16. Income Taxes

Income from continuing operations before income taxes is summarized in the table below.

	Year Ended December 31,
	2016		2015		2014
	(in millions)
Domestic	$	654	$	192	$	707
Foreign		196		130		165
Income from continuing operations before income taxes	$	850	$	322	$	872

The components of the Company’s current and deferred portions of the provision for income taxes on continuing operations are presented in the table below.

	Year Ended December 31,
	2016		2015			2014
	(in millions)
Current income tax provision:
Federal	$	88	$	60		$	78
State and local		10		5			1
Foreign		48		26			35
Subtotal		146		91			114

Deferred income tax provision/(benefit):
Federal		37		(67	)		101
State and local		6		(1	)		11
Foreign		—		2			1
Subtotal		43		(66	)		113
Total provision for income taxes	$	189	$	25		$	227

A reconciliation of the statutory federal income tax rate to the effective income tax rate on continuing operations of the Company is presented in the table below.

	Year Ended December 31,
	2016			2015			2014
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal income tax benefit		2.3			2.0			2.1
Foreign income taxes		(2.9	)		(14.2	)		(3.6	)
Manufacturing benefits		(2.2	)		(3.7	)		(1.7	)
Research and experimentation and other tax credits		(4.4	)		(12.9	)		(4.3	)
Resolution of tax contingencies		(2.9	)		(2.8	)		(1.0	)
Tax deductible dividends		(0.9	)		(2.3	)		(0.8	)
Equity compensation - excess income tax benefits		(2.0	)		—			—
Goodwill impairment		—			6.6			—
Other, net		0.2			0.1			0.3
Effective income tax rate on continuing operations		22.2	%		7.8	%⁽¹⁾		26.0	%

⁽¹⁾

In 2015, the Company recorded non-cash goodwill impairment charges of $384 million, which resulted in a deferred tax benefit of $120 million. Excluding the goodwill impairment charge and the related deferred income tax benefit, the effective income tax rate for 2015 would have been 20.5%.

The significant components of the Company’s net deferred tax assets and liabilities are presented in the table below.

	December 31,
	2016			2015
	(in millions)
Deferred tax assets:
Inventoried costs	$	63		$	56
Compensation and benefits		152			147
Pension and postretirement benefits		415			354
Loss carryforwards		18			12
Tax credit carryforwards		6			6
Other		89			79
Deferred tax assets		743			654
Less: valuation allowance		(12	)		(9	)
Deferred tax assets, net of valuation allowance		731			645

Deferred tax liabilities:
Goodwill and other intangible assets	$	(752	)	$	(675	)
Income recognition on contracts in process		(63	)		(36	)
Property, plant and equipment		(96	)		(94	)
Other		(54	)		(56	)
Deferred tax liabilities		(965	)		(861	)
Total deferred tax liabilities, net of valuation allowance	$	(234	)	$	(216	)

The classification of the Company’s deferred tax assets and liabilities are presented in the table below.

	December 31,
	2016			2015
	(in millions)
Non-current deferred tax assets	$	2		$	3
Non-current deferred tax liabilities		(236	)		(219	)
Total net deferred tax liabilities	$	(234	)	$	(216	)

Non-current deferred tax assets are presented in other assets on the consolidated balance sheets.

The following table presents the Company’s loss and tax credit carryforwards at December 31, 2016 on a tax return basis. The Company has established a valuation allowance as indicated in those instances in which it does not believe that it is more likely than not it will generate sufficient taxable income, of the appropriate character and in the applicable subsidiary, to utilize the carryforwards.

	Year Ended December 31, 2016
	Carryforwards				Valuation Allowances
	Gross		Tax Effected		Gross		Tax Effected		Expiration Periods
	(in millions)				(in millions)
Capital loss carryforwards	$	6	$	2	$	6	$	2	2017-2021
Federal net operating loss carryforwards		33		11		5		2	2026-2035
Foreign net operating loss carryforwards		14		3		3		1	Indefinite
State net operating loss carryforwards		136		2		47		1	2017-2036
Total loss carryforwards			$	18			$	6
State tax credit carryforwards		7		5		7		4	2017-2031
Foreign tax credit carryforwards		1		1		—		—	Indefinite
Total tax credit carryforwards			$	6			$	4

At December 31, 2016, the total amount of unrecognized tax benefits was $111 million, $92 million of which would reduce the effective income tax rate, if recognized. A reconciliation of the change in unrecognized income tax benefits, excluding potential interest and penalties, is presented in the table below.

	2016			2015			2014
	(in millions)
Balance at January 1	$	140		$	169		$	155
Additions for tax positions related to the current year		16			14			20
Additions for tax positions related to prior years		2			2			12
Reductions for tax positions related to prior years		(39	)		(37	)		(11	)
Reductions for tax positions related to settlements with taxing authorities		(1	)		(1	)		(1	)
Reduction for tax positions related to prior years as a result of a lapse of statute of limitations		(7	)		(7	)		(6	)
Balance at December 31	$	111		$	140		$	169

The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction, which is the Company’s primary tax jurisdiction, and various state and foreign jurisdictions. At December 31, 2016, the statutes of limitations for the Company’s U.S. Federal income tax returns for the years ended December 31, 2010 through 2015 are open. The U.S. Internal Revenue Service (IRS) commenced audits of the Company’s U.S. Federal income tax returns for the years ended 2012 through 2014. The Company cannot predict the outcome of the audits at this time. At December 31, 2016, the Company anticipates that unrecognized tax benefits will decrease by approximately $9 million over the next 12 months due to the potential resolution of unrecognized tax benefits involving several jurisdictions and tax periods. The actual amount of the decrease over the next 12 months could vary significantly depending on the ultimate timing and nature of any settlements.

During the years ended December 31, 2016, 2015 and 2014, the Company effectively settled various Federal, state and local and foreign audits. As a result of these settlements, the Company reversed previously accrued income tax expense of $25 million, $9 million and $8 million, including potential interest and penalties.

At December 31, 2016 and 2015, current and non-current income taxes payable include accrued potential interest of $11 million ($7 million after income taxes) and $18 million ($11 million after income taxes), respectively, and potential penalties of $8 million and $9 million, respectively. With respect to the interest related items, the Company’s income tax expense included a benefit of $4 million for the year ended December 31, 2016 and an expense of $2 million for the year ended December 31, 2015.

Prior to 2015, the Company recorded a deferred tax liability related to the repatriation of earnings from certain subsidiaries. During 2015, the Company completed a legal restructuring of its significant foreign operations, and the earnings of these subsidiaries are now considered reinvested indefinitely. As a result, the Company recognized a $17 million deferred tax benefit in the year ended December 31, 2015. At December 31, 2016, the Company had not provided deferred U.S. income taxes and foreign withholding taxes for $708 million of undistributed earnings by its non-U.S. subsidiaries as such earnings are intended to be reinvested indefinitely. Quantification of additional taxes that may be payable on distribution is not practicable.