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	2017			2016			2015
Current:
Federal	$	371		$	224		$	275
Foreign	5			5			5
State and local	36			15			20
Total current	412			244			300
Deferred:
Federal	(26		)	(49		)	(68		)
State and local	(2		)	(2		)	(3		)
Remeasurement of deferred taxes	107			—			—
Total deferred	79			(51		)	(71		)
Total	$	491		$	193		$	229

Income before income taxes of $1.2 billion for the year ended December 31, 2017 included $24 million of foreign-source income.

The provision for income taxes for the year ended December 31, 2017 included a $107 million charge to adjust deferred taxes as a result of the enactment of the Tax Cuts and Jobs Act. Refer to Note 1 for further details.

The income tax provision on securities transactions for the years ended December 31, 2017, 2016 and 2015 were benefits of $1 million, $2 million and $1 million, respectively.

The provision for income taxes does not reflect the tax effects of unrealized gains and losses on investment securities available-for-sale or the change in defined benefit pension and other postretirement plans adjustment included in accumulated other comprehensive loss. Refer to Note 14 for additional information on accumulated other comprehensive loss.

The provision for income taxes for 2017 included a benefit of $35 million related to employee stock transactions as a result of new accounting guidance for stock compensation. For the years ended December 31, 2016 and 2015, tax effects of employee stock transactions of $4 million and $3 million, respectively, were recorded in shareholders' equity.

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)	2017					2016					2015
Years Ended December 31	Amount			Rate		Amount			Rate		Amount			Rate
Tax based on federal statutory rate	$	432		35.0	%	$	235		35.0	%	$	262		35.0	%
Remeasurement of deferred taxes	107			8.7		—			—		—			—
State income taxes	22			1.8		8			1.2		10			1.3
Employee stock transactions	(35		)	(2.8	)	—			—		—			—
Affordable housing and historic credits	(21		)	(1.7	)	(22		)	(3.3	)	(22		)	(2.9	)
Bank-owned life insurance	(16		)	(1.3	)	(15		)	(2.3	)	(15		)	(2.0	)
Lease termination transactions	(2		)	(0.2	)	(15		)	(2.2	)	(5		)	(0.7	)
Tax-related interest and penalties	4			0.3		3			0.5		1			0.1
Other	—			—		(1		)	(0.1	)	(2		)	(0.3	)
Provision for income taxes	$	491		39.8	%	$	193		28.8	%	$	229		30.5	%

The liability for tax-related interest and penalties included in “accrued expenses and other liabilities” on the consolidated balance sheets was $10 million and $7 million at December 31, 2017 and 2016, respectively.

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)	2017			2016			2015
Balance at January 1	$	15		$	22		$	14
Increase as a result of tax positions taken during a prior period	4			—			8
Decrease related to settlements with tax authorities	(8		)	(7		)	—
Other	(1		)	—			—
Balance at December 31	$	10		$	15		$	22

The Corporation anticipates that it is reasonably possible that settlements with tax authorities will result in a $1 million decrease 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 $8 million and $4 million at December 31, 2017 and 2016, respectively.

The following tax years for significant jurisdictions remain subject to examination as of December 31, 2017:



Jurisdiction	Tax Years
Federal	2014-2016
California	2005-2016

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	2017			2016
Deferred tax assets:
Allowance for loan losses	$	150		$	256
Deferred compensation	49			91
Deferred loan origination fees and costs	6			20
Net unrealized losses on investment securities available-for-sale	31			20
Other temporary differences, net	57			76
Total deferred tax asset before valuation allowance	293			463
Valuation allowance	(3		)	(3		)
Total deferred tax assets	290			460
Deferred tax liabilities:
Lease financing transactions	(76		)	(150		)
Defined benefit plans	(72		)	(82		)
Allowance for depreciation	(1		)	(11		)
Total deferred tax liabilities	(149		)	(243		)
Net deferred tax asset	$	141		$	217

Deferred tax assets included state net operating loss carryforwards of $4 million at both December 31, 2017 and December 31, 2016. The carryforwards expire between 2018 and 2027. The Corporation believes it is more likely than not that the benefit from certain of these state net operating loss carryforwards will not be realized and, accordingly, maintained a valuation allowance of $3 million at both December 31, 2017 and December 31, 2016. For further information on the Corporation’s valuation policy for deferred tax assets, refer to Note 1.