Note 12. Income Taxes

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


	Year Ended December 31,
	2014			2013			2012
Pretax income
U.S.	$	382		$	462		$	356
Foreign		400			366			262

	$	782		$	828		$	618

Provision (benefit) for income tax
Current:
U.S. federal	$	53		$	77		$	26
State and local		10			3			22
Foreign		93			118			118

		156			198			166

Deferred:
U.S. federal		36			69			(25	)
State and local		19			13			(2	)
Foreign		(72	)		(17	)		9

		(17	)		65			(18	)

	$	139		$	263		$	148

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,
	2014			2013
Current deferred tax assets	$	199		$	211
Long-term deferred tax assets		596			591
Current deferred tax liabilities ⁽¹⁾		(12	)		(17	)
Long-term deferred tax liabilities		(38	)		(48	)

Deferred income taxes	$	745		$	737

(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,
	2014			2013
Plant, property and equipment	$	(1	)	$	45
Intangibles		(51	)		(51	)
Inventories		61			52
Deferred gains		396			338
Investments		141			139
Receivables (net of reserves)		(30	)		(22	)
Accrued expenses and other reserves		117			140
Employee benefits		67			84
Net operating loss, capital loss and tax credit carryforwards		269			270
Other		56			41

		1,025			1,036
Less valuation allowance		(280	)		(299	)

Deferred income taxes	$	745		$	737

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 carry back and carry forward 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, 2014, we had gross federal net operating loss carryforwards of $6 million which are subject to certain limitations and have varying expiration dates extending through 2033, 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, 2014, we had gross state net operating loss carryforwards of approximately $1.3 billion, which have varying expiration dates extending through 2034, the earliest of which will begin to expire in 2015. We also had state tax credit carryforwards of $19 million of which $4 million are indefinite and $15 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, 2014, we had foreign net operating losses, capital losses and other attributes, which are indefinite or have varying expiration dates extending through 2033, of approximately $468 million, $14 million and $13 million, respectively. These carryforwards primarily relate to certain operations in Latin America and Europe and we have established a valuation allowance against the majority of these attributes as it is more likely than not that these attributes will not be 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 determined they do not have a material impact to 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,
	2014			2013			2012
Tax provision at U.S. statutory rate	$	274		$	290		$	216
U.S. state and local income taxes		17			19			6
Net U.S. tax on foreign earnings		—			5			3
Foreign tax rate differential		(90	)		(81	)		(77	)
Foreign withholding tax		25			26			34
Change in permanent reinvestment assertion on certain foreign earnings		(25	)		—			—
Change in tax law		2			(31	)		—
Change in asset basis		—			(2	)		(13	)
Change in uncertain tax positions		49			20			15
Tax settlements		(51	)		—			(1	)
Tax/(benefits) on asset dispositions		(44	)		(7	)		(41	)
Change in valuation allowances		(9	)		48			21
Other		(9	)		(24	)		(15	)

Provision for income tax	$	139		$	263		$	148

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

During the year ended December 31, 2014, we entered into a plan to undertake certain internal legal entity restructurings to better align our operations with our global footprint. As a result, we had a change in the indefinite reinvestment assertion regarding undistributed foreign earnings and profits at certain foreign subsidiaries and we recognized a $25 million tax benefit, including the impacts of foreign tax credits.

No U.S. income taxes have been provided on remaining filing basis undistributed foreign earnings and profits of $3.5 billion as of December 31, 2014 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.

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, 2014, we reduced the net valuation allowance by $9 million through continuing operations, primarily related to foreign jurisdictions. 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.

During the year ended December 31, 2014, the Tax Increase Prevention Act of 2014 was signed into law which extended certain business tax provisions through December 31, 2014, 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 2015.

During the years ended December 31, 2014 and 2013, we recorded tax benefits of $5 million and $70 million, respectively, in discontinued operations. The 2013 tax benefit of $70 million was the 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 16). The applicable statute of limitation for this tax position lapsed during 2013. In addition, during the year ended December 31, 2012 we recorded a tax expense of $87 million in discontinued operations primarily related to asset dispositions.

As we pursue opportunities to sell hotels, we continually assess our tax positions, indefinite reinvestment assertions, and our ability to realize deferred tax assets to identify if changes in recognition are required.

In addition, we continually evaluate initiatives to better align our tax and legal entity structure with the footprint of our non-U.S. operations and recognize the tax impact of these initiatives, including changes in assessment of our uncertain tax positions, indefinite reinvestment assertions and realizability of deferred tax assets in the period when we believe all necessary internal and external approvals associated with such initiatives have been obtained, or when the initiatives are materially complete, whichever occurs earliest. It is possible that we may recognize the tax impacts of one or more of these initiatives within the foreseeable future.

As of December 31, 2014, we had approximately $240 million of total unrecognized tax benefits, of which $87 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,
	2014			2013			2012
Beginning of year	$	261		$	258		$	221
Additions based on tax positions related to the current year		37			21			14
Additions for tax positions of prior years		26			40			29
Settlements with tax authorities		(81	)		—			(4	)
Reductions for tax positions in prior years		(3	)		(19	)		(1	)
Reductions due to the lapse of applicable statutes of limitations		—			(39	)		(1	)

End of year	$	240		$	261		$	258

During the year ended December 31, 2014, we resolved a previous dispute related to foreign operating losses, which resulted in a tax benefit of $49 million. As a result, we recognized a previously unrecognized tax benefit, reversed associated interest accruals, and recognized a deferred tax asset for the balance of net operating losses available as of December 31, 2013.

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. It is reasonably possible that approximately $19 million of our unrecognized tax benefits as of December 31, 2014 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 accrued for the payment of interest as of December 31, 2014 and December 31, 2013, respectively. We had $7 million and $1 million accrued for the payment of penalties as of December 31, 2014 and December 31, 2013, respectively. We are subject to taxation in the U.S. federal jurisdiction, as well as various state and foreign jurisdictions. As of December 31, 2014, 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 2007.

We are currently under audit by the Internal Revenue Service (IRS) for years 2007 through 2009. Through December 31, 2014, we received certain 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 a significant cash 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 to the extent we believe it is more likely than not that we will ultimately prevail. Subsequent to the end of the year, the IRS issued a 30-day letter which finalizes all adjustments for the audit period. The final adjustments are consistent with the proposed adjustments received through December 31, 2014. As stated, we intend to pursue remedies through the administrative process, including litigation, as discussed above.