Income Taxes

12 Months Ended

Dec. 29, 2012

Income Taxes

Income Taxes

Note 14. Income Taxes

We conduct business globally and, as a result, file numerous consolidated and separate income tax returns within and outside the U.S.  For all of our U.S. subsidiaries, we file a consolidated federal income tax return.  Income from continuing operations before income taxes is as follows:

(In millions)	2012		2011		2010
U.S.	$	644	$	137	$	(63	)
Non-U.S.	197		200		149
Total income from continuing operations before income taxes	$	841	$	337	$	86

Income tax expense (benefit) for continuing operations is summarized as follows:

(In millions)	2012			2011			2010
Current:
Federal	$	40		$	(23	)	$	(79	)
State	9			15			3
Non-U.S.	29			29			19
	78			21			(57		)
Deferred:
Federal	169			67			59
State	23			1			(5		)
Non-U.S.	(10		)	6			(3		)
	182			74			51
Income tax expense (benefit)	$	260		$	95		$	(6	)

The current federal and state provisions for 2012 and 2011 included $25 million and $37 million, respectively, of tax related to the sale of certain leveraged leases in the Finance segment for which we had previously recorded significant deferred tax liabilities.

The following table reconciles the federal statutory income tax rate to our effective income tax rate for continuing operations:

	2012	2011	2010
Federal statutory income tax rate	35.0%	35.0%	35.0%
Increase (decrease) in taxes resulting from:
State income taxes	2.2	3.1	(2.7)
Non-U.S. tax rate differential and foreign tax credits	(5.4)	(9.4)	(60.5)
Unrecognized tax benefits and interest	0.2	1.2	17.5
Cash surrender value of life insurance	(0.5)	(1.5)	(5.1)
Nondeductible healthcare claims	—	—	12.7
Change in status of subsidiaries	—	—	12.0
Research credit	—	(2.5)	(5.4)
Valuation allowance on contingent receipts	—	—	(2.0)
Other, net	(0.6)	2.2	(7.9)
Effective rate	30.9%	28.1%	(6.4)%

The amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and non-U.S. tax authorities, which may result in proposed assessments.  Our estimate for the potential outcome for any uncertain tax issue is highly judgmental.  We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date.  For those tax positions for which it is more likely than not that a tax benefit will be sustained, we record the largest amount of tax benefit with a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.  Interest and penalties are accrued, where applicable.  If we do not believe that it is not more likely than not that a tax benefit will be sustained, no tax benefit is recognized.

Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities due to settlement of income tax examinations, new regulatory or judicial pronouncements, expiration of statutes of limitations or other relevant events.  As a result, our effective tax rate may fluctuate significantly on a quarterly and annual basis.

Our unrecognized tax benefits represent tax positions for which reserves have been established.  Unrecognized state tax benefits and interest related to unrecognized tax benefits are reflected net of applicable tax benefits.  A reconciliation of our unrecognized tax benefits, excluding accrued interest, is as follows:

(In millions)	December 29, 2012			December 31, 2011
Balance at beginning of year	$	294		$	285
Additions for tax positions related to current year	5			8
Additions for tax positions of prior years	2			8
Reductions for tax positions of prior years	(3		)	(7		)
Reductions for expiration of statute of limitations and settlements	(8		)	—
Balance at end of year	$	290		$	294

At December 29, 2012 and December 31, 2011, approximately $204 million and $206 million, respectively, of these unrecognized tax benefits, if recognized, would favorably affect our effective tax rate in a future period.  The remaining $86 million in unrecognized tax benefits were related to discontinued operations.  Based on the outcome of appeals proceedings and the expiration of statutes of limitations, it is possible that certain audit cycles for U.S. and foreign jurisdictions could be completed during the next 12 months, which could result in a change in our balance of unrecognized tax benefits with the aggregate tax effect of the differences between tax return positions and the benefits being recognized in our financial statements.  Although the outcome of these matters cannot be determined, we believe adequate provision has been made for any potential unfavorable financial statement impact.

In the normal course of business, we are subject to examination by taxing authorities throughout the world, including major jurisdictions such as Canada, China, Germany, Japan and the U.S.  With few exceptions, we no longer are subject to U.S. federal, state and local income tax examinations for years before 1997.  We are no longer subject to non-U.S. income tax examinations in our major jurisdictions for years before 2005.

During 2012, 2011 and 2010, we recognized net tax-related interest expense totaling approximately $9 million, $10 million and $19 million, respectively, in the Consolidated Statements of Operations.  At December 29, 2012 and December 31, 2011, we had a total of $134 million and $132 million, respectively, of net accrued interest expense included in our Consolidated Balance Sheets.

The tax effects of temporary differences that give rise to significant portions of our net deferred tax assets and liabilities are as follows:

(In millions)	December 29, 2012			December 31, 2011
Deferred tax assets
Obligation for pension and postretirement benefits	$	643		$	635
Accrued expenses*	205			193
Deferred compensation	180			196
Loss carryforwards	81			74
Valuation allowance on finance receivables held for sale	40			130
Allowance for credit losses	39			68
Inventory	30			38
Deferred income	29			52
Other, net	168			172
Total deferred tax assets	1,415			1,558
Valuation allowance for deferred tax assets	(165		)	(189		)
	$	1,250		$	1,369
Deferred tax liabilities
Leasing transactions	$	(217	)	$	(285	)
Property, plant and equipment, principally depreciation	(138		)	(145		)
Amortization of goodwill and other intangibles	(110		)	(111		)
Total deferred tax liabilities	(465		)	(541		)
Net deferred tax asset	$	785		$	828

* Accrued expenses includes warranty and product maintenance reserves, self-insured liabilities, interest and restructuring reserves.

We believe that our earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future income tax benefits.  For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not more than likely, a valuation allowance is provided.

The following table presents the breakdown between current and long-term net deferred tax assets:

(In millions)	December 29, 2012			December 31, 2011
Current	$	256		$	288
Non-current	591			532
	847			820
Finance group’s net deferred tax asset (liability)	(62		)	8
Net deferred tax asset	$	785		$	828

Our net operating loss and credit carryforwards at December 29, 2012 are as follows:

(In millions)
Non-U.S. net operating loss with no expiration	$	94
Non-U.S. net operating loss expiring through 2032	50
State net operating loss and tax credits, net of tax benefits, expiring through 2032	49
U.S. federal tax credits beginning to expire in 2021	19

The undistributed earnings of our non-U.S. subsidiaries approximated $604 million at December 29, 2012.  We consider the undistributed earnings to be indefinitely reinvested; therefore, we have not provided a deferred tax liability for any residual U.S. tax that may be due upon repatriation of these earnings.  Because of the effect of U.S. foreign tax credits, it is not practicable to estimate the amount of tax that might be payable on these earnings in the event they no longer are indefinitely reinvested.