Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

v3.20.4
INCOME TAXES
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes
Income (loss) from continuing operations before income taxes includes the following components:
(In Millions)
2020 2019 2018
United States $ (201) $ 313  $ 565 
Foreign 8  —  — 
$ (193) $ 313  $ 565 
The components of the income tax provision (benefit) on continuing operations consist of the following:
(In Millions)
2020 2019 2018
Current provision (benefit):
United States federal $ (2) $ (1) $ (1)
United States state & local —  —  — 
Foreign (1) —  1 
(3) (1) — 
Deferred provision (benefit):
United States federal (95) 19  (475)
United States state & local (11) —  — 
  Foreign (2) —  — 
Total income tax provision (benefit) from continuing operations $ (111) $ 18  $ (475)
Reconciliation of our income tax attributable to continuing operations computed at the U.S. federal statutory rate is as follows:
(In Millions)
2020 2019 2018
Tax at U.S. statutory rate $ (41) 21  % $ 66  21  % $ 119  21  %
Increase (decrease) due to:
Percentage depletion in excess of cost depletion (42) 22  (49) (16) (55) (10)
Non-taxable income related to noncontrolling interests (9) 4  —  —  —  — 
Luxembourg legal entity reduction —  —  846  271  162  29 
Valuation allowance release:
Current year activity —  —  —  —  (80) (14)
Release of U.S. valuation allowance —  —  —  —  (461) (81)
Luxembourg legal entity reduction —  —  (846) (271) (162) (29)
State taxes, net (11) 6  —  —  —  — 
Other items, net (8) 4  1  1  2  — 
Provision for income tax expense (benefit) and effective income tax rate including discrete items $ (111) 57  % $ 18  6  % $ (475) (84) %
The increase in income tax benefit from 2019 to 2020 is directly correlated to the increase in pre-tax book loss from the prior period for both federal and state income tax purposes. The other primary driver of the increase in income tax benefit is related to income of noncontrolling interests for which no tax is recognized.
The increase in income tax expense from 2018 to 2019 is primarily due to release of the valuation allowance in the U.S. of $461 million in 2018, which did not recur in 2019. The Luxembourg legal entity reduction relates to initiatives resulting in the dissolution of certain entities and settlement of related financial instruments in the years ended December 31, 2019 and 2018. These 2019 and 2018 NOL deferred tax asset reductions resulted in tax expense of $846 million and $162 million, respectively, which were fully offset by decreases in the respective valuation allowance.
The components of income taxes for other than continuing operations consisted of the following:
(In Millions)
2020 2019 2018
Other comprehensive income:
Postretirement benefit liability $ (52) $ 11  $ 4 
Unrealized net loss on derivative financial instruments (1) —  1 
Total $ (53) $ 11  $ 5 
Significant components of our deferred tax assets and liabilities are as follows:
(In Millions)
2020 2019
Deferred tax assets:
Operating loss and other carryforwards $ 1,236  $ 795 
Pension and OPEB liabilities 228  114 
Property, plant and equipment and mineral rights —  1 
State and local 132  71 
Other liabilities 190  70 
Total deferred tax assets before valuation allowance 1,786  1,051 
Deferred tax asset valuation allowance (836) (441)
Net deferred tax assets 950  610 
Deferred tax liabilities:
Investment in partnerships (144) (137)
Property, plant and equipment and mineral rights (246) — 
Other assets (68) (14)
Total deferred tax liabilities (458) (151)
Net deferred tax assets $ 492  $ 459 
We had gross domestic (including states) and foreign NOLs of $7,444 million and $1,592 million, respectively, at December 31, 2020. We had gross domestic and foreign NOLs of $3,459 million and $1,592 million, respectively, at December 31, 2019. The U.S. federal NOLs will begin to expire in 2034 and state NOLs will begin to expire in 2021. The foreign NOLs can be carried forward indefinitely. We had foreign tax credit carryforwards of $6 million at December 31, 2019, which expired in 2020. We had gross interest expense limitation carryforwards of $80 million and $55 million for the years ended December 31, 2020 and 2019, respectively. This interest expense can be carried forward indefinitely.
The changes in the valuation allowance are presented below:
(In Millions)
2020 2019 2018
Balance at beginning of year $ 441  $ 1,287  $ 1,983 
Change in valuation allowance:
Included in income tax expense (benefit) (3) (846) (691)
Change in deferred assets in other comprehensive income —  —  (5)
Increase from acquisitions 398  —  — 
Balance at end of year $ 836  $ 441  $ 1,287 
During 2020, we recorded a $398 million valuation allowance through opening balance sheet adjustments to reflect the portion of federal and state NOLs that are limited under Section 382 of the IRC acquired through the AK Steel Merger.
