INCOME TAXES:

As a partnership, we are not subject to United States federal income tax and most state income taxes. However, the Partnership conducts certain activities through corporate subsidiaries which are subject to federal and state income taxes. The components of the federal and state income tax expense (benefit) of our taxable subsidiaries were summarized as follows:



	Years Ended December 31,
	2017			2016			2015
Current expense (benefit):
Federal	$	54		$	(47	)	$	(308	)
State	(16		)	(34		)	(54		)
Total	38			(81		)	(362		)
Deferred expense (benefit):
Federal	(2,055		)	(189		)	268
State	184			12			(29		)
Total	(1,871		)	(177		)	239
Total income tax expense (benefit) from continuing operations	$	(1,833	)	$	(258	)	$	(123	)

Historically, our effective tax rate has differed from the statutory rate primarily due to partnership earnings that are not subject to United States federal and most state income taxes at the partnership level. A reconciliation of income tax expense (benefit) at the United States statutory rate to the income tax expense (benefit) attributable to continuing operations for the years ended December 31, 2017, 2016 and 2015 is as follows:



	2017			2016			2015
Income tax expense (benefit) at United States statutory rate of 35 percent	$	248		$	71		$	316
Increase (reduction) in income taxes resulting from:
Partnership earnings not subject to tax	(477		)	(576		)	(355		)
Goodwill impairment	207			278			—
State tax, net of federal tax benefit	124			(10		)	(29		)
Dividend received deduction	(14		)	(15		)	(22		)
Federal rate change	(1,812		)	—			—
Audit settlement	—			—			(7		)
Change in tax status of subsidiary	(124		)	—			—
Other	15			(6		)	(26		)
Income tax expense (benefit) from continuing operations	$	(1,833	)	$	(258	)	$	(123	)

Deferred taxes result from the temporary differences between financial reporting carrying amounts and the tax basis of existing assets and liabilities. The table below summarizes the principal components of the deferred tax assets (liabilities) as follows:



	December 31,
	2017			2016
Deferred income tax assets:
Net operating losses and alternative minimum tax credit	$	683		$	472
Pension and other postretirement benefits	21			30
Long-term debt	14			32
Other	191			182
Total deferred income tax assets	909			716
Valuation allowance	(189		)	(118		)
Net deferred income tax assets	720			598

Deferred income tax liabilities:
Property, plant and equipment	(1,036		)	(1,633		)
Investments in unconsolidated affiliates	(2,726		)	(3,789		)
Trademarks	(173		)	(273		)
Other	(100		)	(15		)
Total deferred income tax liabilities	(4,035		)	(5,710		)
Net deferred income taxes	$	(3,315	)	$	(5,112	)

The table below provides a rollforward of the net deferred income tax liability as follows:



	December 31,
	2017			2016
Net deferred income tax liability, beginning of year	$	(5,112	)	$	(4,590	)
Goodwill associated with Sunoco Retail to Sunoco LP transaction (see Note 3)	—			(460		)
Net assets (excluding goodwill) associated with Sunoco Retail to Sunoco LP (see Note 3)	—			(243		)
Tax provision, including provision from discontinued operations	1,825			201
Other	(28		)	(20		)
Net deferred income tax liability	$	(3,315	)	$	(5,112	)

ETP Holdco and certain other corporate subsidiaries have federal net operating loss carryforward tax benefits of $403 million, all of which will expire in 2031 through 2037. Our corporate subsidiaries have $62 million of federal alternative minimum tax credits at December 31, 2017, of which $29 million is expected to be reclassified to current income tax receivable in 2018 pursuant to the Tax Cuts and Jobs Act. Our corporate subsidiaries have net operating loss carryforward benefits of $274 million, $217 million net of federal tax, which expire between January 1, 2018 and 2037. A valuation allowance of $186 million is applicable to the state net operating loss carryforward benefits applicable to significant restriction on their use in the Commonwealth of Pennsylvania and the remaining $3 million valuation allowance is applicable to the federal net operating loss carryforward benefit.

