Note 13. Income Taxes

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


	Year Ended December 31,
	2013			2012			2011
Pretax income
U.S.	$	462		$	356		$	165
Foreign		366			262			260

	$	828		$	618		$	425

Provision (benefit) for income tax
Current:
U.S. federal	$	77		$	26		$	(215	)
State and local		3			22			(21	)
Foreign		118			118			88

		198			166			(148	)

Deferred:
U.S. federal		69			(25	)		62
State and local		13			(2	)		(11	)
Foreign		(17	)		9			22

		65			(18	)		73

	$	263		$	148		$	(75	)

No U.S. income taxes have been provided on filing basis undistributed foreign earnings of $3.3 billion as of December 31, 2013 since we have the ability and intent to permanently reinvest these amounts. 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,
	2013			2012
Current deferred tax assets	$	211		$	290
Long-term deferred tax assets		591			660
Current deferred tax liabilities ⁽¹⁾		(17	)		(27	)
Long-term deferred tax liabilities		(48	)		(85	)

Deferred income taxes	$	737		$	838

(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 tax assets (liabilities) were as follows (in millions):


	December 31,
	2013			2012
Plant, property and equipment	$	(41	)	$	(43	)
Intangibles		(51	)		(70	)
Inventories		52			73
Deferred gains		338			366
Investments		225			208
Receivables (net of reserves)		(22	)		47
Accrued expenses and other reserves		140			182
Employee benefits		84			81
Net operating loss, capital loss and tax credit carryforwards		270			223
Other		41			22

		1,036			1,089
Less valuation allowance		(299	)		(251	)

Deferred income taxes	$	737		$	838

In assessing whether it is more likely than not that deferred tax assets will be realized, we consider all available evidence, both positive and negative, including our recent cumulative earnings experience and expectations of future available taxable income of the appropriate character by taxing jurisdiction, tax attribute carryback and carryforward periods available to us for tax reporting purposes, and prudent and feasible tax planning strategies. Considering the factors, a possibility exists that we may release a portion of the valuation allowance against some deferred tax assets in the next twelve months in the event of sustainable earnings or the identification of a prudent and feasible tax planning strategy.

At December 31, 2013, we had gross federal net operating loss carryforwards of $8 million which have varying expiration dates extending through 2032, the earliest of which will begin to expire in 2026. It is more likely than not that substantially all of these attributes will be realized prior to expiration.

At December 31, 2013, we had gross state net operating loss carryforwards of approximately $1.4 billion, which have varying expiration dates extending through 2033, the earliest of which will begin to expire in 2014. We also had state tax credit carryforwards of $21 million of which $5 million are indefinite and $16 million will fully expire by 2026. We have established a valuation allowance against a portion of these attributes as it is more likely than not that they will not be fully realized due to a lack of sustainable earnings in separate state filings.

At December 31, 2013, we had foreign net operating losses, capital losses and other attributes, which are indefinite or have varying expiration dates extending through 2032, of approximately $441 million, $19 million and $18 million, respectively. We also had tax credit carryforwards of approximately $1 million in foreign jurisdictions. We have established a valuation allowance against the majority of these attributes as it is more likely than not that these attributes will be not realized prior to expiration.

On September 13, 2013, Treasury and the Internal Revenue Service (the “IRS”) issued final regulations regarding the deduction and capitalization of expenditures related to tangible property, which could affect deferred income taxes. The final regulations under Internal Revenue Code Sections 162, 167, and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014. We have evaluated these regulations and do not anticipate they will have a material impact on our consolidated results of operations.

