INCOME TAXES

12 Months Ended

Dec. 31, 2019



							(In Millions)
	2019			2018			2017
Income from continuing operations before income taxes:
U.S.	$	684		$	670		$	562
Foreign	230			237			156
	$	914		$	907		$	718
Income tax expense:
Currently payable:
U.S. Federal	$	155		$	115		$	142
State and local	46			29			22
Foreign	70			74			67
Deferred:
U.S. Federal	(23		)	12			12
State and local	(15		)	—			—
Foreign	(3		)	(9		)	2
	$	230		$	221		$	245
Deferred tax assets at December 31:
Receivables	$	7		$	3
Inventories	15			16
Other assets, including stock-based compensation	15			23
Accrued liabilities	48			58
Long-term liabilities	176			149
Net operating loss carryforward	63			51
Tax credit carryforward	9			9
	333			309
Valuation allowance	(38		)	(43		)
	295			266
Deferred tax liabilities at December 31:
Property and equipment	73			87
Operating lease right-of-use assets	42			—
Intangibles	71			139
Investment in foreign subsidiaries	10			9
Other	22			14
	218			249
Net deferred tax asset at December 31	$	77		$	17

The net deferred tax asset consisted of net deferred tax assets (included in other assets) of $99 million and $42 million, and net deferred tax liabilities (included in other liabilities) of $22 million and $25 million, at December 31, 2019 and 2018, respectively.

We continue to maintain a valuation allowance on certain state and foreign deferred tax assets as of December 31, 2019. Should we determine that we would not be able to realize our remaining deferred tax assets, or the deferred tax assets that currently have a valuation allowance become realizable in these jurisdictions in the future, an adjustment to the valuation allowance would be recorded in the period such determination is made.

R. INCOME TAXES (Continued)

The current portion of the state and local income tax includes an $8 million, $8 million and $5 million tax benefit from the reversal of an accrual for uncertain tax positions resulting primarily from the expiration of applicable statutes of limitations in 2019, 2018 and 2017, respectively. The deferred portion of the state and local taxes includes a $1 million tax benefit in 2019, 2018 and 2017, resulting from changes in valuation allowances against state and local deferred tax assets. The deferred portion of the foreign taxes includes a $4 million and $2 million tax benefit in 2019 and 2018, respectively, from a change in the valuation allowances against foreign deferred tax assets.

Due to the enactment of the Tax Cuts and Jobs Act of 2017 ("2017 Tax Act") on December 22, 2017, we recorded a $20 million tax benefit from the elimination of a deferred tax liability previously recorded on undistributed foreign earnings as a result of the change from a worldwide to a territorial system of taxation. This tax benefit was offset by a $3 million tax charge resulting from the re-measurement of our remaining net deferred tax assets due to a reduction in the U.S. Federal corporate tax rate from 35 percent to 21 percent.

In addition, the 2017 Tax Act requires a mandatory deemed repatriation of undistributed foreign earnings resulting in a toll charge of 15.5 percent on earnings related to cash and liquid assets and 8 percent on earnings for non-liquid assets. Due to the ability to offset positive foreign earnings with existing foreign deficits, we did not pay any toll charge related to our undistributed foreign earnings.

The $64 million loss from the divestiture of Moores that was recorded in the fourth quarter of 2017 provided no tax benefit.

Our capital allocation strategy includes reinvesting in our business, balancing share repurchases with potential acquisitions and maintaining an appropriate dividend. In order to provide greater flexibility in the execution of our capital allocation strategy, we may repatriate earnings from certain foreign subsidiaries. Our deferred tax balance on investment in foreign subsidiaries reflects the impact of all taxable temporary differences, including those related to substantially all undistributed foreign earnings, except those that are legally restricted. As a result of the enactment of the 2017 Tax Act, our deferred tax balance on investment in foreign subsidiaries consists primarily of foreign withholding taxes.

Of the $72 million and $60 million deferred tax assets related to the net operating loss and tax credit carryforwards at December 31, 2019 and 2018, respectively, $44 million and $32 million, respectively, will expire between 2021 and 2036 and $28 million has no expiration.

A reconciliation of the U.S. Federal statutory tax rate to the income tax expense on income from continuing operations before income taxes was as follows:



	2019		2018		2017
U.S. Federal statutory tax rate	21	%	21	%	35	%
State and local taxes, net of U.S. Federal tax benefit	3		3		2
Higher (lower) taxes on foreign earnings	2		2		(1	)
U.S. and foreign taxes on distributed and undistributed foreign earnings	1		1		1
Domestic production deduction	—		—		(1	)
Stock-based compensation	(1	)	(2	)	(3	)
Business divestitures with no tax impact	—		—		5
Change in U.S. Federal tax law	—		—		(3	)
Other, net	(1	)	(1	)	(1	)
Effective tax rate	25	%	24	%	34	%

Income taxes paid were $384 million, $231 million and $258 million in 2019, 2018 and 2017, respectively.

R. INCOME TAXES (Concluded)

A reconciliation of the beginning and ending liability for uncertain tax positions, including related interest and penalties, is as follows, in millions:



	Uncertain Tax Positions			Interest and Penalties		Total
Balance at January 1, 2018	$	54		$	8	$	62
Current year tax positions:
Additions	13			—		13
Reductions	(1		)	—		(1		)
Prior year tax positions:
Additions	1			—		1
Reductions	(1		)	—		(1		)
Lapse of applicable statute of limitations	(8		)	—		(8		)
Interest and penalties recognized in income tax expense	—			1		1
Balance at December 31, 2018	$	58		$	9	$	67
Current year tax positions:
Additions	14			—		14
Reductions	(1		)	—		(1		)
Prior year tax positions:
Additions	1			—		1
Lapse of applicable statute of limitations	(9		)	—		(9		)
Interest and penalties recognized in income tax expense	—			1		1
Balance at December 31, 2019	$	63		$	10	$	73

If recognized, $50 million and $46 million of the liability for uncertain tax positions at December 31, 2019 and 2018, respectively, net of any U.S. Federal tax benefit, would impact our effective tax rate.

Of the $73 million and $67 million total liability for uncertain tax positions (including related interest and penalties) at December 31, 2019 and 2018, respectively, $68 million and $64 million are recorded in other liabilities, respectively, and $5 million and $3 million are recorded as a net offset to other assets, respectively.

We file income tax returns in the U.S. Federal jurisdiction, and various local, state and foreign jurisdictions. We continue to participate in the Compliance Assurance Process ("CAP"). CAP is a real-time audit of the U.S. Federal income tax return that allows the Internal Revenue Service ("IRS"), working in conjunction with us, to determine tax return compliance with the U.S. Federal tax law prior to filing the return. This program provides us with greater certainty about our tax liability for a given year within months, rather than years, of filing our annual tax return and greatly reduces the need for recording a liability for U.S. Federal uncertain tax positions. The IRS has completed their examination of our consolidated U.S. Federal tax returns through 2018. With few exceptions, we are no longer subject to state or foreign income tax examinations on filed returns for years before 2016.

As a result of tax audit closings, settlements and the expiration of applicable statutes of limitations in various jurisdictions within the next 12 months, we anticipate that it is reasonably possible the liability for uncertain tax positions could be reduced by approximately $9 million.