INCOME TAXES

This note provides details about our income taxes applicable to continuing operations:


•	earnings before income taxes,


•	provision for income taxes,


•	effective income tax rate,


•	deferred tax assets and liabilities and


•	unrecognized tax benefits.

Income taxes related to discontinued operations are discussed in Note 3: Discontinued Operations.

EARNINGS BEFORE INCOME TAXES

Domestic and Foreign Earnings (Loss) From Continuing Operations Before Income Taxes



DOLLAR AMOUNTS IN MILLIONS
	2012			2011			2010
Domestic earnings	$	450		$	341		$	96
Foreign loss	(11		)	(84		)	(14		)
Total	$	439		$	257		$	82

PROVISION FOR INCOME TAXES

Provision (Benefit) for Income Taxes From Continuing Operations



DOLLAR AMOUNTS IN MILLIONS
	2012			2011			2010
Current:
Federal	$	(69	)	$	(73	)	$	53
State	(11		)	16			3
Foreign	26			8			9
	(54		)	(49		)	65
Deferred:
Federal	39			11			(1,180		)
State	4			(11		)	(69		)
Foreign	66			(13		)	(8		)
	109			(13		)	(1,257		)
Total income tax provision (benefit)	$	55		$	(62	)	$	(1,192	)

Included in our income tax provision for 2012 are recomputations of prior year taxes, resulting in reclassifications between foreign and domestic for both current and deferred taxes as a result of final tax proceedings between countries.

EFFECTIVE INCOME TAX RATE

Effective Income Tax Rate Applicable to Continuing Operations



DOLLAR AMOUNTS IN MILLIONS
	2012			2011			2010
U.S. federal statutory income tax	$	154		$	90		$	29
State income taxes, net of federal tax benefit	6			4			4
REIT income not subject to federal income tax	(94		)	(80		)	(37		)
Foreign taxes	8			20			4
Federal income tax credits	—			(4		)	(4		)
Medicare Part D subsidy	—			—			26
Provision for unrecognized tax benefits	(6		)	(7		)	(3		)
REIT conversion benefit	—			—			(1,064		)
Cellulosic biofuel producer credit	—			—			(149		)
Repatriation of Canadian earnings	—			(76		)	—
State income tax settlement	(10		)	—			—
Other, net	(3		)	(9		)	2
Total income tax provision (benefit)	$	55		$	(62	)	$	(1,192	)
Effective income tax rate	12.5		%	(23.3		)%	N/M*
* Not meaningful

One-Time Tax Benefits/Charges

In 2012, we recorded a tax benefit resulting from a state income tax settlement.

In 2011, we recorded a tax benefit related to foreign tax credits associated with the repatriation of Canadian earnings.

As a result of the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act and a change in our postretirement medical plan, it was determined that previously recognized deferred tax assets related to the income tax deduction for prescription drug benefits provided to retirees and reimbursed under the Medicare Part D subsidy would not be realized and a $32 million charge was recorded in 2010.

In 2010, we reversed certain deferred income tax liabilities, primarily relating to temporary differences of timber assets, as a result of our conversion to a REIT. See Note 1: Summary of Significant Accounting Policies.

Fuel Credits

In 2010, the IRS concluded that black liquor sold or used in 2009 qualifies for the cellulosic biofuel producer credit. Black liquor potentially qualifies for either the cellulosic biofuel producer credit or the alternative fuel mixture credit (but not both on the same gallon of black liquor). During 2009, we produced approximately 238 million gallons of black liquor, which did not qualify for the alternative fuel mixture credit. This equals $240 million of potential cellulosic biofuel producer credit at $1.01 per gallon, or $149 million net of tax, which we recognized in 2010.

DEFERRED TAX ASSETS AND LIABILITIES

Deferred tax assets and liabilities reflect temporary differences between pretax book income and taxable income. Deferred tax assets represent tax benefits that have already been recorded for book purposes but will be recorded for tax purposes in the future. Deferred tax liabilities represent income that has been recorded for book purposes but will be reported as taxable income in the future.

