Note 14. Income Taxes

Income tax data from our continuing operations is as follows (in millions):


	Year Ended December 31,
	2012			2011			2010
Pretax income
U.S.	$	356		$	165		$	85
Foreign		262			260			250

	$	618		$	425		$	335

Provision (benefit) for income tax
Current:
U.S. federal	$	26		$	(215	)	$	(61	)
State and local		22			(21	)		18
Foreign		118			88			43

		166			(148	)		—

Deferred:
U.S. federal		(25	)		62			22
State and local		(2	)		(11	)		(7	)
Foreign		9			22			12

		(18	)		73			27

	$	148		$	(75	)	$	27

No provision has been made for U.S. taxes payable on undistributed foreign earnings amounting to approximately $2.9 billion as of December 31, 2012 since these amounts are permanently reinvested. If such earnings were repatriated, additional tax expense may result, although the calculation of such additional taxes is not practicable.

Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities plus carryforward items. The composition of net deferred tax balances were as follows (in millions):


	December 31,
	2012			2011
Current deferred tax assets	$	320		$	278
Long-term deferred tax assets		636			639
Current deferred tax liabilities ⁽¹⁾		(40	)		(7	)
Long-term deferred tax liabilities		(78	)		(46	)

Deferred income taxes	$	838		$	864

(1)	Included in the accrued taxes and other line item in the consolidated balance sheets.

The tax effect of the temporary differences and carryforward items that give rise to deferred taxes were as follows (in millions):


	December 31,
	2012			2011
Plant, property and equipment	$	(43	)	$	(23	)
Intangibles		(70	)		(11	)
Inventories		58			118
Deferred gains		366			350
Investments		208			133
Receivables (net of reserves)		47			9
Accrued expenses and other reserves		182			201
Employee benefits		81			61
Net operating loss, capital loss and tax credit carryforwards		223			257
Other		37			3

		1,089			1,098
Less valuation allowance		(251	)		(234	)

Deferred income taxes	$	838		$	864

At December 31, 2012, we had federal net operating losses, which have varying expiration dates extending through 2030, of approximately $9 million. We expect to realize substantially all of the tax benefit associated with these attributes.

At December 31, 2012, we had state net operating losses, which have varying expiration dates extending through 2032, of approximately $1.4 billion. We also had state tax credit carryforwards of $22 million which are indefinite or will fully expire by 2026. We have established a valuation allowance against the majority of these attributes as it is unlikely that the tax benefit of these attributes will be realized prior to expiration.

At December 31, 2012, we had foreign net operating losses, capital losses and other attributes, which are indefinite or have varying expiration dates extending through 2031, of approximately $250 million, $19 million and $14 million, respectively. We also had tax credit carryforwards of approximately $23 million in foreign jurisdictions. The tax credit carryforwards available in foreign jurisdictions are indefinite or will fully expire by 2031. We have established a valuation allowance against the majority of these attributes as it is unlikely that the tax benefit of these attributes will be realized prior to expiration.

A reconciliation of our tax provision at the U.S. statutory rate to the provision for income tax as reported is as follows (in millions):


	Year Ended December 31,
	2012			2011			2010
Tax provision at U.S. statutory rate	$	216		$	149		$	117
U.S. state and local income taxes		6			(19	)		(2	)
Tax on repatriation of foreign earnings		3			25			(19	)
Effect of foreign operations and other		(74	)		(94	)		(108	)
Foreign withholding tax		34			22			16
Tax/(benefit) on capital gains		(1	)		334			99
Change in asset basis		(13	)		(130	)		—
Change in uncertain tax positions		15			22			23
Tax settlements		(1	)		(25	)		(42	)
Tax/(benefit) on asset dispositions		(41	)		(51	)		4
Change in valuation allowances		21			(304	)		(99	)
Other		(17	)		(4	)		38

Provision for income tax (benefit)	$	148		$	(75	)	$	27

The effect of foreign operations and other reconciling item includes the difference between the U.S. statutory tax rate and the local country statutory tax rate, impacts of tax holidays and tax exempt income.

In 2011, we completed transactions that involved certain domestic and foreign subsidiaries. These transactions generated capital gains, increased the tax basis in subsidiaries including U.S. partnerships and resulted in the inclusion of foreign earnings for U.S. tax purposes. The capital gains were largely reduced by the utilization of capital losses. Due to the uncertainty regarding our ability to generate capital gain income, the deferred tax asset associated with these capital losses was offset by a full valuation allowance prior to these transactions.

During 2011, the IRS closed its audit with respect to tax years 2004 through 2006 resulting in a $25 million tax benefit primarily related to the reversal of tax and interest reserves. During 2010, the IRS closed its audit with respect to tax years 1998 through 2003 and we recognized a $42 million tax benefit in continuing operations primarily associated with the refund of interest on taxes previously paid. Also in 2010, as a result of the 1998 through 2003 audit closure, we recognized a $134 million tax benefit in discontinued operations primarily related to the portion of the tax no longer due.

As of December 31, 2012, we had approximately $191 million of total unrecognized tax benefits, of which $52 million would affect our effective tax rate if recognized. A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows (in millions):


	Year Ended December 31,
	2012			2011			2010
Beginning of year	$	153		$	510		$	999
Additions based on tax positions related to the current year		19			24			29
Additions for tax positions of prior years		27			36			18
Settlements with tax authorities		(4	)		(407	)		(499	)
Reductions for tax positions in prior years		(3	)		(6	)		(5	)
Reductions due to the lapse of applicable statutes of limitations		(1	)		(4	)		(32	)

End of year	$	191		$	153		$	510

It is reasonably possible that approximately $51 million of our unrecognized tax benefits as of December 31, 2012 will reverse within the next twelve months, the majority of which will not impact the effective tax rate.

We recognize interest and penalties related to unrecognized tax benefits through income tax expense. We had $80 million and $74 million accrued for the payment of interest as of December 31, 2012 and December 31, 2011, respectively. We did not have any reserves for penalties as of December 31, 2012 and 2011.

We are subject to taxation in the U.S. federal jurisdiction, as well as various state and foreign jurisdictions. As of December 31, 2012, we are no longer subject to examination by U.S. federal taxing authorities for years prior to 2007 and to examination by any U.S. state taxing authority prior to 1998. All subsequent periods remain eligible for examination. In the significant foreign jurisdictions in which we operate, we are no longer subject to examination by the relevant taxing authorities for any years prior to 2001.