Income taxes

The statutory federal income tax rate is reconciled to our effective income tax rate below:



Effective tax rate	Nine months ended
	Sept. 30, 2013		Sept. 30, 2012
Federal rate	35.0	%	35.0	%
State and local income taxes, net of federal income tax benefit	3.0		2.3
Tax-exempt income	(2.8	)	(3.6	)
Foreign operations	(4.5	)	(5.1	)
Tax credits	(3.4	)	(5.0	)
Tax litigation	19.8		—
Other - net	(1.6	)	(0.3	)
Effective rate	45.5	%	23.3	%

As previously disclosed, on Nov. 10, 2009 BNY Mellon filed a petition with the U.S. Tax Court challenging the Internal Revenue Service’s (“IRS”) disallowance of certain foreign tax credits claimed for the 2001 and 2002 tax years. Trial was held from April 16 to May 17, 2012. On Feb. 11, 2013, BNY Mellon received an adverse decision from the U.S. Tax Court. On Sept. 23, 2013, the U.S. Tax Court amended its prior ruling to allow BNY Mellon an interest expense deduction and to exclude certain items from taxable income. These items for all years involved and related interest increased after-tax income in the third quarter of 2013 by $261 million. The U.S. Tax Court has not entered a final decision; it is possible these amounts may be adjusted. Finally, we intend to appeal the Tax Court’s Feb. 11, 2013 decision disallowing the foreign tax credits.

Our total tax reserves as of Sept. 30, 2013 were $840 million compared with $1,060 million at June 30, 2013. If these tax reserves were unnecessary, $840 million would affect the effective tax rate in future periods. We recognize accrued interest and penalties, if applicable, related to income taxes in income tax expense. Included in the balance sheet at Sept. 30, 2013 is accrued interest, where applicable, of $198 million. The additional tax expense related to interest for the nine months ended Sept. 30, 2013 was $187 million compared with $10 million for the nine months ended Sept. 30, 2012.

It is reasonably possible the total reserve for uncertain tax positions could decrease within the next 12 months by an amount up to $72 million as a result of adjustments related to tax years that are still subject to examination.

Our federal income tax returns are closed for all periods through 2005. The 2006 year remains open to examination. The years 2007 and 2008 are also closed to further examination; however, one matter is before the IRS Appeals Division. The years 2009 and 2010 are currently under examination. Our New York State and New York City income tax returns are closed to examination through 2010. Our UK income tax returns are closed to examination through 2010.