During 2019, a legal entity reduction initiative was completed in Luxembourg resulting in the dissolution of certain entities and settlement of related financial instruments, triggering the utilization of $1.3 billion of NOL deferred tax asset and reversal of the intercompany notes deferred tax liability of $447 million. In addition, prior year adjustments in Luxembourg and a statutory rate reduction from 26.01% to 24.94% resulted in a net increase to the operating loss carryforward deferred tax asset of $46 million. The total net deferred tax reduction resulted in an expense of $846 million which was fully offset by a decrease in the valuation allowance. During 2018, a similar legal entity reduction initiative was completed resulting in the dissolution of certain Luxembourg entities which resulted in a decrease in the NOL deferred tax asset of $162 million which was fully offset by a decrease in valuation allowance. We continue to maintain a full valuation allowance against the remaining Luxembourg net deferred tax assets of $397 million at December 31, 2020 and 2019. Our losses in Luxembourg in recent periods represent sufficient negative evidence to require a full valuation allowance against the deferred tax assets in that jurisdiction. We intend
to maintain a valuation allowance against the deferred tax assets related to these operating losses, until sufficient positive evidence exists to support the realization of such assets.
We recorded a $696 million net decrease in the valuation allowance in the year ended December 31, 2018. As of December 31, 2018, our U.S. operations emerged from a three-year cumulative loss position. As the significant negative evidence of cumulative losses had been eliminated, we undertook an evaluation of the continuing need for a valuation allowance on the U.S. deferred tax assets, the majority of which related to the U.S. tax NOLs.
In completing our evaluation of whether a valuation allowance was still needed, we considered all available positive and negative evidence. Positive evidence considered included the emergence from the three-year cumulative loss position, our long-term customer contracts with minimum tonnage requirements, the global scarcity of iron ore pellets, near term forecasts of strong profitability and the recently revised IRC Section 163(j) interest deduction limitation. Negative evidence included the overall size of the deferred tax asset with limited carryforward and no carryback opportunity, the finite nature of the iron ore resources we mine, the uncertainty of steel tariffs that positively impacted our revenue rates in 2018 and the various market signs that the U.S. economy may be nearing the end of the current expansion.
We also considered that future realization of the deferred tax assets depends on the existence of sufficient taxable income of the appropriate character during the carryforward period. In considering sources of taxable income, we identified that a portion of the deferred tax assets would be utilized by existing taxable temporary differences reversing in the same periods as existing deductible temporary differences. In addition, we determined that carryback opportunities and tax planning strategies do not exist as potential sources of future taxable income. Lastly, forecasting future taxable income was considered, but was challenging in a cyclical industry such as ours as it relies heavily on the accuracy of key assumptions, particularly about key pricing benchmarks.
Because historical information is verifiable and more objective than forecast information and due to the cyclicality of the industry, we developed an estimate of future income based on our historical earnings through the most recent industry cycle. We adjusted historical earnings for certain non-recurring items as well as to reflect the current corporate structure by eliminating the impact of discontinued operations and extinguished debt (“core earnings”). Additionally, we adjusted core earnings to reflect the impact of the recently revised IRC Section 163(j) interest expense deduction limitation as well as permanent tax adjustments. The IRC Section 163(j) limitation would limit our interest expense deduction, particularly in down years in the industry cycle, resulting in higher taxable income.
Based on the core earnings analysis, our average annual book taxable income through the business cycle was in excess of the estimated $10 million taxable income that would be required annually to fully utilize the deferred tax assets within the 19-year carryforward period. We ascribed significant weight in our assessment to the core earnings analysis and the resulting projection of taxable income through the industry cycle. Based on the weight of this positive evidence, and after considering the other available positive and negative evidence, we determined that it was appropriate to release all of the valuation allowance related to U.S. federal deferred tax assets at December 31, 2018 as it was more likely than not that the entire amount of the U.S. deferred tax asset would be realized before the end of the carryforward period. The income tax benefit recorded for the reversal of the valuation allowance against the U.S. deferred tax assets was $461 million for the year ended December 31, 2018.
We also have a valuation allowance recorded against certain state NOLs and foreign tax credits, which are expected to expire before utilization. At December 31, 2020 and 2019, we had a valuation allowance recorded against certain state NOLs of $98 million and $38 million, respectively. At December 31, 2019, we had a valuation allowance recorded against certain foreign tax credits of $6 million, which expired in 2020.
At December 31, 2020 and 2019, we had no cumulative undistributed earnings of foreign subsidiaries included in retained earnings. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(In Millions)
2020 2019 2018
Unrecognized tax benefits balance as of January 1 $ 29  $ 29  $ 33 
Increase for tax positions in current year 7  —  4 
Decrease for tax positions of prior year (4) —  — 
Lapses in statutes of limitations —  —  (8)
Increases from acquisitions 75  —  — 
Unrecognized tax benefits balance as of December 31 $ 107  $ 29  $ 29 
At December 31, 2020 and 2019, we had $107 million and $29 million, respectively, of unrecognized tax benefits recorded. Of this amount, $9 million was recorded in Other current liabilities for the year ended December 31, 2020. Additionally, $2 million and $4 million, were recorded in Other non-current liabilities for the years ended December 31, 2020 and 2019, respectively, and $96 million was recorded in Other non-current assets for both years in the Statements of Consolidated Financial Position. If the unrecognized tax benefits were recognized, the entire $11 million would impact the effective tax rate. We do not expect that the amount of unrecognized benefits will change significantly within the next 12 months. At December 31, 2020 and 2019, we had $1 million and $4 million, respectively, of accrued interest and penalties related to the unrecognized tax benefits recorded in Other non-current liabilities in the Statements of Consolidated Financial Position.
Tax years 2016 and forward remain subject to examination for the U.S., and tax years 2008 and forward remain subject to examination for Canada.