Income Taxes

12 Months Ended

May 31, 2012

Income Taxes [Abstract]

Income Taxes

NOTE 11: INCOME TAXES

The components of the provision for income taxes for the years ended May 31 were as follows (in millions):

			2012		2011		2010
Current provision (benefit)
	Domestic:
		Federal	$	(120)	$	79	$	36
		State and local		80		48		54
	Foreign			181		198		207
				141		325		297
Deferred provision (benefit)
	Domestic:
		Federal		947		485		408
		State and local		21		12		15
	Foreign			-		(9)		(10)
				968		488		413
			$	1,109	$	813	$	710

Our current federal income tax expenses in 2012, 2011 and 2010 were significantly reducedby accelerated depreciation deductions we claimed under provisions of the Tax Relief and the Small Business Jobs Acts of 2010, the American Recovery and Reinvestment Tax Act of 2009, and the Economic Stimulus Act of 2008. Those Acts, designed to stimulate new business investment in the U.S., accelerated our depreciation deductions for new qualifying investments, such as our new Boeing 777 Freighter (“B777F”) aircraft. These are timing benefits only, in that the depreciation would have otherwise been recognized in later years.

Pre-tax earnings of foreign operations for 2012, 2011 and 2010 were $358 million, $472 million and $555 million, respectively, which represent only a portion of total results associated with international shipments.

A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended May 31 was as follows:

			2012		2011		2010
Statutory U.S. income tax rate			35.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
	State and local income taxes,
		net of federal benefit	2.1		1.7		2.4
	Other, net		(1.8)		(0.8)		0.1
Effective tax rate			35.3	%	35.9	%	37.5	%

Our 2012 rate was lower than our 2011 rateprimarily due to favorable audit developments. The 2011 rate was lower than our 2010 rateprimarily due to increased permanently reinvested foreign earnings and a lower state rate driven by favorable audit and legislative developments.

The significant components of deferred tax assets and liabilities as of May 31 were as follows (in millions):

		2012				2011
		Deferred Tax Assets		Deferred Tax Liabilities		Deferred Tax Assets		Deferred Tax Liabilities
Property, equipment,
	leases and intangibles	$	248	$	3,436	$	274	$	2,675
Employee benefits			2,300		11		1,016		34
Self-insurance accruals			495		-		519		-
Other			338		271		422		269
Net operating loss/credit
	carryforwards		179		-		172		-
Valuation allowances			(145)		-		(151)		-
		$	3,415	$	3,718	$	2,252	$	2,978

The net deferred tax liabilities as of May 31 have been classified in the balance sheets as follows (in millions):

	2012		2011
Current deferred tax asset	$	533	$	610
Noncurrent deferred tax liability		(836)		(1,336)
	$	(303)	$	(726)

We have $560 million of net operating loss carryovers in various foreign jurisdictions and $510 million of state operating loss carryovers.  The valuation allowances primarily represent amounts reserved for operating loss and tax credit carryforwards, which expire over varying periods starting in 2013.  As a result of this and other factors, we believe that a substantial portion of these deferred tax assets may not be realized.

Permanently reinvested earnings of our foreign subsidiaries amounted to $1billion at the end of 2012 and $640 million at the end of 2011.  We have not recognized deferred taxes for U.S. federal income tax purposes on those earnings. In 2012, our permanent reinvestment strategy with respect to unremittedearnings of our foreign subsidiaries provided a 1.3% benefit to our effective tax rate.  Were the earnings to be distributed, in the form of dividends or otherwise, these earnings could be subject to U.S. federal income tax and non-U.S. withholding taxes.  Unrecognized foreign tax credits potentially could be available to reduce a portion of any U.S. tax liability.  Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable due to uncertainties related to the timing and source of any potential distribution of such funds, along with other important factors such as the amount of associated foreign tax credits. Cash in offshore jurisdictions associated with our permanent reinvestment strategy totaled $410millionat the end of 2012 and $300 million at the end of 2011.

We file income tax returns in the U.S., various U.S. state and local jurisdictions, and various foreign jurisdictions.  The Internal Revenue Service is currently auditing our consolidated U.S. income tax returns for the 2010 and 2011 tax years.  We are no longer subject to U.S. federal income tax examination for years through 2009 except for specific and immaterial U.S. federal income tax positions that are in various stages of litigation.  We anticipate resolution of part or all of this litigation could occur within 2013, but it would not have a material effect on our consolidated financial statements.  We are also subject to ongoing audits in state, local and foreign tax jurisdictions throughout the world.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

		2012		2011		2010
Balance at beginning of year		$	69	$	82	$	72
	Increases for tax positions taken in the current year		2		2		3
	Increases for tax positions taken in prior years		4		6		14
	Decreases for tax positions taken in prior years		(35)		(10)		(4)
	Settlements		(3)		(11)		(3)
	Increases due to acquisitions		15		-		-
	Changes due to currency translation		(1)		-		-
Balance at end of year		$	51	$	69	$	82

Our liabilities recorded for uncertain tax positions include $47 million at May 31, 2012 and $56 million at May 31, 2011 associated with positions that if favorably resolved would provide a benefit to our effective tax rate. We classify interest related to income tax liabilities as interest expense, and if applicable, penalties are recognized as a component of income tax expense. The balance of accrued interest and penalties was $29 million on May 31, 2012 and $18 million on May 31, 2011. Total interest and penalties included in our consolidated statements of income are immaterial.

It is difficult to predict the ultimate outcome or the timing of resolution for tax positions. Changes may result from the conclusion of ongoing audits, appeals or litigation in state, local, federal and foreign tax jurisdictions, or from the resolution of various proceedings between the U.S. and foreign tax authorities. Our liability for uncertain tax positions includes no matters that are individually or collectively material to us. It is reasonably possible that the amount of the benefit with respect to certain of our unrecognized tax positions will increase or decrease within the next 12 months, but an estimate of the range of the reasonably possible changes cannot be made. However, we do not expect that the resolution of any of our uncertain tax positions will be material.