The following table sets forth the changes in unrecognized tax benefits:



	Years Ended December 31,
	2017			2016			2015
Balance at beginning of year	$	615		$	610		$	440
Additions attributable to tax positions taken in the current year	—			8			178
Additions attributable to tax positions taken in prior years	28			18			—
Reduction attributable to tax positions taken in prior years	(25		)	(20		)	—
Lapse of statute	(9		)	(1		)	(8		)
Balance at end of year	$	609		$	615		$	610

As of December 31, 2017, we have $605 million ($576 million after federal income tax benefits) related to tax positions which, if recognized, would impact our effective tax rate.

Our policy is to accrue interest expense and penalties on income tax underpayments (overpayments) as a component of income tax expense. During 2017, we recognized interest and penalties of less than $3 million. At December 31, 2017, we have interest and penalties accrued of $9 million, net of tax.

Sunoco, Inc. has historically included certain government incentive payments as taxable income on its federal and state income tax returns. In connection with Sunoco, Inc.’s 2004 through 2011 years, Sunoco, Inc. filed amended returns with the IRS excluding these government incentive payments from federal taxable income. The IRS denied the amended returns, and Sunoco, Inc. petitioned the Court of Federal Claims (“CFC”) in June 2015 on this issue. In November 2016, the CFC ruled against Sunoco, Inc., and Sunoco, Inc. is appealing this decision to the Federal Circuit. If Sunoco, Inc. is ultimately fully successful in its litigation, it will receive tax refunds of approximately $530 million. However, due to the uncertainty surrounding the litigation, a reserve of $530 million was established for the full amount of the litigation. Due to the timing of the litigation and the related reserve, the receivable and the reserve for this issue have been netted in the consolidated balance sheet as of December 31, 2017.

In December 2015, the Pennsylvania Commonwealth Court determined in Nextel Communications v. Commonwealth (“Nextel”) that the Pennsylvania limitation on NOL carryforward deductions violated the uniformity clause of the Pennsylvania Constitution and struck the NOL limitation in its entirety. In October 2017, the Pennsylvania Supreme Court affirmed the decision with respect to the uniformity clause violation; however, the Court reversed with respect to the remedy and instead severed the flat-dollar limitation, leaving the percentage-based limitation intact. Nextel has until April 4, 2018 to file a petition for writ of certiorari with the U.S. Supreme Court. Sunoco, Inc. has recognized approximately $67 million ($53 million after federal income tax benefits) in tax benefit based on previously filed tax returns and certain previously filed protective claims as relates to its cases currently held pending the Nextel matter. However, based upon the Pennsylvania Supreme Court’s October 2017 decision, and because of uncertainty in the breadth of the application of the decision, we have reserved $27 million ($21 million after federal income tax benefits) against the receivable.

In general, ETP and its subsidiaries are no longer subject to examination by the Internal Revenue Service (“IRS”), and most state jurisdictions, for 2013 and prior tax years. However, Sunoco, Inc. and its subsidiaries are no longer subject to examination by the IRS for tax years prior to 2007.

Sunoco, Inc. has been examined by the IRS for tax years through 2013. However, statutes remain open for tax years 2007 and forward due to carryback of net operating losses and/or claims regarding government incentive payments discussed above. All other issues are resolved. Though we believe the tax years are closed by statute, tax years 2004 through 2006 are impacted by the carryback of net operating losses and under certain circumstances may be impacted by adjustments for government incentive payments.

ETE and its subsidiaries also have various state and local income tax returns in the process of examination or administrative appeal in various jurisdictions. We believe the appropriate accruals or unrecognized tax benefits have been recorded for any potential assessment with respect to these examinations.

Income Tax Benefit. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Among other provisions, the highest corporate federal income tax rate was reduced from 35% to 21% for taxable years beginning after December 31, 2017. As a result, the Partnership recognized a deferred tax benefit of $1.81 billion in December 2017. For the year ended December 2016, the Partnership recorded an income tax benefit due to pre-tax losses at its corporate subsidiaries.