10	Income Taxes


	2011		2010		2009
Income Before Income Taxes

Domestic (including U.S. exports)	$	7,330	$	6,074	$	5,472
Foreign subsidiaries		713		553		186

	$	8,043	$	6,627	$	5,658

Income Tax Expense / (Benefit)
Current
Federal	$	1,851	$	1,530	$	1,278
State		272		236		195
Foreign		521		432		312

		2,644		2,198		1,785


Deferred
Federal		147		307		296
State		(5)		(191)		(32)
Foreign		(1)		–		–

		141		116		264

	$	2,785	$	2,314	$	2,049


	October 1, 2011		October 2, 2010
Components of Deferred Tax Assets and Liabilities
Deferred tax assets
Accrued liabilities	$	(2,806)	$	(2,270)
Foreign subsidiaries		(566)		(553)
Equity-based compensation		(323)		(379)
Noncontrolling interest net operating losses		(554)		(375)
Other		(386)		(290)

Total deferred tax assets		(4,635)		(3,867)


Deferred tax liabilities
Depreciable, amortizable and other property		4,959		4,510
Licensing revenues		301		328
Leveraged leases		38		49
Other		136		189

Total deferred tax liabilities		5,434		5,076

Net deferred tax liability before valuation allowance		799		1,209
Valuation allowance		580		404

Net deferred tax liability	$	1,379	$	1,613

The valuation allowance principally relates to a $554 million deferred tax asset for the noncontrolling interest share of operating losses at our consolidated international theme parks. The ultimate utilization of the noncontrolling interest share of the net operating losses, which have an indefinite carryforward period, would not have an impact on the Company’s net income attributable to Disney as any income tax benefit would be offset by a charge to noncontrolling interest in the income statement.

As of October 1, 2011, the Company had undistributed earnings of foreign subsidiaries of approximately $340 million for which deferred taxes have not been provided. The Company intends to reinvest these earnings for the foreseeable future. If these amounts were distributed to the United States, in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes. Assuming the permanently reinvested foreign earnings were repatriated under laws and rates applicable at 2011 fiscal year end, the incremental U.S. tax applicable to the earnings would be approximately $30 million.

A reconciliation of the effective income tax rate to the federal rate is as follows:


	2011		2010		2009
Federal income tax rate		35.0 %		35.0 %		35.0 %
State taxes, net of federal benefit		2.1		2.6		2.6
Domestic production activity deduction		(2.3)		(1.7)		(1.8)
Other, including tax reserves and related interest		(0.2)		(1.0)		0.4

		34.6 %		34.9 %		36.2 %

The American Jobs Creation Act of 2004 made a number of changes to the income tax laws including the creation of a deduction for qualifying domestic production activities. The deduction equals three percent of qualifying net income for fiscal 2007, six percent for fiscal 2008 through 2010, and nine percent for fiscal 2011 and thereafter. Our tax provisions for fiscal years 2011, 2010, and 2009 reflect benefits of $183 million, $111 million and $100 million, respectively, resulting from this deduction.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding the related accrual for interest, is as follows:


	2011		2010		2009
Balance at the beginning of the year	$	680	$	686	$	655
Increases for current year tax positions		75		58		63
Increases for prior year tax positions		41		141		17
Decreases in prior year tax positions		(17)		(192)		(7)
Settlements with taxing authorities		(61)		(13)		(42)

Balance at the end of the year	$	718	$	680	$	686

The year end 2011 and 2010 balances include $480 million and $473 million, respectively, that if recognized, would reduce our income tax expense and effective tax rate. These amounts are net of the offsetting benefits from other tax jurisdictions.

As of the end of fiscal 2011 and 2010, the Company had $175 million and $163 million, respectively, in accrued interest and penalties related to unrecognized tax benefits. During 2011, 2010 and 2009, the Company accrued additional interest of $17 million, $28 million and $27 million, respectively, and recorded reductions in accrued interest of $13 million, $7 million and $12 million, respectively, as a result of audit settlements and other prior-year adjustments. The Company’s policy is to report interest and penalties as a component of income tax expense.

During the current year, the Company resolved various refund claims and other matters with tax authorities. The Company is also subject to U.S. federal, state and local and foreign tax audits. The Company is no longer subject to U.S. Federal examination for years prior to 2008. The Company is no longer subject to examination in any of its major state or foreign tax jurisdictions for years prior to 2003.

In the next twelve months, it is reasonably possible that our unrecognized tax benefits could change due to the resolution of tax matters, including payments on the tax matters discussed above. These resolutions and payments could reduce our unrecognized tax benefits by $93 million.

In fiscal 2011 and 2010, income tax benefits attributable to equity-based compensation transactions exceeded the amounts recorded based on grant date fair value. Accordingly, $109 million and $61 million were credited to shareholders’ equity, respectively in these years. In fiscal year 2009, income tax benefits attributable to equity-based compensation transactions were less than the amounts recorded at grant date and a shortfall of $26 million was charged to shareholder’s equity.