Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes

13. Income Taxes

Income tax provisions (benefits) were:

	2012						2011						2010
(In millions)	Current		Deferred		Total		Current		Deferred		Total		Current		Deferred		Total
Federal	$	1,185	$	432	$	1,617	$	1,040	$	139	$	1,179	$	81	$	289	$	370
State and local		169		57		226		152		(16)		136		15		19		34
Foreign		(1)		3		2		15		-		15		(4)		-		(4)
Total	$	1,353	$	492	$	1,845	$	1,207	$	123	$	1,330	$	92	$	308	$	400

The provision for income taxes for periods prior to the Spinoff have been computed as if we were a stand-alone company.

A reconciliation of the federal statutory income tax rate (35 percent) applied to income before income taxes to the provision for income taxes follows:

	2012			2011			2010
Statutory rate applied to income before income taxes		35	%		35	%		35	%
State and local income taxes, net of federal income tax effects		2			2			3
Legislation(a)		-			-			2
Domestic manufacturing deduction		(1)			(1)			-
Effect of dividends received deduction		-			-			(1)
Other		(1)			-			-
Provision for income taxes		35	%		36	%		39	%

^(a)  The Patient Protection and Affordable Care Act (“PPACA”) and the Health Care and Education Reconciliation Act of 2010 were signed into law in March 2010. These new laws effectively changed the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide prescription drug benefits that are at least actuarially equivalent to the corresponding benefits provided under Medicare Part D. The federal subsidy paid to employers was introduced as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “MPDIMA”). Under the MPDIMA, the federal subsidy did not reduce our income tax deduction for the costs of providing such prescription drug plans, nor was it subject to income tax individually. Beginning in 2013, under the 2010 legislation, our income tax deduction for the costs of providing Medicare Part D-equivalent prescription drug benefits to retirees will be reduced by the amount of the federal subsidy. As a result, we recorded a charge of $26 million in 2010 for the write-off of deferred tax assets to reflect the change in the tax treatment of the federal subsidy.

Deferred tax assets and liabilities resulted from the following:

	December 31,
(In millions)	2012		2011
Deferred tax assets:
Employee benefits	$	585	$	820
Other		90		73
Total deferred tax assets		675		893
Deferred tax liabilities:
Property, plant and equipment		2,225		1,936
Inventories		610		610
Investments in subsidiaries and affiliates		307		79
Other		29		25
Total deferred tax liabilities		3,171		2,650
Net deferred tax liabilities	$	2,496	$	1,757

Net deferred tax liabilities were classified in the consolidated balance sheets as follows:

	December 31,
(In millions)	2012		2011
Liabilities:
Accrued taxes	$	446	$	447
Deferred income taxes		2,050		1,310
Net deferred tax liabilities	$	2,496	$	1,757

MPC was a new taxpayer beginning in 2011. Prior to 2011, MPC was included in the Marathon Oil federal income tax returns for applicable years. Marathon Petroleum Company LP, a subsidiary of MPC, is continuously undergoing examination of its U.S. federal income tax returns by the Internal Revenue Service. Such audits have been completed through the 2009 tax year. We believe adequate provision has been made for federal income taxes and interest which may become payable for years not yet settled. Further, we are routinely involved in U.S. state income tax audits. We believe all other audits will be resolved with the amounts paid and/or provided for these liabilities. As of December 31, 2012, our income tax returns remain subject to examination in the following major tax jurisdictions for the tax years indicated:

United States Federal	2010 - 2011
States	2004 - 2011

As a result of the Spinoff and pursuant to the tax sharing agreement by Marathon Oil and MPC, the unrecognized tax benefits related to MPC operations for which Marathon Oil was the taxpayer remain the responsibility of Marathon Oil and MPC has indemnified Marathon Oil. Before the Spinoff, MPC made a prepayment of a portion of the unrecognized tax benefits to Marathon Oil, which is reflected in the table below as settlements. See Note 25.

The following table summarizes the activity in unrecognized tax benefits:

(In millions)	2012		2011		2010
January 1 balance	$	20	$	14	$	19
Additions for tax positions of prior years		32		50		7
Reductions for tax positions of prior years		(6)		-		(1)
Settlements		(6)		(44)		(11)
December 31 balance	$	40	$	20	$	14

If the unrecognized tax benefits as of December 31, 2012 were recognized, $20 million would affect our effective income tax rate. There were $29 million of uncertain tax positions as of December 31, 2012 for which it is reasonably possible that the amount of unrecognized tax benefits would significantly increase or decrease during the next twelve months.

Interest and penalties related to income taxes are recorded as part of the provision for income taxes. Such interest and penalties were net receipts (expenses) of $1 million, ($5 million) and ($1 million) in 2012, 2011 and 2010. As of December 31, 2012 and 2011, $9 million and $11 million of interest and penalties were accrued related to income taxes.