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,
	2013			2012			2011
Tax provision at U.S. statutory rate	$	290		$	216		$	149
U.S. state and local income taxes		19			6			(19	)
Net U.S. tax on repatriation of foreign earnings		5			3			25
Foreign tax rate differential		(81	)		(77	)		(98	)
Foreign withholding tax		26			34			22
Tax/(benefit) on capital gains		—			(1	)		334
Change in tax law		(31	)		—			—
Change in asset basis		(2	)		(13	)		(130	)
Change in uncertain tax positions		20			15			22
Tax settlements		—			(1	)		(25	)
Tax/(benefits) on asset dispositions		(7	)		(41	)		(51	)
Change in valuation allowances		48			21			(304	)
Other		(24	)		(14	)		—

Provision for income tax (benefit)	$	263		$	148		$	(75	)

The foreign tax rate differential benefit primarily relates to our operations in Luxembourg and Singapore.

During the year ended December 31, 2013, we recorded a $31 million tax benefit for changes in tax law primarily related to Mexico. On December 11, 2013, Mexican federal income tax law changes were enacted eliminating the statutory income tax rate reduction scheduled to start in 2014, and leaving the current 30% statutory income tax rate in effect for future years. Additionally, the Entrepreneurial Tax of Unique Rate (IETU or Flat Tax) has been repealed as of January 1, 2014. We have revalued our deferred income tax assets and liabilities using the rates expected to be in effect when the underlying temporary differences are expected to reverse.

During the year ended December 31, 2013, we established a net valuation allowance of $48 million through continuing operations primarily related to foreign jurisdictions, which includes $22 million resulting from the law change in Mexico.

On December 31, 2013, certain US income tax provisions expired including IRC section 954(c)(6) dealing with the application of Subpart F to certain inter-company payments among controlled foreign corporations. The expiration of section 954(c)(6) and the other expired provisions could have a material impact on our consolidated results of operations subsequent to 2014.

During the year ended December 31, 2013, we recorded a tax benefit of $70 million in discontinued operations, net as a result of the reversal of state income tax and interest reserves associated with an uncertain tax position, which was related to a previous disposition (see Note 17). The applicable statute of limitation for this tax position lapsed during 2013.

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.

As of December 31, 2013, we had approximately $261 million of total unrecognized tax benefits, of which $124 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,
	2013			2012			2011
Beginning of year	$	258		$	221		$	585
Additions based on tax positions related to the current year		21			14			20
Additions for tax positions of prior years		40			29			33
Settlements with tax authorities		—			(4	)		(407	)
Reductions for tax positions in prior years		(19	)		(1	)		(6	)
Reductions due to the lapse of applicable statutes of limitations		(39	)		(1	)		(4	)

End of year	$	261		$	258		$	221

Unrecognized tax benefits are subject to change over the next twelve months primarily as a result of the expiration of certain statutes of limitations and as audits are settled. During the first quarter of fiscal year 2014, we settled a foreign tax audit. We will remeasure our unrecognized tax benefits and recognize the tax impact of this settlement in the first quarter of 2014. We expect the settlement to result in a tax benefit of approximately $52 million. In addition to this settlement, we also believe it is reasonably possible that approximately $13 million of our unrecognized tax benefits as of December 31, 2013 will reverse within the next twelve months, the majority of which will impact the effective tax rate.

We recognize interest and penalties related to unrecognized tax benefits through income tax expense. We had $16 million and $80 million accrued for the payment of interest as of December 31, 2013 and December 31, 2012, respectively. We had $1 million accrued for the payment of penalties as of December 31, 2013, while at December 31, 2012, we had no accruals for the payment of penalties. We are subject to taxation in the U.S. federal jurisdiction, as well as various state and foreign jurisdictions. As of December 31, 2013, 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 2002. 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.

We are currently under audit by the IRS for years 2007 through 2009. During the period ending December 31, 2013, we received Notices of Proposed Adjustment from the IRS for such years; however, we disagree with the IRS on certain of these adjustments and intend to vigorously contest them, including pursuing all available remedies such as the IRS Appeals process and litigation, if necessary. These unagreed adjustments, if upheld, would result in significant tax and interest payments. More than half of this amount would not affect the effective tax rate due to the timing nature of certain issues. We believe we will prevail in the eventual resolution of these matters and have not adjusted our results of operations as a result of these unagreed proposed adjustments.