INCOME TAXES



Domestic and Foreign Components of Income (Loss) Before Income Taxes
In millions	2016		2015			2014
Domestic	$	49	$	1,254		$	896
Foreign	8		(11		)	(5		)
Total	$	57	$	1,243		$	891



Provision (Credit) for Income Taxes
				2016								2015									2014
In millions	Current			Deferred			Total			Current		Deferred			Total			Current			Deferred		Total
Federal (1)	$	265		$	(285	)	$	(20	)	$	373	$	(31	)	$	342		$	(41	)	$	311	$	270
State and local	(3		)	(12		)	(15		)	2		(13		)	(11		)	(5		)	38		33
Foreign	3			—			3			104		—			104			1			—		1
Total	$	265		$	(297	)	$	(32	)	$	479	$	(44	)	$	435		$	(45	)	$	349	$	304


(1)	In 2016, reflects the impact of the asbestos-related charge. In 2014, reflects the impact of accelerated deductions.



Reconciliation to U.S. Statutory Rate
In millions	2016			2015			2014
Taxes at U.S. statutory rate	$	20		$	435		$	312
U.S. manufacturing deductions	(8		)	(8		)	(26		)
Unrecognized tax benefits	(26		)	24			—
Federal tax accrual adjustments	(7		)	(7		)	(14		)
State and local tax impact	(14		)	(11		)	42
Other - net	3			2			(10		)
Total tax provision (credit)	$	(32	)	$	435		$	304
Effective tax rate	(56.1		)%	35.0		%	34.1		%

The tax rate for 2016 was favorably impacted by the release of a reserve in excess of the settlement of an uncertain tax position and from the asbestos-related charge. UCC's reported effective tax rate for 2016 was negative 56.1 percent.

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" 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.



Deferred Tax Balances at December 31	2016					2015
In millions	Deferred Tax Assets			Deferred Tax Liabilities		Deferred Tax Assets			Deferred Tax Liabilities
Property	$	—		$	183	$	—		$	193
Tax loss and credit carryforwards	53			—		70			—
Postretirement benefit obligations (1)	442			—		407			—
Other accruals and reserves (2)	611			—		297			—
Inventory (3)	14			—		18			—
Other - net	13			2		7			1
Subtotal	$	1,133		$	185	$	799		$	194
Valuation allowances	(20		)	—		(28		)	—
Total	$	1,113		$	185	$	771		$	194


(1)	Prior year was adjusted to conform to current year presentation.


(2)	In 2016, the increase is primarily due to the asbestos-related charge.


(3)	The Corporation elected to early adopt ASU 2015-17 in the first quarter of 2016. As a result, prior year was adjusted to reflect the reclassification of prepaid tax assets of $5 million to “Other current assets” in the consolidated balance sheets.

Gross operating loss carryforwards, primarily related to state operating losses, amounted to $681 million at December 31, 2016, compared with $889 million at December 31, 2015. At December 31, 2016, $436 million of the operating loss carryforwards were subject to expiration in the years 2017 through 2021. The remaining balances expire in years beyond 2021 or have an indefinite carryforward period. Tax credit carryforwards amounted to $5 million at December 31, 2016 and $5 million at December 31, 2015, of which $1 million is subject to expiration in the years 2017 through 2021. The remaining balances expire in years beyond 2021 or have an indefinite carryforward period.

Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $36 million at December 31, 2016, $41 million at December 31, 2015 and $50 million at December 31, 2014. 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 $20 million at December 31, 2016 and $28 million at December 31, 2015.

In the fourth quarter of 2016, a settlement in the amount of $206 million was reached for a tax matter regarding a historical change in the legal ownership structure of a nonconsolidated affiliate. As a result of the settlement, the Corporation recorded a net decrease to uncertain tax positions of $67 million in “Other noncurrent obligations” in the consolidated balance sheets.



Total Gross Unrecognized Tax Benefits
In millions	2016			2015		2014
Balance at January 1	$	68		$	1	$	4
Increases related to positions taken on items from prior years	139			67		—
Settlement of uncertain tax positions with tax authorities	(206		)	—		—
Decreases due to expiration of statutes of limitations	—			—		(3		)
Balance at December 31	$	1		$	68	$	1

At December 31, 2016, the total amount of unrecognized tax benefits which would impact the effective tax rate if recognized was $1 million ($1 million at December 31, 2015).

Interest and penalties are recognized as components of “Provision (Credit) for income taxes” in the consolidated statements of income and was a benefit of $36 million in 2016, a charge of $37 million in 2015 and a benefit of $6 million in 2014. The Corporation's accrual for interest and penalties associated with uncertain tax positions was insignificant at December 31, 2016 and $38 million at December 31, 2015.

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	2016	2015
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, 2016, will be reduced by approximately $1 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.