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, 2014		Sept. 30, 2013 (a)
Federal rate	35.0	%	35.0	%
State and local income taxes, net of federal income tax benefit	2.2		3.0
Tax-exempt income	(2.5	)	(2.8	)
Foreign operations	(1.9	)	(4.4	)
Tax credits	(0.8	)	(2.2	)
Tax litigation	—		19.4
Leverage lease adjustment	(1.0	)	(2.3	)
Other – net	(1.4	)	0.9
Effective tax rate	29.6	%	46.6	%


(a)	Results for the first nine months of 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.

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. On March 5, 2014, BNY Mellon appealed the decision to the Second Circuit Court of Appeals. On Sept. 25, 2014, the government filed its response to our appeal. In addition to requesting that the denial of foreign tax credits be upheld, the government also requested a reversal of the interest deduction allowed by the Tax Court in the amended decision. If the interest deduction is ultimately disallowed, further income tax expense of approximately $100 million may be required. See Note 18 of the Notes to Consolidated Financial Statements for additional information.

Our total tax reserves as of Sept. 30, 2014 were $811 million compared with $829 million at June 30, 2014. If these tax reserves were unnecessary, $811 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, 2014 is accrued interest, where applicable, of $197 million. The additional tax benefit related to interest for the nine months ended Sept. 30, 2014 was $1 million compared with additional tax expense of $187 million for the nine months ended Sept. 30, 2013.

It is reasonably possible the total reserve for uncertain tax positions could decrease within the next 12 months by an amount up to $204 million as a result of adjustments related to tax years that are still subject to examination.

With the exception of 2006, our federal income tax returns are closed for all periods through 2008. 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.