The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in the Consolidated Statements of Income for the years ended December 31:


($ in millions)		2013	2012	2011
Current income tax expense (benefit):
U.S. Federal income taxes	$	494	327	82
State and local income taxes		23	38	14
Foreign income taxes		2	-	-
Total current tax expense		519	365	96
Deferred income tax expense
U.S. Federal income taxes		232	252	411
State and local income taxes		23	19	26
Foreign income taxes		(2)	-	-
Total deferred income tax expense		253	271	437
Applicable income tax expense	$	772	636	533

The following is a reconciliation between the statutory U.S. Federal income tax rate and the Bancorp’s effective tax rate for the years ended December 31:

($ in millions)	2013		2012	2011
Statutory tax rate	35.0	%	35.0	35.0
Increase (decrease) resulting from:
State taxes, net of federal benefit	1.2		1.7	1.4
Tax-exempt income	(1.1)		(2.1)	(1.4)
Credits	(6.0)		(6.7)	(7.3)
Unrealized stock-based compensation benefits	0.3		0.8	1.3
Other, net	0.3		0.1	0.1
Effective tax rate	29.7	%	28.8	29.1

Tax-exempt income in the rate reconciliation table includes interest on municipal bonds, interest on tax-exempt lending, income/charges on life insurance policies held by the Bancorp, and certain gains on sales of leases that are exempt from federal taxation.

The following table provides a summary of the Bancorp’s unrecognized tax benefits as of December 31:

($ in millions)		2013	2012
Tax positions that would impact the effective tax rate, if recognized	$	7	18
Tax positions where the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of the deduction		-	-
Unrecognized tax benefits	$	7	18

The following table provides a reconciliation of the beginning and ending amounts of the Bancorp’s unrecognized tax benefits:

($ in millions)		2013	2012	2011
Unrecognized tax benefits at January 1	$	18	14	16
Gross increases for tax positions taken during prior period		1	6	1
Gross decreases for tax positions taken during prior period		(7)	(3)	(2)
Gross increases for tax positions taken during current period		1	2	-
Settlements with taxing authorities		(5)	-	-
Lapse of applicable statute of limitations		(1)	(1)	(1)
Unrecognized tax benefits at December 31	$	7	18	14

The Bancorp's unrecognized tax benefits as of December 31, 2013, 2012, and 2011 relate largely to state income tax exposures from taking tax positions where the Bancorp believes it is likely that, upon examination, a state will take a position contrary to the position taken by the Bancorp.

While it is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the Bancorp's uncertain tax positions could increase or decrease during the next 12 months, the Bancorp believes it is unlikely that its unrecognized tax benefits will change by a material amount during the next 12 months.

Deferred income taxes are comprised of the following items at December 31:

($ in millions)		2013	2012
Deferred tax assets:
Allowance for loan and lease losses	$	554	649
Deferred compensation		109	105
Reserves		101	63
Reserve for unfunded commitments		57	47
Impairment reserves		31	74
State net operating losses		22	33
Other		149	191
Total deferred tax assets	$	1,023	1,162
Deferred tax liabilities:
Lease financing	$	865	844
Investments in joint ventures and partnership interests		381	470
MSRs		254	162
Bank premises and equipment		114	108
Qualifying hedges and free-standing derivatives		97	31
State deferred taxes		76	64
Other comprehensive income		44	202
Other		130	124
Total deferred tax liabilities	$	1,961	2,005
Total net deferred tax liability	$	(938)	(843)

At December 31, 2013 and 2012, the Bancorp had recorded deferred tax assets of $22 million and $33 million, respectively, related to state net operating loss carryforwards. The deferred tax assets relating to state net operating losses (primarily resulting from leasing operations) are presented net of specific valuation allowances of $19 million and $20 million at December 31, 2013 and 2012, respectively. If these carryforwards are not utilized, they will expire in varying amounts through 2030.

The Bancorp has determined that a valuation allowance is not needed against the remaining deferred tax assets as of December 31, 2013 or 2012. The Bancorp considered all of the positive and negative evidence available to determine whether it is more likely than not that the deferred tax assets will ultimately be realized and, based upon that evidence, the Bancorp believes it is more likely than not that the deferred tax assets recorded at December 31, 2013 and 2012 will ultimately be realized. The Bancorp reached this conclusion as the Bancorp has taxable income in the carryback period and it is expected that the Bancorp's remaining deferred tax assets will be realized through the reversal of its existing taxable temporary differences and its projected future taxable income.

The IRS concluded its audit for 2008 and 2009 during the first quarter of 2012. As a result, all issues have been resolved with the IRS through 2009. The IRS is currently examining the Bancorp's 2010 and 2011 federal income tax returns. The statute of limitations for the Bancorp's federal income tax returns remains open for tax years 2010-2013. On occasion, as various state and local taxing jurisdictions examine the returns of the Bancorp and its subsidiaries, the Bancorp may agree to extend the statute of limitations for a short period of time. Otherwise, with the exception of a few states with insignificant uncertain tax positions, the statutes of limitations for state income tax returns remain open only for tax years in accordance with each state's statutes.

Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the Consolidated Financial Statements. During the years ended December 31, 2013, 2012 and 2011, the Bancorp recognized an immaterial amount of interest expense in connection with income taxes. At December 31, 2013 and 2012, the Bancorp had accrued interest liabilities, net of the related tax benefits, of $1 million and $3 million, respectively. No material liabilities were recorded for penalties.

Retained earnings at December 31, 2013 and 2012 included $157 million in allocations of earnings for bad debt deductions of former thrift subsidiaries for which no income tax has been provided. Under current tax law, if certain of the Bancorp's subsidiaries use these bad debt reserves for purposes other than to absorb bad debt losses, they will be subject to federal income tax at the current corporate tax rate.