INCOME TAXES AND TAX-RELATED ITEMS

The provision for income taxes is calculated as the sum of income taxes due for the current year and deferred taxes. Income taxes due for the current year is computed by applying federal and state tax statutes to current year taxable income. Deferred taxes arise from temporary differences between the income tax basis and financial accounting basis of assets and liabilities. Tax-related interest and penalties and foreign taxes are then added to the tax provision.

The current and deferred components of the provision for income taxes were as follows:



(in millions)
December 31	2013			2012		2011
Current:
Federal	$	186		$	7	$	42
Foreign	6			6		9
State and local	17			18		7
Total current	209			31		58
Deferred:
Federal	(20		)	152		73
State and local	—			6		6
Total deferred	(20		)	158		79
Total	$	189		$	189	$	137

Income before income taxes of $730 million for the year ended December 31, 2013 included $25 million of foreign-source income.

There was no income tax provision on securities transactions for the year ended December 31, 2013. The income tax provision on securities transactions was $4 million and $5 million for the years ended December 31, 2012 and 2011, respectively.

A reconciliation of expected income tax expense at the federal statutory rate to the Corporation’s provision for income taxes and effective tax rate follows:



(dollar amounts in millions)	2013					2012					2011
Years Ended December 31	Amount			Rate		Amount			Rate		Amount			Rate
Tax based on federal statutory rate	$	255		35.0	%	$	249		35.0	%	$	185		35.0	%
State income taxes	11			1.5		14			2.0		9			1.6
Affordable housing and historic credits	(57		)	(7.8	)	(56		)	(7.8	)	(51		)	(9.7	)
Bank-owned life insurance	(15		)	(2.1	)	(15		)	(2.1	)	(14		)	(2.7	)
Other changes in unrecognized tax benefits	(2		)	(0.2	)	1			0.2		17			3.2
Tax-related interest and penalties	(1		)	(0.1	)	—			—		(7		)	(1.3	)
Other	(2		)	(0.4	)	(4		)	(0.7	)	(2		)	(0.2	)
Provision for income taxes	$	189		25.9	%	$	189		26.6	%	$	137		25.9	%

The Corporation recognized a benefit of $1 million in 2013 for tax-related interest and penalties included in “provision for income taxes” on the consolidated statements of income, compared to no expense recognized in 2012 and a benefit of $7 million in 2011. Included in “accrued expenses and other liabilities” on the consolidated balance sheets was a $2 million liability for tax-related interest and penalties at December 31, 2013, compared to $4 million at December 31, 2012.

In the ordinary course of business, the Corporation enters into certain transactions that have tax consequences. From time to time, the Internal Revenue Service (IRS) may review and/or challenge specific interpretive tax positions taken by the Corporation with respect to those transactions. The Corporation believes that its tax returns were filed based upon applicable statutes, regulations and case law in effect at the time of the transactions. The IRS, an administrative authority or a court, if presented with the transactions, could disagree with the Corporation’s interpretation of the tax law.

A reconciliation of the beginning and ending amount of net unrecognized tax benefits follows:



(in millions)	2013			2012			2011
Balance at January 1	$	42		$	20		$	10
Increases as a result of tax positions taken during a prior period	—			33			22
Decrease related to settlements with tax authorities	(31		)	(11		)	(12		)
Balance at December 31	$	11		$	42		$	20

The Corporation anticipates that there will be no change in net unrecognized tax benefits within the next twelve months.

After consideration of the effect of the federal tax benefit available on unrecognized state tax benefits, the total amount of unrecognized tax benefits that, if recognized, would affect the Corporation’s effective tax rate was approximately $2 million at December 31, 2013.

The following tax years for significant jurisdictions remain subject to examination as of December 31, 2013:



Jurisdiction	Tax Years
Federal	2010-2012
California	2001-2012

Based on current knowledge and probability assessment of various potential outcomes, the Corporation believes that current tax reserves are adequate, and the amount of any potential incremental liability arising is not expected to have a material adverse effect on the Corporation’s consolidated financial condition or results of operations. Probabilities and outcomes are reviewed as events unfold, and adjustments to the reserves are made when necessary.

The principal components of deferred tax assets and liabilities were as follows:



(in millions)
December 31	2013			2012
Deferred tax assets:
Allowance for loan losses	$	209		$	220
Deferred compensation	131			134
Defined benefit plans	2			113
Loan purchase accounting adjustments	17			38
Deferred loan origination fees and costs	28			30
Net unrealized losses on investment securities available-for-sale	39			—
Foreign tax credit	—			1
Other tax credits	—			39
Other temporary differences, net	74			34
Total deferred tax assets	500			609
Deferred tax liabilities:
Lease financing transactions	(226		)	(241		)
Net unrealized gains on investment securities available-for-sale	—			(86		)
Allowance for depreciation	(18		)	(28		)
Total deferred tax liabilities	(244		)	(355		)
Net deferred tax asset	$	256		$	254

At December 31, 2013, the Corporation determined that no valuation allowance was necessary on federal or state deferred tax assets. This determination was based on sufficient taxable income in the carry-back period and anticipated future events to absorb a significant portion of the deferred tax assets. The remaining deferred tax assets will be absorbed by future reversals of existing taxable temporary differences. For further information on the Corporation’s valuation policy for deferred tax assets, refer to Note 1.