Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

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 (loss) from continuing operations before income taxes is as follows:

(In millions)	2011		2010			2009
U.S.	$	137	$	(63	)	$	(229)
Non-U.S.		200		149			80
Total income (loss) from continuing operations before income taxes	$	337	$	86		$	(149)

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

(In millions)	2011			2010			2009
Current:
Federal	$	(23	)	$	(79	)	$	160
State		15			3			17
Non-U.S.		29			19			(8)
		21			(57	)		169
Deferred:
Federal		67			59			(238)
State		1			(5	)		(22)
Non-U.S.		6			(3	)		15
		74			51			(245)
Income tax expense (benefit)	$	95		$	(6	)	$	(76)

The current federal and state provisions for 2011 and 2009 include $37 million and $85 million, respectively, of tax related to the sale of certain leverage leases in the Finance segment for which we had previously recorded significant deferred tax liabilities. A substantial portion of the $85 million was paid in 2010.

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

	2011			2010			2009
Federal statutory income tax rate		35.0	%		35.0	%		(35.0)%
Increase (decrease) in taxes resulting from:
State income taxes		3.1			(2.7	)		0.4
Non-U.S. tax rate differential and foreign tax credits		(9.4	)		(60.5	)		(13.5)
Unrecognized tax benefits and interest		1.2			17.5			(4.1)
Nondeductible healthcare claims		—			12.7			—
Change in status of subsidiaries		—			12.0			(3.6)
Research credit		(2.5	)		(5.4	)		(4.7)
Cash surrender value of life insurance		(1.5	)		(5.1	)		(1.9)
Valuation allowance on contingent receipts		—			(2.0	)		(7.3)
Goodwill impairment		—			—			18.5
Other, net		2.2			(7.9	)		0.2
Effective rate		28.1	%		(6.4	)%		(51.0)%

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 31, 2011	January 1,   2011
Balance at beginning of year	$           285	$	294
Additions for tax positions related to current year	8		7
Additions for tax positions of prior years	8		8
Reductions for tax positions of prior years	(7)		(17)
Reductions for expiration of statute of limitations	—		(5)
Reductions for settlements with tax authorities	—		(2)
Balance at end of year	$           294	$	285

At December 31, 2011 and January 1, 2011, approximately $206 million and $197 million, respectively, of these unrecognized tax benefits, if recognized, would favorably affect our effective tax rate in a future period. The remaining $88 million in unrecognized tax benefits are related to discontinued operations. Unrecognized tax benefits were reduced in 2011 and 2010, primarily related to favorable tax audit resolutions. 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 Belgium, Canada, 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 2011, 2010 and 2009, we recognized net tax-related interest expense totaling approximately $10 million, $19 million and $12 million, respectively, in the Consolidated Statements of Operations. At December 31, 2011 and January 1, 2011, we had a total of $132 million and $122 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 31, 2011			January 1,   2011
Deferred tax assets
Obligation for pension and postretirement benefits	$	635		$	692
Deferred compensation		196			203
Accrued expenses*		193			255
Valuation allowance on finance receivables held for sale		130			29
Loss carryforwards		74			66
Allowance for credit losses		68			141
Deferred income		52			59
Inventory		38			—
Other, net		172			177
Total deferred tax assets		1,558			1,622
Valuation allowance for deferred tax assets		(189	)		(200)
	$	1,369		$	1,422
Deferred tax liabilities
Leasing transactions	$	(285	)	$	(387)
Property, plant and equipment, principally depreciation		(145	)		(132)
Amortization of goodwill and other intangibles		(111	)		(135)
Inventory		—			(15)
Total deferred tax liabilities		(541	)		(669)
Net deferred tax asset	$	828		$	753

* 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 31, 2011	January 1,   2011
Current	$          288	$	290
Non-current	532		571
	820		861
Finance group’s net deferred tax asset (liability)	8		(108)
Net deferred tax asset	$          828	$	753

Our net operating loss and credit carryforwards at December 31, 2011 are as follows:

(In millions)
Non-U.S. net operating loss with no expiration	$	98
Non-U.S. net operating loss expiring through 2031		45
State net operating loss and tax credits, net of tax benefits, expiring through 2027		36
U.S. federal tax credits beginning to expire in 2021		30

The undistributed earnings of our non-U.S. subsidiaries approximated $470 million at December 31, 2011. 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.