11. Income Taxes

The components of earnings before income taxes and equity in earnings of non-operating affiliates are as follows:

	Year ended December 31,

	2013		2012		2011
	(in millions)
Domestic	$	2,155.4	$	2,629.0	$	2,502.0
Non-U.S.		54.3		200.5		143.6


	$	2,209.7	$	2,829.5	$	2,645.6

The components of the income tax provision are as follows:

	Year ended December 31,

	2013			2012			2011
	(in millions)
Current
Federal	$	641.5		$	915.4		$	811.4
Foreign		8.6			56.0			31.5
State		70.7			131.2			116.5


		720.8			1,102.6			959.4


Deferred
Federal		(6.5	)		(130.2	)		(63.0	)
Foreign		(6.7	)		(4.5	)		(2.8	)
State		(21.1	)		(3.7	)		32.9


		(34.3	)		(138.4	)		(32.9	)


Income tax provision	$	686.5		$	964.2		$	926.5

Differences in the expected income tax provision based on statutory rates applied to earnings before income taxes and the income tax provision reflected in the consolidated statements of operations are summarized below:

	Year ended December 31,

	2013					2012					2011
	(in millions, except percentages)
Earnings before income taxes and equity in earnings of non-operating affiliates	$	2,209.7				$	2,829.5				$	2,645.6




Expected tax at U.S. statutory rate		773.4		35.0	%		990.3		35.0	%		925.9		35.0	%
State income taxes, net of federal		32.0		1.4	%		82.9		2.9	%		88.6		3.3	%
Net earnings attributable to the noncontrolling interest		(23.9	)	(1.1	)%		(26.2	)	(0.9	)%		(77.6	)	(2.9	)%
U.S. manufacturing profits deduction		(47.0	)	(2.1	)%		(47.0	)	(1.7	)%		(39.0	)	(1.5	)%
Difference in tax rates on foreign earnings		(11.5	)	(0.5	)%		(43.3	)	(1.5	)%		5.8		0.2	%
Depletion		(24.2	)	(1.1	)%		(8.0	)	(0.3	)%		(8.6	)	(0.3	)%
Valuation allowance		26.8		1.2	%		16.5		0.6	%		29.8		1.1	%
Non-deductible capital costs		—		—	%		0.2		—	%		0.6		—	%
Federal tax settlement		(50.1	)	(2.2	)%		—		—	%		—		—	%
Other		11.0		0.5	%		(1.2	)	—	%		1.0		0.1	%


Income tax at effective rate	$	686.5		31.1	%	$	964.2		34.1	%	$	926.5		35.0	%

Deferred tax assets and deferred tax liabilities are as follows:

	December 31,

	2013			2012
	(in millions)
Deferred tax assets
Net operating loss carryforward, patronage-sourced	$	—		$	94.3
Other net operating loss carryforwards		96.0			70.8
Retirement and other employee benefits		71.5			92.1
Asset retirement obligations		—			31.8
Unrealized loss on investments		—			0.2
Intangible asset		115.3			—
Federal tax settlement		43.7			—
Other		70.5			56.7


		397.0			345.9
Valuation allowance		(109.2	)		(176.1	)


		287.8			169.8


Deferred tax liabilities
Depreciation and amortization		(921.0	)		(968.0	)
Foreign earnings		(35.4	)		(24.4	)
Deferred patronage from CFL		—			(1.7	)
Depletable mineral properties		(45.9	)		(46.7	)
Unrealized gain on hedging derivatives		(14.6	)		(3.3	)
Other		(44.1	)		(55.0	)


		(1,061.0	)		(1,099.1	)


Net deferred tax liability		(773.2	)		(929.3	)
Less amount in current assets (liabilities)		60.0			9.5


Noncurrent liability	$	(833.2	)	$	(938.8	)

We consider the earnings of certain of our Canadian subsidiaries to not be permanently reinvested and we recognize a deferred tax liability for the future repatriation of these earnings, as they are earned. As of December 31, 2013, we have recorded a deferred income tax liability of approximately $35 million, which reflects the additional U.S. and foreign income taxes that would be due upon the repatriation of the accumulated earnings of our non-U.S. subsidiaries that are considered to not be permanently reinvested. At December 31, 2013, we have approximately $1 billion of indefinitely reinvested earnings related to investment in other non-U.S. subsidiaries and corporate joint ventures, for which a deferred tax liability has not been recognized. It is not practicable to estimate the amount of such taxes.

