Income Taxes (Notes)

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

INCOME TAXES [Text Block]

INCOME TAXES

The components of income tax expense (benefit) from continuing operations were as follows (in millions):

	2011		2010			2009
Current:
Federal	$	94	$	(1	)	$	(148	)
State	48		(4		)	5
Deferred:
Federal	196		4			107
State	4		5			(12		)
Income tax expense (benefit)	$	342	$	4		$	(48	)

We record deferred tax assets and liabilities for future income tax consequences that are attributable to differences between the financial statement carrying amounts of assets and liabilities and their income tax bases. Temporary differences and the resulting deferred tax assets and liabilities at December 31, 2011 and 2010, were (in millions):

	2011			2010
Deferred tax assets:
Accrued pension and other postretirement benefits	$	137		$	139
Investment in TLLP	79			—
Other accrued liabilities	69			63
Stock-based compensation	57			58
Accrued environmental remediation liabilities	34			40
Tax credit carryforwards	21			85
Asset retirement obligations	10			12
Net operating losses	8			149
Other	25			12
Total deferred tax assets	440			558
Less: valuation allowance	(9		)	(9		)
Deferred tax assets, net	$	431		$	549
Deferred tax liabilities:
Accelerated depreciation and property related items	$	994		$	941
Deferred maintenance costs, including refinery turnarounds	91			93
Inventory	82			67
Amortization of intangible assets	35			37
Other	13			16
Total deferred tax liabilities	1,215			1,154
Deferred tax liabilities, net	$	784		$	605

We have recorded a valuation allowance as of December 31, 2011 and 2010, due to uncertainties related to our ability to use certain state tax credit carryforwards. The valuation allowance reduces the benefit of those carryforwards to the amount that will more likely than not be realized, and is based on anticipated taxable income in the various jurisdictions. The realization of our other deferred tax assets depends on Tesoro’s ability to generate future taxable income. Although realization is not assured, we believe it is more likely than not that we will realize those deferred tax assets.

The net deferred income tax liability is classified in the consolidated balance sheets as follows (in millions):

	2011		2010
Current Assets	$	31	$	11
Noncurrent Liabilities	815		616

The reconciliation of income tax expense (benefit) at the U.S. statutory rate to the income tax expense (benefit) is as follows (in millions):

	2011			2010			2009
Income tax expense (benefit) at U.S. federal statutory rate	$	317		$	(9	)	$	(66	)
Effect of:
State income taxes, net of federal income tax effect	34			—			(7		)
Manufacturing activities deduction	(9		)	—			4
Goodwill write-off	—			1			17
Medicare Part D law change	—			7			—
Income attributable to noncontrolling interest	(6		)	—			—
Other	6			5			4
Income tax expense (benefit)	$	342		$	4		$	(48	)

We have approximately $19 million of state alternative minimum tax credit carryforwards as of December 31, 2011, which never expire. Additionally, we have approximately $9 million of other state income tax credit carryforwards, most of which expire in 2026. As of December 31, 2011, we have no remaining federal regular or alternative minimum tax net operating losses to carry forward to 2012. In the states in which we file tax returns, we have approximately $13 million of tax-effected net operating loss carryforwards, which expire in 2031.

We are subject to income taxes in the U.S., multiple state jurisdictions, and a few foreign jurisdictions. Our unrecognized tax benefits totaled $31 million and $34 million as of December 31, 2011 and 2010, respectively, of which $12 million and $22 million are recognized as tax liabilities. Included in those amounts are $18 million and $19 million (net of the tax benefit on state issues) as of December 31, 2011 and 2010, respectively, that would reduce the effective tax rate if recognized.

We do not expect our unrecognized tax benefits to change significantly over the next twelve months. We had accrued $8 million and $11 million at December 31, 2011 and 2010, respectively, for interest and penalties. We recognized $(1) million, $(4) million and $5 million in interest and penalties associated with unrecognized tax benefits during the years ended December 31, 2011, 2010, and 2009, respectively. For interest and penalties relating to income taxes we recognize accrued interest in interest and financing costs, and penalties in selling, general and administrative expenses in the statements of consolidated operations. The tax years 2006 forward remain open to federal examination by the Internal Revenue Service, and in general the tax years 2001 forward remain open to examination by various state taxing authorities.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in millions):

	2011			2010			2009
Balance as of beginning of year	$	34		$	36		$	44
Increases related to prior year tax positions	3			2			1
Decreases related to prior year tax positions	(6		)	(1		)	(6		)
Increases related to current year tax positions	2			—			—
Decreases related to lapse of applicable statute of limitations	—			(1		)	(2		)
Decreases related to settlements with taxing authorities	(2		)	(2		)	(1		)
Balance as of end of year	$	31		$	34		$	36