12. INCOME TAXES

The domestic pretax loss from continuing operations for the years ended December 31, 2016, 2015 and 2014 was $31.4 million, $94.4 million and $138.8 million, respectively.

The (benefit from) provision for income taxes from continuing operations for the years ended December 31, 2016, 2015 and 2014 consists of the following (dollars in thousands):

	For the Year Ended December 31,
	2016			2015			2014
Current provision (benefit)
Federal	$	-		$	(364	)	$	(10,168	)
State and local		704			(2,279	)		(346	)
Total current provision (benefit)		704			(2,643	)		(10,514	)
Deferred (benefit) provision
Federal		(16,247	)		(126,465	)		13,445
State and local		(1,007	)		(18,346	)		805
Total deferred (benefit) provision		(17,254	)		(144,811	)		14,250
Total (benefit from) provision for income taxes	$	(16,550	)	$	(147,454	)	$	3,736

A reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate for continuing operations for the years ended December 31, 2016, 2015 and 2014 is as follows:

	For the Year Ended December 31,
	2016				2015				2014
Statutory U.S. federal income tax rate		(35.0	)	%		(35.0	)	%		(35.0	)	%
State and local income taxes		(3.4	)			(2.7	)			(2.6	)
Nondeductible goodwill		-				-				0.6
Valuation allowance		0.5				0.6				37.0
Valuation allowance release		-				(116.3	)			-
Federal audit settlement		(6.7	)			-				2.4
Worthless stock		(11.9	)			-				-
Tax credits		(0.4	)			(0.2	)			-
Other		4.1				(2.5	)			0.3
Effective income tax rate		(52.8	)	%		(156.1	)	%		2.7		%

The effective tax rate for the year ended December 31, 2016 includes a $3.7 million net benefit for a worthless stock deduction, which decreased the effective tax rate by 11.9%. The 2016 effective tax rate also includes a $2.1 million favorable tax adjustment related to the recent closure of a federal income tax audit covering the years ended December 31, 2013 through December 31, 2014, which decreased the effective tax rate by 6.7%. The effective tax rate for the year ended December 31, 2015 benefitted by 116.3% due to a valuation allowance release of $109.8 million. The effective tax rate for the year ended December 31, 2014 was negatively impacted by 37.0% due to a valuation allowance of $51.6 million. Additionally, the 2014 effective tax rate was negatively impacted by the settlement of a federal income tax audit covering the years ended December 31, 2008 through December 31, 2012, the impact of which was 2.4%.

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits as of December 31, 2016, 2015 and 2014 is as follows (dollars in thousands):

	2016			2015			2014
Gross unrecognized tax benefits, beginning of the year	$	7,737		$	9,318		$	13,900
Additions for tax positions of prior years		263			19			129
Reductions for tax positions of prior years		-			(20	)		-
Additions for tax positions related to the current year		1,247			864			931
Reductions due to settlements		-			-			(4,064	)
Reductions due to lapse of applicable statute of limitations		(1,115	)		(2,444	)		(1,578	)
Subtotal		8,132			7,737			9,318
Interest and penalties		2,008			1,986			2,820
Total gross unrecognized tax benefits, end of the year	$	10,140		$	9,723		$	12,138

The total amount of net unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods was $6.6 million and $6.4 million for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, our short and long-term reserves, recorded within current accrued income taxes and other non-current liabilities, respectively, related to FASB’s interpretation No. 48 of ASC Topic 740-10, Accounting for Uncertainty in Income Taxes or (“FIN 48”), were $1.2 million and $6.9 million, respectively. We record interest and penalties related to unrecognized tax benefits within (benefit from) provision for income taxes on our consolidated statements of (loss) income and comprehensive (loss) income. The total amount of accrued interest and penalties resulting from such unrecognized tax benefits was $2.0 million for the years ended December 31, 2016 and 2015. For the years ended December 31, 2016, 2015 and 2014, we recognized less than $0.1 million of benefit, $0.7 million of benefit and $0.1 million of benefit, respectively, related to interest and penalties from unrecognized tax benefits in our consolidated results of continuing operations.

CEC and its subsidiaries file income tax returns in the U.S. and in various state and local jurisdictions. CEC and its subsidiaries are routinely examined by tax authorities in these jurisdictions. As of December 31, 2016, CEC had been examined by the Internal Revenue Service through our tax year ending December 31, 2014. In addition, a number of state and local examinations are currently ongoing. It is possible that these state examinations may be resolved within twelve months. Due to the potential for resolution of state examinations, and the expiration of various statutes of limitations, it is reasonably possible that CEC’s gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $1.8 million.

