Note 20 – Income Taxes

The following table reconciles the total provision for income taxes recorded in the consolidated statement of income with the amounts computed at the statutory federal tax rate of 35%.


TABLE 82: INCOME TAXES	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2014			2013			2012
Tax at Statutory Rate	$	416.6		$	376.4		$	347.3
Tax Exempt Income		(4.9	)		(6.2	)		(8.0	)
Leveraged Lease Adjustments		(3.4	)		(2.3	)		(12.0	)
Foreign Tax Rate Differential		(44.1	)		(27.6	)		(27.1	)
State Taxes, net		29.6			26.3			20.4
Other		(15.4	)		(22.4	)		(15.6	)

Provision for Income Taxes	$	378.4		$	344.2		$	305.0

The Corporation files income tax returns in the U.S. federal, various state, and foreign jurisdictions. The Corporation is no longer subject to income tax examinations by U.S. federal tax authorities for years before 2009, or non-U.S. tax authorities for years before 2006. The Corporation is no longer subject to income tax examinations by state or local tax authorities for years before 2008.

Included in other liabilities within the consolidated balance sheet at December 31, 2014, and 2013 were $11.9 million and $15.6 million of unrecognized tax benefits, respectively. If recognized, 2014 and 2013 net income would have increased by $8.8 million and $12.6 million, respectively, resulting in a decrease of those years’ effective income tax rates. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


TABLE 83: UNRECOGNIZED TAX BENEFITS
(In Millions)	2014			2013
Balance at January 1	$	15.6		$	19.4
Additions for Tax Positions Taken in Prior Years		3.0			2.4
Reductions for Tax Positions Taken in Prior Years		(5.5	)		(4.4	)
Reductions Resulting from Expiration of Statutes		(1.2	)		(1.8	)

Balance at December 31	$	11.9		$	15.6

Unrecognized tax benefits had net decreases of $3.7 million, resulting in a remaining balance of $11.9 million at December 31, 2014, compared to net decreases of $3.8 million resulting in a remaining balance of $15.6 million at December 31, 2013. It is possible that changes in the amount of unrecognized tax benefits could occur in the next 12 months due to changes in judgment related to recognition or measurement, settlements with taxing authorities, or expiration of statute of limitations. Management does not believe that future changes, if any, would have a material effect on the consolidated financial position or liquidity of Northern Trust, although they could have a material effect on operating results for a particular period.

The provision for income tax in 2012 included a $12.4 million tax benefit in connection with the resolution of certain leveraged lease related matters.

A provision for interest and penalties of $0.2 million, net of tax, was included in the provision for income taxes for the year ended December 31, 2014. This compares to a benefit for recoveries of interest and penalties of $1.7 million, net of tax, for the year ended December 31, 2013. As of December 31, 2014, and 2013, the liability for the potential payment of interest and penalties totaled $10.2 million and $11.0 million, net of tax, respectively.

Pre-tax earnings of non-U.S. subsidiaries are subject to U.S. taxation when effectively repatriated. Northern Trust provides income taxes on the undistributed earnings of non-U.S. subsidiaries, except to the extent that those earnings are indefinitely reinvested outside the U.S. Northern Trust elected to indefinitely reinvest $177.4 million, $141.0 million, and $137.4 million of 2014, 2013, and 2012 earnings, respectively, of certain non-U.S. subsidiaries and, therefore, no U.S. deferred income taxes were recorded on those earnings. As of December 31, 2014, the cumulative amount of undistributed pre-tax earnings in these subsidiaries was approximately $1.1 billion. Based on the current U.S. federal income tax rate, an additional deferred tax liability of approximately $255.0 million would have been required as of December 31, 2014, if Northern Trust had not elected to indefinitely reinvest those earnings.

The components of the consolidated provision for income taxes for each of the three years ended December 31 are as follows:


TABLE 84: PROVISION FOR INCOME TAXES	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2014			2013			2012
Current Tax Provision:
Federal	$	291.5		$	185.6		$	140.5
State		47.2			24.6			21.4
Non-U.S.		76.1			67.4			63.4

Total		414.8			277.6		$	225.3
Deferred Tax Provision:
Federal		(31.1	)		53.9		$	66.0
State		(1.6	)		14.1			10.6
Non-U.S.		(3.7	)		(1.4	)		3.1

Total		(36.4	)		66.6			79.7

Provision for Income Taxes	$	378.4		$	344.2		$	305.0

In addition to the amounts shown above, tax charges (benefits) have been recorded directly to stockholders’ equity for the following items:


TABLE 85: TAX CHARGES (BENEFITS) RECORDED DIRECTLY TO STOCKHOLDERS’ EQUITY	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2014		2013		2012
Current Tax Benefit for Employee Stock Options and Other Stock-Based Plans	$	8.8	$	3.0	$	2.3
Tax Effect of Other Comprehensive Income		18.6		4.3		18.7

Deferred taxes result from temporary differences between the amounts reported in the consolidated financial statements and the tax bases of assets and liabilities. Deferred tax liabilities and assets have been computed as follows:


TABLE 86: DEFERRED TAX LIABILITIES	DECEMBER 31,
(In Millions)	2014			2013			2012
Deferred Tax Liabilities:
Lease Financing	$	388.6		$	392.0		$	409.1
Software Development		316.1			299.0			277.8
Accumulated Depreciation		24.1			22.0			19.7
Compensation and Benefits		63.5			112.2			29.7
State Taxes, net		62.3			63.3			54.7
Other Liabilities		157.5			104.0			170.9

Gross Deferred Tax Liabilities		1,012.1			992.5			961.9

Deferred Tax Assets:
Allowance for Credit Losses		103.5			107.8			114.7
Other Assets		126.7			85.0			118.4

Gross Deferred Tax Assets		230.2			192.8			233.1

Valuation Reserve		(3.9	)		(3.9	)		(3.9	)
Deferred Tax Assets, net of Valuation Reserve		226.3			188.9			229.2

Net Deferred Tax Liabilities	$	785.8		$	803.6		$	732.7

Northern Trust had various state net operating loss carryforwards as of December 31, 2014, 2013, and 2012. The income tax benefits associated with these loss carryforwards were approximately $3.9 million. A valuation allowance of $3.9 million was recorded at December 31, 2014, 2013, and 2012, as management believes the net operating losses will not be fully realized. No valuation allowance related to the remaining deferred tax assets was recorded at December 31, 2014, 2013, or 2012, as management believes it is more likely than not that the deferred tax assets will be fully realized.