INCOME TAXES



Domestic and Foreign Components of Income (Loss) Before Income Taxes
In millions	2015			2014			2013
Domestic (1)	$	1,254		$	896		$	1,077
Foreign	(11		)	(5		)	(10		)
Total	$	1,243		$	891		$	1,067


(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
			2015									2014						2013
In millions	Current		Deferred			Total			Current			Deferred		Total		Current		Deferred			Total
Federal (1)	$	373	$	(31	)	$	342		$	(41	)	$	311	$	270	$	337	$	18		$	355
State and local	2		(13		)	(11		)	(5		)	38		33		5		(47		)	(42		)
Foreign	104		—			104			1			—		1		6		—			6
Total	$	479	$	(44	)	$	435		$	(45	)	$	349	$	304	$	348	$	(29	)	$	319


(1)	Reflects the 2014 impact of accelerated deductions.



Reconciliation to U.S. Statutory Rate
In millions	2015			2014			2013
Taxes at U.S. statutory rate	$	435		$	312		$	374
U.S. manufacturing deductions	(8		)	(26		)	(7		)
Benefit of dividend income from investments in related companies	—			—			(6		)
Audit settlement and court case impact	—			—			20
Unrecognized tax benefits	24			—			(30		)
Federal tax accrual adjustments	(7		)	(14		)	(5		)
State and local tax impact	(11		)	42			(38		)
Other - net	2			(10		)	11
Total tax provision	$	435		$	304		$	319
Effective tax rate	35.0		%	34.1		%	29.9		%

The tax rate for 2015 was favorably impacted by changes in valuation allowances on state income tax attributes. A change in uncertain tax positions in the fourth quarter of 2015 unfavorably impacted the tax rate and resulted in an increase in "Deferred income tax assets - noncurrent" and "Other noncurrent obligations" in the consolidated balance sheets. UCC's reported effective tax rate for 2015 was 35.0 percent.

The tax rate for 2014 was unfavorably impacted by changes in valuation allowances on state income tax attributes, partially offset by favorable manufacturing deductions in the United States. UCC's reported effective tax rate for 2014 was 34.1 percent.

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 unfavorably impacted by an unfavorable court ruling in the first quarter of 2013. UCC's reported effective tax rate for 2013 was 29.9 percent.



Deferred Tax Balances at December 31	2015					2014
In millions	Deferred Tax Assets			Deferred Tax Liabilities		Deferred Tax Assets			Deferred Tax Liabilities
Property	$	—		$	193	$	—		$	197
Tax loss and credit carryforwards	70			—		82			—
Postretirement benefit obligations	802			395		818			420
Other accruals and reserves	297			—		263			3
Inventory	23			—		53			—
Other - net	7			1		2			1
Subtotal	$	1,199		$	589	$	1,218		$	621
Valuation allowances	(28		)	—		(53		)	—
Total	$	1,171		$	589	$	1,165		$	621

Gross operating loss carryforwards, primarily related to state operating losses, amounted to $889 million at December 31, 2015, compared with $1,035 million at the end of 2014. At December 31, 2015, $497 million of the operating loss carryforwards were subject to expiration in the years 2016 through 2020. The remaining balances expire in years beyond 2020 or have an indefinite carryforward period. Tax credit carryforwards amounted to $5 million at December 31, 2015 and $5 million at December 31, 2014, of which $1 million is subject to expiration in the years 2016 through 2020. The remaining balances expire in years beyond 2020 or have an indefinite carryforward period.

Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $41 million at December 31, 2015, $50 million at December 31, 2014 and $48 million at December 31, 2013. 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 $28 million at December 31, 2015 and $53 million at December 31, 2014.



Total Gross Unrecognized Tax Benefits
In millions	2015		2014			2013
Balance at January 1	$	1	$	4		$	166
Increases related to positions taken on items from prior years	67		—			1
Decreases related to positions taken on items from prior years	—		—			(7		)
Settlement of uncertain tax positions with tax authorities	—		—			(154		)
Decreases due to expiration of statutes of limitations	—		(3		)	(2		)
Balance at December 31	$	68	$	1		$	4

At December 31, 2015, the total amount of unrecognized tax benefits was $68 million ($1 million at December 31, 2014), of which $1 million ($1 million at December 31, 2014) would impact the effective tax rate, if recognized. The increase in unrecognized tax benefits relates to litigation in a foreign jurisdiction that, if paid, is creditable in the United States.

Interest and penalties are recognized as components of “Provision for income taxes” in the consolidated statements of operations and was a charge of $37 million in 2015, and a benefit of $6 million in 2014 and $15 million in 2013. The Corporation's accrual for interest and penalties associated with uncertain tax positions was $38 million at December 31, 2015 and zero at December 31, 2014.

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 income. 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	2015	2014
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, 2015, will be reduced by approximately $68 million from resolution of these examinations.

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.