Income taxes

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



Effective tax rate	Three months ended
	March 31, 2014		March 31, 2013
Federal rate	35.0	%	35.0	%
State and local income taxes, net of federal income tax benefit	(0.7	)	1.7
Tax-exempt income	(2.8	)	(3.0	)
Foreign operations	(4.6	)	(4.9	)
Tax credits	(0.8	)	(4.1	)
Tax litigation	—		103.5
Other – net	(1.0	)	0.5
Effective tax rate	25.1	%	128.7	%

In accordance with ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects”, the investment amortization expense related to qualified affordable housing projects is presented as a component of provision for income taxes. Previously, the amortization expense was included in investment and other income. This change results in an increased income tax expense and effective tax rate however, it does not change the amount of income taxes paid. For additional information, see Note 2 of the Notes to Consolidated Financial Statements.

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. The net impact of the court rulings for all years involved and related interest decreased after-tax income in 2013 by $593 million. The U.S. Tax Court ruling was finalized on Feb. 20, 2014. BNY Mellon appealed the decision to the Second Circuit Court of Appeals on March 5, 2014. See Note 18 of the Notes to Consolidated Financial Statements for additional information.

Our total tax reserves as of March 31, 2014 were $869 million compared with $866 million at Dec. 31, 2013. If these tax reserves were unnecessary, $869 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 March 31, 2014 is accrued interest, where applicable, of $204 million. The additional tax expense related to interest for the three months ended March 31, 2014 was $1 million compared with $289 million for the three months ended March 31, 2013.

It is reasonably possible the total reserve for uncertain tax positions could decrease within the next 12 months by an amount up to $270 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 no longer under examination, but remain open for carryback claims. 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 2011.