INCOME TAXES



Domestic and Foreign Components of Income (Loss) Before Income Taxes
In millions	2012			2011			2010
Domestic	$	(95	)	$	303		$	611
Foreign	(2		)	(1		)	8
Total	$	(97	)	$	302		$	619



Provision for Income Taxes
				2012									2011									2010
In millions	Current			Deferred			Total			Current			Deferred			Total			Current			Deferred			Total
Federal	$	10		$	15		$	25		$	126		$	(41	)	$	85		$	237		$	(38	)	$	199
State and local	(5		)	(3		)	(8		)	(2		)	(2		)	(4		)	(42		)	(2		)	(44		)
Foreign	—			—			—			6			—			6			5			—			5
Total	$	5		$	12		$	17		$	130		$	(43	)	$	87		$	200		$	(40	)	$	160



Reconciliation to U.S. Statutory Rate
In millions	2012			2011			2010
Taxes at U.S. statutory rate	$	(34	)	$	106		$	216
Equity earnings effect (1)	2			—			—
U.S. business credits	—			(6		)	—
Benefit of dividend income from investments in related companies	(9		)	(2		)	(14		)
Unrecognized tax benefits	9			(1		)	(28		)
Miscellaneous U.S. permanent differences	(3		)	—			—
Impairment of investment in related company	46			—			—
Federal tax accrual adjustments (1)	(8		)	—			—
State and local tax impact	12			(7		)	(7		)
Other - net	2			(3		)	(7		)
Total tax provision	$	17		$	87		$	160
Effective tax rate	(17.5		)%	28.8		%	25.8		%


(1)	The amount for the noted reconciliation item is immaterial for 2011 and 2010 and has been included in the “Other - net” category.

The tax rate for 2012 was negatively impacted primarily by the minimal tax relief related to the impairment of the investment in related company and the inability to utilize state tax credits. UCC's reported effective tax rate for 2012 was (17.5) percent.

The tax rate for 2011 was positively impacted by U.S. state and business credits. These events resulted in an effective tax rate for 2011 that was lower than the U.S. statutory rate. UCC's reported effective tax rate for 2011 was 28.8 percent.

The tax rate for 2010 was positively impacted by dividends received from investments in related companies accounted for using the cost method and the reversal of certain state tax liabilities (uncertain tax positions). These events resulted in an effective tax rate for 2010 that was lower than the U.S. statutory rate. UCC's reported effective tax rate for 2010 was 25.8 percent.



Deferred Tax Balances at December 31 In millions	2012					2011
Deferred Tax Balances at December 31 In millions	Deferred Tax Assets			Deferred Tax Liabilities		Deferred Tax Assets			Deferred Tax Liabilities
Property	$	—		$	202	$	—		$	229
Tax loss and credit carryforwards	103			—		122			—
Postretirement benefit obligations	887			403		772			363
Other accruals and reserves	595			4		576			4
Inventory	10			1		9			—
Long-term debt	—			1		—			1
Investments	—			1		—			1
Other - net	28			46		26			48
Subtotal	$	1,623		$	658	$	1,505		$	646
Valuation allowances	(124		)	—		(121		)	—
Total	$	1,499		$	658	$	1,384		$	646

Gross operating loss carryforwards at December 31, 2012 amounted to $1,255 million compared with $1,348 million at the end of 2011. At December 31, 2012, $582 million of the operating loss carryforwards were subject to expiration in the years 2013 through 2017. The remaining balances expire in years beyond 2017 or have an indefinite carryforward period. Tax credit carryforwards amounted to $39 million at December 31, 2012 and $39 million at December 31, 2011, all of which expire in years beyond 2017 or have an indefinite carryforward period.

Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $53 million at December 31, 2012, $63 million at December 31, 2011 and $103 million at December 31, 2010. It is not practicable to calculate the unrecognized deferred tax liability on those earnings.

The Corporation had valuation allowances that were primarily related to the realization of recorded tax benefits on tax loss carryforwards from operations in the United States of $124 million at December 31, 2012 and $121 million at December 31, 2011.



Total Gross Unrecognized Tax Benefits
In millions	2012			2011			2010
Balance at January 1	$	161		$	163		$	208
Decreases related to positions taken on items from prior years	—			(1		)	(18		)
Increases related to positions taken in current year	8			1			5
Settlement of uncertain tax positions with tax authorities	—			—			(8		)
Decreases due to expiration of statutes of limitations	(3		)	(2		)	(24		)
Balance at December 31	$	166		$	161		$	163

At December 31, 2012, the total amount of unrecognized tax benefits was $166 million ($161 million at December 31, 2011), of which $158 million ($152 million at December 31, 2011) would impact the effective tax rate, if recognized.

Interest and penalties associated with unrecognized tax benefits are recognized as components of the “Provision for income taxes” and was a credit of $1 million in 2012, a credit of $2 million in 2011 and expense of $6 million in 2010. The Corporation's accrual for interest and penalties was a credit of $4 million at December 31, 2012 and a credit of $2 million at December 31, 2011.

Tax years that remain subject to examination for the Corporation's major tax jurisdictions are shown below:



Tax Years Subject to Examination by Major Tax Jurisdiction at December 31
Jurisdiction	Earliest Open Year
Jurisdiction	2012	2011
United States:
Federal income tax	2004	2004
State and local income tax	2004	2004

The Corporation is included in Dow's consolidated federal income tax group and consolidated tax return. Current and deferred tax expenses are calculated for the Corporation as a stand-alone group and are allocated to the group from the consolidated totals. UCC is currently under examination in a number of tax jurisdictions, including the U.S. federal and various state jurisdictions. It is reasonably possible that these examinations may be resolved within twelve months. As a result, it is reasonably possible that the total gross unrecognized tax benefits of the Corporation at December 31, 2012, will be reduced by approximately $7 million to $150 million primarily related to litigation of R&D credits.

The reserve for non-income tax contingencies related to issues in the United States was $8 million at December 31, 2012 and $10 million at December 31, 2011. This is management's best estimate of the potential liability for non-income tax contingencies. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded through the various jurisdictions' tax court systems. It is the opinion of the Corporation's management that the possibility is remote that costs in excess of those accrued will have a material impact on the Corporation's consolidated financial statements.

Subsequent Event

On January 2, 2013, President Obama signed into law the “American Taxpayer Relief Act of 2012.” This law extends retroactively to 2012 and prospectively through 2013 certain temporary business tax provisions (“extenders”) that are beneficial to UCC including the research and experimentation tax credit, the controlled foreign corporation look-through rule, bonus depreciation, and various incentives for energy efficient homes and buildings. As this tax law was enacted on January 2, 2013, the retroactive impact for 2012 will be recognized in the first quarter of 2013 tax provision. The Corporation estimates the extenders will have an immaterial impact on the tax provision.