INCOME TAXES

12 Months Ended

May 27, 2012

INCOME TAXES [Abstract]

INCOME TAXES

NOTE 14. INCOME TAXES

The components of earnings before income taxes and after-tax earnings from joint ventures and the corresponding income taxes thereon are as follows:

		Fiscal Year
In Millions		2012		2011		2010
Earnings before income taxes and after-tax earnings from joint ventures:
United States	$	1,816.5	$	2,144.8	$	2,060.4
Foreign		394.0		283.4		144.1
Total earnings before income taxes and after-tax earnings from joint ventures	$	2,210.5	$	2,428.2	$	2,204.5
Income taxes:
Currently payable:
Federal	$	399.1	$	370.0	$	616.0
State and local		52.0		76.9		87.4
Foreign		109.1		68.9		45.5
Total current		560.2		515.8		748.9
Deferred:
Federal		167.9		178.9		38.5
State and local		(1.3)		30.8		(4.9)
Foreign		(17.2)		(4.4)		(11.3)
Total deferred		149.4		205.3		22.3
Total income taxes	$	709.6	$	721.1	$	771.2

The following table reconciles the United States statutory income tax rate with our effective income tax rate:

	Fiscal Year
	2012		2011		2010
United States statutory rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal tax benefits	1.4		2.7		2.5
Foreign rate differences	(2.0)		(2.0)		(1.8)
Enactment date effect of health care reform	-		-		1.3
Court decisions and audit settlements	-		(3.7)		-
Domestic manufacturing deduction	(1.8)		(1.6)		(1.8)
Other, net	(0.5)		(0.7)		(0.2)
Effective income tax rate	32.1	%	29.7	%	35.0	%

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:

In Millions		May 27, 2012		May 29, 2011
Accrued liabilities	$	86.9	$	129.5
Compensation and employee benefits		635.4		582.9
Unrealized hedge losses		26.4		-
Pension liability		240.1		74.1
Tax credit carryforwards		86.5		62.0
Stock, partnership, and miscellaneous investments		534.3		500.6
Capital losses		90.7		92.1
Net operating losses		130.6		140.9
Other		151.9		123.7
Gross deferred tax assets		1,982.8		1,705.8
Valuation allowance		384.4		404.5
Net deferred tax assets		1,598.4		1,301.3
Brands		1,292.8		1,289.1
Fixed assets		500.1		394.6
Intangible assets		289.1		122.3
Tax lease transactions		56.5		63.0
Inventories		55.9		53.0
Stock, partnership, and miscellaneous investments		468.2		424.5
Unrealized hedges		-		34.9
Other		47.5		20.0
Gross deferred tax liabilities		2,710.1		2,401.4
Net deferred tax liability	$	1,111.7	$	1,100.1

We have established a valuation allowance against certain of the categories of deferred tax assets described above as current evidence does not suggest we will realize sufficient taxable income of the appropriate character (e.g., ordinary income versus capital gain income) within the carry forward period to allow us to realize these deferred tax benefits.

Of the total valuation allowance of $384.4 million, $168.3 million relates to a deferred tax asset for losses recorded as part of the Pillsbury acquisition. Of the remaining valuation allowance, $90.7 million relates to capital loss carryforwards and $122.1 million relates to state and foreign operating loss carryforwards. We have approximately $78.9 million of U.S. foreign tax credit carryforwards for which no valuation allowance has been recorded. As of May 27, 2012, we believe it is more-likely-than-not that the remainder of our deferred tax assets are realizable.

The carryforward periods on our foreign loss carryforwards are as follows: $86.8 million do not expire; $4.4 million expire in fiscal 2013 and 2014; and $23.0 million expire in fiscal 2015 and beyond.

We have not recognized a deferred tax liability for unremitted earnings of $2.8 billion from our foreign operations because our subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings will be remitted in a tax-neutral transaction. It is not practicable for us to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings. Deferred taxes are recorded for earnings of our foreign operations when we determine that such earnings are no longer indefinitely reinvested.

We are subject to federal income taxes in the United States as well as various state, local, and foreign jurisdictions. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our liabilities for income taxes reflect the most likely outcome. We adjust these liabilities, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position would usually require the use of cash.

The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions include the United States (federal and state) and Canada. The IRS initiated its audit of our fiscal 2009 and fiscal 2010 tax years during fiscal 2012.

During fiscal 2012, we reached a settlement with the IRS concerning research and development tax credits claimed for fiscal years 2002 to 2008. This settlement did not have a material impact on our results of operations or financial position. As of the end of fiscal 2012, we have effectively settled all issues with the IRS for fiscal years 2008 and prior.

During fiscal 2011, we reached a settlement with theIRS concerning certain corporate income tax adjustments for fiscal years 2002 to 2008. The adjustments primarily relate to the amount of capital loss, depreciation, and amortization we reported as a result of the sale of noncontrolling interests in our GMCsubsidiary. As a result, we recorded a $108.1 million reduction in our total liabilities for uncertain tax positionsin fiscal 2011. We made payments totaling $385.3 million in fiscal 2011 related to this settlement.

During 2011, the Superior Court of the State of California issued an adverse decision concerning our state income tax apportionment calculations. As a result, we recorded an $11.5 million increase in our total liabilities for uncertain tax positions in fiscal 2011. We believe our positions are supported by substantial technical authority and have appealed this decision. We do not expect to make a payment related to this matter until it is definitively resolved.

Various tax examinations by United States state taxing authorities could be conducted for any open tax year, which vary by jurisdiction, but are generally from 3 to 5 years. Currently, several state examinations are in progress. The Canada Revenue Agency (CRA) has completed its review of our income tax returns in Canada for fiscal years2003 to 2005. The CRA has raised assessments for these years to which we have objected or otherwise addressed through the Mutual Agreement procedures of the Canada-US tax treaty. We believe our positions are supported by substantial technical authority and are vigorously defending our positions. We do not anticipate that any United States or Canadian tax adjustments will have a significant impact on our financial position or results of operations.

We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly we recognize the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. Future changes in judgment related to the expected ultimate resolution of uncertain tax positions will affect earnings in the quarter of such change.

The following table sets forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for fiscal 2012. Approximately $148.3 million of this total represents the amount that, if recognized, would affect our effective income tax rate in future periods. This amount differs from the gross unrecognized tax benefits presented in the table because certain of the liabilities below would impact deferred taxes if recognized or are the result of stock compensation items impacting additional paid-in capital. We also would record a decrease in U.S. federal income taxes upon recognition of the state tax benefits included therein.

	Fiscal Year
In Millions		2012		2011
Balance, beginning of year	$	226.2	$	552.9
Tax positions related to current year:
Additions		23.8		25.0
Tax positions related to prior years:
Additions		24.3		75.6
Reductions		(13.4)		(131.2)
Settlements		(6.6)		(287.9)
Lapses in statutes of limitations		(23.0)		(8.2)
Balance, end of year	$	231.3	$	226.2

As of May 27, 2012, we do not expect to pay any unrecognized tax benefit liabilities within the next 12 months. We are not able to reasonably estimate the timing of future cash flows beyond 12 months due to uncertainties in the timing of tax audit outcomes.The remaining amount of our unrecognized tax liability was classified in other liabilities.

We report accrued interest and penalties related to unrecognized tax benefit liabilities in income tax expense. For fiscal 2012, we recognized $0.2 millionof tax-related net interest and penalties, and had $49.3 million of accrued interest and penalties as of May 27, 2012. For fiscal 2011, we recognized a net benefit of $10.5 million associated with tax-related interest and penalties, and had $53.4 million of accrued interest and penalties as of May 29, 2011.