Deferred Income Tax Assets (Liabilities) Related to Continuing Operations by Category



DOLLAR AMOUNTS IN MILLIONS
	DECEMBER 31, 2012		DECEMBER 31, 2011
Forest Products:
Current	$	65	$	81
Noncurrent - domestic	106		(129		)
Noncurrent - foreign	83		36
Real Estate	202		240
Net deferred tax assets	$	456	$	228

Items Included in Our Deferred Income Tax Assets (Liabilities)



DOLLAR AMOUNTS IN MILLIONS
	DECEMBER 31, 2012			DECEMBER 31, 2011
Postretirement benefits	$	144		$	134
Pension	521			337
Real estate impairments	115			141
State tax credits	59			57
Net operating loss carryforwards	187			162
Cellulosic biofuel producers credit	240			240
Other	336			369
Gross deferred tax assets	1,602			1,440
Valuation allowance	(144		)	(139		)
Net deferred tax assets	1,458			1,301
Property, plant and equipment	(577		)	(610		)
Timber installment notes	(240		)	(277		)
Other	(185		)	(186		)
Deferred tax liabilities	(1,002		)	(1,073		)
Net deferred tax assets	$	456		$	228

OTHER INFORMATION ABOUT OUR DEFERRED INCOME TAX ASSETS (LIABILITIES)

Other information about our deferred income tax assets (liabilities) include:


•	net operating loss carryforwards,


•	valuation allowances and


•	reinvestment of undistributed earnings.

Net Operating Loss Carryforwards

Our state and foreign net operating loss carryforwards as of the end of 2012 are as follows:


•	$858 million, which expire from 2013 through 2032; and


•	$111 million, which do not expire.

Valuation Allowances

With the exception of the valuation allowance discussed below, we believe it is more likely than not that we will have sufficient future taxable income to realize our deferred tax assets.

Our valuation allowance on our deferred tax assets was $144 million as of the end of 2012. This primarily related to foreign and state net operating losses and state and provincial credits.

The total changes in our valuation allowance over the last year was a net increase of $5 million. This net increase resulted primarily from:


•	$4 million increase due to additional foreign losses and


•	$1 million increase due to the change in expectations of future use of state net operating loss carryforwards and state credits.

Reinvestment of Undistributed Earnings

The balance of our foreign undistributed earnings was approximately $22 million at the end of 2012 and has been permanently reinvested; therefore, it is not subject to U.S. income tax. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability on the remaining undistributed earnings.

HOW WE ACCOUNT FOR INCOME TAXES

The Income Taxes section of Note 1: Summary of Significant Accounting Policies provides details about how we account for our income taxes.

UNRECOGNIZED TAX BENEFITS

Unrecognized tax benefits represent potential future obligations to taxing authorities if uncertain tax positions we have taken on previously filed tax returns are not sustained. The total amount of unrecognized tax benefits as of December 31, 2012 and 2011, are $177 million and $251 million, respectively, which does not include related interest of $15 million and $33 million, respectively. These amounts represent the gross amount of exposure in individual jurisdictions and do not reflect any additional benefits expected to be realized if such positions were not sustained, such as the federal deduction that could be realized if an unrecognized state deduction was not sustained.

Reconciliation of the Beginning and Ending Amount of Unrecognized Tax Benefits



DOLLAR AMOUNTS IN MILLIONS
	DECEMBER 31, 2012			DECEMBER 31, 2011
Balance at beginning of year	$	251		$	180
Additions based on tax positions related to current year	—			1
Additions for tax positions of prior years	2			91
Reductions for tax positions of prior years	(21		)	(11		)
Foreign currency translation	—			(2		)
Settlements	(53		)	(2		)
Lapse of statute	(2		)	(6		)
Balance at end of year	$	177		$	251

The net liability recorded in our Consolidated Balance Sheet related to unrecognized tax benefits was $185 million as of December 31, 2012, and $24 million as of December 31, 2011, which includes interest of $15 million and $33 million respectively, net of payments made in advance of settlements.

The net liability recorded for tax positions across all jurisdictions that, if sustained, would affect our effective tax rate was $159 million as of December 31, 2012, and $140 million as of December 31, 2011, which includes interest of $15 million and $33 million, respectively.

During third quarter 2012, as a result of reaching agreements with taxing authorities, we reduced our unrecognized tax benefits. This led to reclasses between our long-term tax receivables and payables and reduced our tax provision by $7 million.

In accordance with our accounting policy, we accrue interest and penalties related to unrecognized tax benefits as a component of income tax expense.

As of December 31, 2012, our 2008 - 2010 federal income tax returns are under exam. We are undergoing examination in various state and foreign jurisdictions for the 2005 - 2010 tax years. We expect that the outcome of any examination will not have a material effect on our consolidated financial statements; however, audit outcomes and the timing of audit settlements are subject to significant uncertainty.

In the next 12 months, we estimate a decrease of up to $1 million in unrecognized tax benefits on several individually insignificant tax positions due to the lapse of applicable statutes of limitation in multiple jurisdictions.