INCOME TAXES

We incur income taxes on the earnings of our U.S. and foreign operations. The following table, based on the locations of the taxable entities from which sales were derived (rather than the location of customers), presents the U.S. and foreign components of our income before income taxes:



	2011		2012		2013
United States	$	696	$	660	$	751
Foreign	133		100		114
	$	829	$	760	$	865

The income shown above was determined according to financial accounting standards. Because those standards sometimes differ from the tax rules used to calculate taxable income, there are differences between: (a) the amount of taxable income and pretax financial income for a year; and (b) the tax bases of assets or liabilities and their amounts as recorded in our financial statements. As a result, we recognize a current tax liability for the estimated income tax payable on the current tax return, and deferred tax liabilities (income tax payable on income that will be recognized on future tax returns) and deferred tax assets (income tax refunds from deductions that will be recognized on future tax returns) for the estimated effects of the differences mentioned above.

Deferred tax assets and liabilities as of the end of each of the last two years were as follows:



	2012			2013
April 30,
Deferred tax assets:
Postretirement and other benefits	$	127		$	136
Accrued liabilities and other	24			26
Inventories	12			8
Loss and credit carryforwards	35			39
Valuation allowance	(24		)	(25		)
Total deferred tax assets, net	174			184
Deferred tax liabilities:
Intangible assets	(228		)	(258		)
Property, plant, and equipment	(49		)	(50		)
Other	(14		)	(20		)
Total deferred tax liabilities	(291		)	(328		)
Net deferred tax liability	$	(117	)	$	(144	)

The $25 valuation allowance at April 30, 2013, relates primarily to a $13 net operating loss in Brazil, which can be carried forward indefinitely, and an $8 non-trading loss carryforward generated by Brown-Forman Beverages Europe during fiscal 2009 in the U.K. Although the non-trading losses can be carried forward indefinitely, we know of no significant transactions that will let us use them. We reduced the valuation allowance related to this item in fiscal 2013, primarily by realizing non-recurring non-trading gains. The remaining valuation allowance relates primarily to other foreign net operating losses that expire between fiscal 2015 and 2022. We are currently unaware of any significant transactions that will allow us to utilize these losses.

As of April 30, 2013, the gross amounts of loss and credit carryforwards include a U.K. non-trading loss of $36 (no expiration); other foreign net operating losses of $75 ($18 of which expire in varying amounts between 2015 and 2022 and $57 of which do not expire); state net operating losses of $46 (expiring in varying amounts between 2026 and 2033); and foreign credit carryforwards of $6 (expiring between fiscal 2014 and 2017).

Deferred tax liabilities were not provided on undistributed earnings of foreign subsidiaries ($542 and $641 at April 30, 2012 and 2013, respectively) because we expect these undistributed earnings to be reinvested indefinitely overseas. If these amounts were not considered permanently reinvested, additional deferred tax liabilities of approximately $121 and $141 would have been provided as of April 30, 2012 and 2013, respectively.

Total income tax expense for a year includes the tax associated with the current tax return (“current tax expense”) and the change in the net deferred tax asset or liability (“deferred tax expense”). Our total income tax expense for each of the last three years was as follows:



	2011			2012		2013
Current:
U.S. federal	$	171		$	160	$	197
Foreign	41			24		41
State and local	18			10		10
	230			194		248
Deferred:
U.S. federal	$	46		$	48	$	23
Foreign	(1		)	—		1
State and local	(18		)	5		2
	27			53		26
	$	257		$	247	$	274

Our consolidated effective tax rate usually differs from current statutory rates due to the recognition of amounts for events or transactions that have no tax consequences. The following table reconciles our effective tax rate to the federal statutory tax rate in the United States:



	Percent of Income Before Taxes
	2011		2012		2013
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of U.S. federal tax benefit	1.1	%	1.3	%	1.0	%
Income taxed at other than U.S. federal statutory rate	(1.6	)%	(1.2	)%	(1.4	)%
Tax benefit from U.S. manufacturing	(2.2	)%	(2.2	)%	(2.1	)%
Capital loss benefit	(2.7	)%	—	%	—	%
Nondeductible goodwill on sale of wine business	2.1	%	—	%	—	%
Other, net	(0.7	)%	(0.4	)%	(0.8	)%
Effective rate	31.0	%	32.5	%	31.7	%

During fiscal 2011, we recorded an adjustment to reverse $8 of income tax expense that was incorrectly recognized in prior periods. We believe the impact of this error and the cumulative out of period adjustment to correct the error is insignificant to our consolidated financial statements for that period and any prior periods.

At April 30, 2013, we had $11 of gross unrecognized tax benefits, $7 of which would reduce our effective income tax rate if recognized. A reconciliation of the beginning and ending unrecognized tax benefits follows:



	2011			2012			2013
Unrecognized tax benefits at beginning of year	$	35		$	40		$	13
Additions for tax positions provided in prior periods	1			—			2
Additions for tax positions provided in current period	14			7			1
Decreases for tax positions provided in prior years	(4		)	(5		)	(1		)
Settlements of tax positions in the current period	(5		)	(27		)	(3		)
Lapse of statutes of limitations	(1		)	(2		)	(1		)
Unrecognized tax benefits at end of year	$	40		$	13		$	11

We record interest and penalties related to unrecognized tax benefits as a component of our income tax provision. Total gross interest and penalties of $11, $3 and $2 were accrued as of April 30, 2011, 2012 and 2013, respectively. The impact of interest and penalties on our effective tax rates for 2011, 2012 and 2013 was not material.

We file income tax returns in the United States, including several state and local jurisdictions, as well as in several other countries in which we conduct business. The major jurisdictions and their earliest fiscal years that are currently open for tax examinations are 2006 in the United States, 2009 in Ireland and Italy, 2008 in Australia and Poland, 2007 in Finland, 2003 in the U.K., and 2002 in Mexico. The audit of our fiscal 2011 U.S. federal tax return was concluded during the current fiscal year. In addition, we are participating in the Internal Revenue Service’s Compliance Assurance Program for our fiscal 2012 and 2013 tax years.

We believe it is reasonably possible that the gross unrecognized tax benefits may increase by approximately $1 in the next 12 months as a result of tax positions taken in the current period, net of decreases for tax positions in prior periods.