Uncertain Tax Positions—We file federal, provincial, state and local income tax returns principally in the United States and Canada as well as in certain other foreign jurisdictions. In general, filed tax returns remain subject to examination by United States tax jurisdictions for years 1999 and thereafter and by Canadian tax jurisdictions for years 2008 and thereafter.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	December 31,

	2013			2012
	(in millions)
Unrecognized tax benefits:
Beginning balance	$	154.4		$	137.1
Additions for tax positions taken during the current year		9.6			17.3
Additions for tax positions taken during prior years		25.0			—
Reductions related to lapsed statutes of limitations		(1.3	)		—
Reductions related to settlements with tax jurisdictions		(84.0	)		—


Ending balance	$	103.7		$	154.4

Unrecognized tax benefits decreased in 2013 by $50.7 million principally for settlements with tax jurisdictions and increased by $17.3 million in 2012 as the result of tax return positions taken in prior years. Our effective tax rate would be affected by $103.7 million if these unrecognized tax benefits were to be recognized in the future.

In connection with our initial public offering (IPO) in August 2005, CF Industries, Inc. (CFI) ceased to be a non-exempt cooperative for income tax purposes, and we entered into a net operating loss agreement (NOL Agreement) with CFI's pre-IPO owners relating to the future utilization of our pre-IPO net operating loss carryforwards (NOLs). The NOL Agreement provided that if we ultimately could utilize the pre-IPO NOLs to offset applicable post-IPO taxable income, we would pay the pre-IPO owners amounts equal to the resulting federal and state income taxes actually saved. On January 2, 2013, we and the pre-IPO owners amended the NOL Agreement to provide, among other things, that we are entitled to retain 26.9% of any settlement realized with the United States Internal Revenue Service (IRS) at the IRS Appeals level.

Our income tax provision in 2013 includes a $75.8 million tax benefit for the effect of a Closing Agreement with the IRS related to the utilization of our pre-IPO net operating losses (NOLs) that was finalized in March 2013. This tax benefit is partially offset by a $55.2 million expense, recorded in Other non-operating-net, reflecting the amount of this tax benefit that is payable to our pre-IPO owners. In our balance sheet at December 31, 2013, $10.2 million is included in accounts payable and accrued expenses for the current portion of the tax savings payable to the pre-IPO owners and $32.7 million is included in other noncurrent liabilities for the portion of the tax savings payable to the pre-IPO owners in future years. The terms of the Closing Agreement resulted in the tax benefits associated with the pre-IPO NOL being realized as a tax deduction over five tax years, commencing with the 2012 tax year. In addition, we have reversed the net operating loss carryforward in the schedule of deferred tax assets and deferred tax liabilities and the valuation allowance associated with the pre-IPO NOLs. As a result of the settlement our unrecognized tax benefits have decreased by $86.7 million in 2013.

Valuation Allowance—the tax benefit associated with of our Closing Agreement with the IRS resulted in a $94.3 million reduction to the valuation allowance that had previously been recorded for the pre-IPO NOL.

A foreign subsidiary of the Company has net operating loss carryovers of $318.2 million that are indefinitely available in the foreign jurisdiction. As the future realization of these losses is not anticipated, a valuation allowance of $93.0 million has been recorded. Of this amount, $26.8 million and $16.5 million were recorded as valuation allowances for the years ended December 31, 2013 and 2012, respectively.

Interest expense and penalties of $13.6 million, $1.3 million, and $13.9 million were recorded for the years ended December 31, 2013, 2012 and 2011, respectively. Amounts recognized in our consolidated balance sheets for accrued interest and penalties related to income taxes of $24.9 million and $30.4 million are included in other noncurrent liabilities as of December 31, 2013 and 2012, respectively.

Prior to April 30, 2013 CFL operated as a cooperative for Canadian income tax purposes and distributed all of its earnings as patronage dividends to its customers, including CFI. The patronage dividends were deductible for Canadian income tax purposes for tax years preceding April 29, 2013. As a result of the August 2, 2012 definitive agreement we entered into with Glencore International plc to acquire their interests in CFL and our April 30, 2013 acquisition of those interests, CFL is no longer permitted to deduct the dividends it distributes to CFI. As a result, CFL has recorded an income tax provision in the years subsequent to 2011. No CFL income tax provision was recorded in 2011. See Note 4—Noncontrolling Interest for further information.

The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013 which includes certain retroactive tax legislation that impacts our tax liabilities for prior years. Under the provisions of this legislation we expect to change our tax methods of accounting related to certain routine repairs periodically conducted at our U.S. manufacturing and distribution locations. The impact of the legislation is not material and has been reflected in our financial statements for the period ending December 31, 2013.