Deferred income tax assets and liabilities result primarily from temporary differences in the recognition of various expenses for tax and financial statement purposes, and from the recognition of the tax benefits of net operating loss carry forwards. Components of deferred income tax assets and liabilities for continuing operations as of December 31, 2016 and 2015 are as follows (dollars in thousands):

	December 31,
	2016			2015
Deferred income tax assets:
Accrued occupancy	$	12,973		$	4,191
Deferred rent obligations		6,232			9,281
Foreign tax credits		32,998			32,998
Valuation allowance foreign tax credits		(32,998	)		(32,998	)
Compensation and employee benefits		15,349			12,751
Tax net operating loss carry forwards		74,315			61,982
Valuation allowance		(12,415	)		(8,196	)
Allowance for doubtful accounts		4,773			3,967
Covenant not-to-compete		7			11
Accrued settlements and legal		13,231			938
Deferred compensation		1,223			520
Accrued restructuring and severance		2,561			6,014
Equity method for investments		669			256
General business tax credits		903			699
Illinois edge credits		4,335			6,351
Valuation allowance edge credits		(4,335	)		(6,351	)
Depreciation and amortization		40,960			47,453
Other		797			712
Total deferred income tax assets		161,578			140,579
Deferred income tax liabilities:
Other		3,306			2,863
Total deferred income tax liabilities		3,306			2,863
Net deferred income tax assets	$	158,272		$	137,716

As of December 31, 2016, the Company has a gross deferred tax asset before valuation allowance of $486.2 million and a gross deferred tax liability of $8.9 million. As of December 31, 2015, the Company had a gross deferred tax asset before valuation allowance of $426.2 million and a gross deferred tax liability of $7.7 million.

As of December 31, 2016, we have federal net operating loss carry forwards of approximately $158.1 million, available to offset future taxable income, which do not begin expiring until 2034 and are fully expired in 2036. Additionally, we have $33.0 million of foreign tax credits which expire during 2022 and 2023, and we continue to maintain a full valuation allowance against the foreign tax credits deferred tax balance. We have state net operating loss (“NOL”) carry forwards of approximately $411.4 million, which expire between 2017 and 2036. Of this amount, approximately $248.2 million relates to separate state NOL carryforwards. We also have Illinois edge credits of $6.7 million gross available to offset future Illinois state income tax, which expire between 2017 and 2019. Valuation allowances have been established against the full amounts of the separate state NOL and Illinois edge credit deferred tax balances.

In assessing the continued need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. Topic 740 provides that important factors in determining whether a deferred tax asset will be realized are whether there has been a strong earnings history exclusive of the loss that created the future deductible amount coupled with evidence indicating that the loss is an aberration rather than a continuing condition and whether sufficient taxable income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets, we consider, among other things, historical levels of taxable income along with possible sources of future taxable income, which include: the expected timing of the reversals of existing temporary reporting differences, the existence of taxable income in prior carryback years, the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits and expected future taxable income. Changes in, among other things, income tax legislation, statutory income tax rates, or future taxable income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods. If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, we record a valuation allowance, or release all or a portion of the valuation allowance if it is more likely than not the deferred tax assets are expected to be realized. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. A high degree of judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets.

As of December 31, 2015, the Company determined that it was more likely than not that we will realize most of our deferred tax assets and, as a result, reversed a significant portion of our valuation allowance in the fourth quarter of 2015. A valuation allowance of $47.5 million was maintained as of December 31, 2015 with respect to our foreign tax credits, separate state net operating losses and Illinois edge credits. After considering both positive and negative evidence related to the realization of these deferred tax assets we have determined that it is necessary to continue to record the valuation allowance against these credits and separate state net operating losses. As of December 31, 2016, the total valuation allowance attributable to these items is $49.7 million. The Company concluded it was not more likely than not for the deferred tax assets related to foreign tax credits to be realized and maintained the valuation allowance with respect to these assets. The separate state NOLs can generally only be used by the originating entity and relate to entities announced for teach-out. Since the future operating income (loss) of these entities is restricted to the teach-out period, the more likely than not threshold was not reached with respect to this portion of the deferred tax assets. The Illinois edge credits expire between 2017 and 2019. Given the limited life of these credits and the need to first exhaust an available NOL carryforward, the valuation allowance pertaining to this item was also not released. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased or decreased, and additional weight may be given to subjective evidence such as our projections for growth. We will continue to evaluate our valuation allowance in future years for any change in circumstances that causes a change in judgment about the realizability of the deferred tax asset.