusive of interest, was $92 million and $9 million at December 31, 2018 and December 31, 2017, respectively, the majority of which would affect our earnings if recognized.

We accrue interest and penalties related to unrecognized tax benefits in tax expense. Interest and penalties recognized during 2018, 2017 and 2016 and accrued as of December 31, 2018 and December 31, 2017 were immaterial.

A rollforward of our unrecognized tax benefits was as follows: 
(In millions)
2018

 
2017

 
2016

Unrecognized tax benefits, beginning of year
$
9

 
$
7

 
$
7

Additions based on current year tax positions
20

 
1

 
2

Additions based on prior year tax positions
68

 
4

 
1

Reductions based on prior year tax positions
(5
)
 
(1
)
 
(3
)
Settlements based on prior year tax positions
—

 
(2
)
 
—

Unrecognized tax benefits, end of year
$
92

 
$
9

 
$
7



With the exception of Forcepoint, we generally defer our state income tax expense to the extent we can recover this expense through the pricing of our products and services to the U.S. government. We include this deferred amount in prepaid expenses and other current assets until allocated to our contracts, which generally occurs upon payment or when otherwise agreed as allocable with the U.S. government. Current state income tax expense allocated to our contracts was $18 million, $32 million and $26 million in 2018, 2017 and 2016, respectively. We include state income tax expense allocated to our contracts in administrative and selling expenses.
Deferred income taxes consisted of the following at December 31:
(In millions)
2018

 
2017

Noncurrent deferred tax assets (liabilities)
 
 
 
Accrued employee compensation and benefits
$
209

 
$
202

Other accrued expenses and reserves
77

 
86

Contract balances and inventories
(494
)
 
(537
)
Pension benefits
1,306

 
1,505

Other retiree benefits
67

 
67

Net operating loss and tax credit carryforwards
83

 
99

Depreciation and amortization
(827
)
 
(858
)
Partnership outside basis difference
(29
)
 
(36
)
Other
21

 
21

Valuation allowance
(84
)
 
(17
)
Deferred income taxes—noncurrent
$
329

 
$
532


 
As of December 31, 2018, we had U.S. federal and state net operating loss (NOL) carryforwards related to Forcepoint of $110 million and $292 million, respectively, which expire at various dates through 2037. We believe it is more likely than not that the deferred tax asset will be realized to the extent of existing deferred tax liabilities.

We also had foreign NOL carryforwards of $95 million as of December 31, 2018, with the majority generated in the U.K. where NOLs may be carried forward indefinitely. We believe that we will have sufficient taxable income to realize these deferred tax assets.

The Tax Cuts and Jobs Act
On December 22, 2017, the President signed the Tax Cuts and Jobs Act of 2017 (2017 Act) which enacted a wide range of changes to the U.S. corporate income tax system. The 2017 Act reduced the U.S. corporate statutory federal tax rate to 21% effective in 2018, eliminated the domestic manufacturing deduction benefit and introduced other tax base broadening measures, changed rules for expensing and capitalizing business expenditures, established a territorial tax system for foreign earnings as well as a minimum tax on certain foreign earnings, provided for a one-time transition tax on previously undistributed foreign earnings, and introduced new rules for the treatment of certain foreign income, including foreign derived intangible income (FDII).

Also on December 22, 2017, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 118 (SAB 118), which provided companies with additional guidance on how to account for the 2017 Act in their financial statements, allowing companies to use a measurement period. As of December 31, 2017, we made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax on previously undistributed foreign earnings and recognized provisional amounts totaling $171 million in accordance with SAB 118, which was included as a component of income tax expense from continuing operations. As of December 31, 2018, we had finalized our provisional estimates for the remeasurement of our existing U.S. deferred tax balances and the one-time transition tax for which we recorded a $1 million tax benefit in 2018.

Deferred tax assets and liabilities—At the date of enactment, the Company had a net deferred tax asset for the difference between the tax basis and the book basis of the U.S. assets and liabilities. Due to the 2017 Act, the future impact associated with the reversal of the net deferred tax asset will be subject to tax at a lower corporate tax rate. Consequently in 2017, we recorded a tax expense of $100 million to reduce the Company’s deferred tax asset due to the remeasurement of the U.S. deferred tax assets and liabilities for the reduction in the corporate tax rate from 35% to 21%. At December 31, 2018, we have finalized our provisional estimate for the remeasurement of our existing deferred tax balances with no additional adjustment.

Transition tax—The one-time transition tax is based on our total post-1986 E&P for which we have previously deferred U.S. income taxes. In 2017, we recorded a provisional amount for our one-time transition tax liability, using an applicable tax rate
of 15.5%, resulting in an increase in income tax expense of $71 million after accounting for foreign tax credits. In 2018, we recorded a $1 million tax benefit to finalize our provisional calculation for the one-time transition tax for foreign E&P. This refinement was a result of completing the data gathering and analysis based on the 2017 Act and guidance issued to date in 2018, including IRS Notices 2018-07, 2018-13 and 2018-26. No provision has been made for deferred taxes related to any remaining historical outside basis differences in our non-U.S. subsidiaries as we continue to assert indefinite reinvestment on outside basis differences not related to amounts that have been previously taxed in the U.S. or undistributed earnings generated after December 31, 2017.

In addition to the changes described above, the 2017 Act imposes a U.S. tax on global intangible low taxed income (GILTI) that is earned by certain foreign affiliates owned by a U.S. shareholder. The computation of GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. The Company has made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred.