INCOME TAXES



Domestic and Foreign Components of Income (Loss) Before Income Taxes
In millions	2013			2012			2011
Domestic (1)	$	1,077		$	(95	)	$	303
Foreign	(10		)	(2		)	(1		)
Total	$	1,067		$	(97	)	$	302


(1)	In 2013, the domestic component of "Income Before Income Taxes" included a gain of $368 million for the sale of Dow's Polypropylene Licensing and Catalysts business.



Provision for Income Taxes
			2013									2012									2011
In millions	Current		Deferred			Total			Current			Deferred			Total			Current			Deferred			Total
Federal	$	337	$	18		$	355		$	10		$	15		$	25		$	126		$	(41	)	$	85
State and local	5		(47		)	(42		)	(5		)	(3		)	(8		)	(2		)	(2		)	(4		)
Foreign	6		—			6			—			—			—			6			—			6
Total	$	348	$	(29	)	$	319		$	5		$	12		$	17		$	130		$	(43	)	$	87



Reconciliation to U.S. Statutory Rate
In millions	2013			2012			2011
Taxes at U.S. statutory rate	$	374		$	(34	)	$	106
Equity earnings effect (1)	(1		)	2			—
U.S. business credits	—			—			(6		)
Benefit of dividend income from investments in related companies	(6		)	(9		)	(2		)
Audit settlement and court case impact	20			—			—
Unrecognized tax benefits	(30		)	9			(1		)
Impairment of investment in related company	1			46			—
Federal tax accrual adjustments (1)	(5		)	(8		)	—
State and local tax impact	(38		)	12			(7		)
Other - net	4			(1		)	(3		)
Total tax provision	$	319		$	17		$	87
Effective tax rate	29.9		%	(17.5		)%	28.8		%


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

The tax rate for 2013 was favorably impacted by changes in valuation allowances in the United States on state income tax attributes, audit settlements and remeasurement of tax positions. The 2013 tax rate was negatively impacted by an unfavorable court ruling in the first quarter of 2013. UCC's reported effective tax rate for 2013 was 29.9 percent.

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 negative 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.



Deferred Tax Balances at December 31 In millions	2013					2012
Deferred Tax Balances at December 31 In millions	Deferred Tax Assets			Deferred Tax Liabilities		Deferred Tax Assets			Deferred Tax Liabilities
Property	$	—		$	235	$	—		$	202
Tax loss and credit carryforwards	95			—		103			—
Postretirement benefit obligations	706			440		887			403
Other accruals and reserves	656			4		595			4
Inventory	30			—		10			1
Long-term debt	—			1		—			1
Investments	7			—		—			1
Other - net	2			1		28			46
Subtotal	$	1,496		$	681	$	1,623		$	658
Valuation allowances	(50		)	—		(124		)	—
Total	$	1,446		$	681	$	1,499		$	658

Gross operating loss carryforwards at December 31, 2013 amounted to $1,188 million compared with $1,255 million at the end of 2012. At December 31, 2013, $584 million of the operating loss carryforwards were subject to expiration in the years 2014 through 2018. The remaining balances expire in years beyond 2018 or have an indefinite carryforward period. Tax credit carryforwards amounted to $7 million at December 31, 2013 and $39 million at December 31, 2012, of which $2 million is subject to expiration in 2014 through 2018. The remaining tax credit carryforwards expire in years beyond 2018 or have an indefinite carryforward period.

Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $48 million at December 31, 2013, $53 million at December 31, 2012 and $63 million at December 31, 2011. 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 state tax loss carryforwards from operations in the United States of $50 million at December 31, 2013 and $124 million at December 31, 2012.



Total Gross Unrecognized Tax Benefits
In millions	2013			2012			2011
Balance at January 1	$	166		$	161		$	163
Increases related to positions taken on items from prior years	1			—			—
Decreases related to positions taken on items from prior years	(7		)	—			(1		)
Increases related to positions taken in current year	—			8			1
Settlement of uncertain tax positions with tax authorities	(154		)	—			—
Decreases due to expiration of statutes of limitations	(2		)	(3		)	(2		)
Balance at December 31	$	4		$	166		$	161

At December 31, 2013, the total amount of unrecognized tax benefits was $4 million ($166 million at December 31, 2012), of which $3 million ($158 million at December 31, 2012) would impact the effective tax rate, if recognized.

Interest and penalties associated with unrecognized tax benefits are recognized as components of “Provision for income taxes” in the consolidated statements of operations and was a benefit of $15 million in 2013, $1 million in 2012 and $2 million in 2011. The Corporation's accrual for interest and penalties was a payable of $1 million at December 31, 2013 and a receivable of $4 million at December 31, 2012.

During 2013, the U.S. Supreme Court denied certiorari in UCC's research tax credit case. Through the denial of certiorari, the U.S. Court of Appeals decision denying UCC's tax credit claim for supplies used in process-related research and development at its manufacturing facilities became final. As a result of this ruling, UCC reversed the uncertain tax positions related to this matter, which resulted in a decrease to "Other noncurrent obligations" and an increase to "Income taxes payable" in the consolidated balance sheets in accordance with the Tax Sharing Agreement between the Corporation and Dow. In addition, UCC recognized a tax charge of $41 million in the first quarter of 2013 included in "Provision for income taxes" in the consolidated statements of operations. An audit settlement in the second quarter of 2013 resulted in a tax benefit of $22 million, included in "Provision for income taxes" and various balance sheet reclassifications from noncurrent to current accruals and receivables.

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	2013	2012
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, 2013, will be reduced by approximately zero to $4 million from resolution of these examinations.

The reserve for non-income tax contingencies related to issues in the United States was zero at December 31, 2013 and $8 million at December 31, 2012. 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.