Income Taxes

Earnings before income taxes and provision for income taxes consisted of the following for the years ended December 31, 2015, 2014 and 2013:



(in millions)	2015			2014			2013
Earnings before income taxes:
United States	$	8,078		$	7,763		$	6,929
Outside United States	—			11			13
Total	$	8,078		$	7,774		$	6,942
Provision for income taxes:
Current:
Federal	$	2,516		$	2,350		$	2,066
State and local	451			480			423
Outside United States	—			3			4
	2,967			2,833			2,493
Deferred:
Federal	(140		)	(124		)	(77		)
State and local	8			(5		)	(9		)
	(132		)	(129		)	(86		)
Total provision for income taxes	$	2,835		$	2,704		$	2,407

Altria Group, Inc.’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The U.S. federal statute of limitations remains open for the year 2007 and forward, with years 2010 to 2013 currently under examination by the IRS as part of an audit conducted in the ordinary course of business. With the exception of corresponding federal audit adjustments, state statutes of limitations generally remain open for the year 2011 and forward. Certain of Altria Group, Inc.’s state tax returns are currently under examination by various states as part of routine audits conducted in the ordinary course of business.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2015, 2014 and 2013 was as follows:



(in millions)	2015			2014			2013
Balance at beginning of year	$	258		$	227		$	262
Additions based on tax positions related to the current year	15			15			15
Additions for tax positions of prior years	57			29			35
Reductions for tax positions due to lapse of statutes of limitations	(4		)	(2		)	(1		)
Reductions for tax positions of prior years	(86		)	—			—
Settlements	(82		)	(11		)	(84		)
Balance at end of year	$	158		$	258		$	227

Unrecognized tax benefits and Altria Group, Inc.’s consolidated liability for tax contingencies at December 31, 2015 and 2014, were as follows:



(in millions)	2015			2014
Unrecognized tax benefits — Altria Group, Inc.	$	158		$	228
Unrecognized tax benefits — PMI	—			30
Unrecognized tax benefits	158			258
Accrued interest and penalties	14			57
Tax credits and other indirect benefits	(3		)	(17		)
Liability for tax contingencies	$	169		$	298

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2015 was $109 million, along with $49 million affecting deferred taxes. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2014 was $207 million, along with $51 million affecting deferred taxes. However, the impact on net earnings at December 31, 2014 would be $177 million, as a result of the tax-related net receivable from Altria Group, Inc.’s former subsidiary, Philip Morris International Inc. (“PMI”), of $30 million pursuant to the tax sharing agreements discussed below.

Under tax sharing agreements entered into in connection with the 2007 and 2008 spin-offs between Altria Group, Inc. and its former subsidiaries Kraft Foods Inc. (now known as Mondelēz International, Inc. (“Mondelēz”)) and PMI, respectively, Mondelēz and PMI are responsible for their respective pre-spin-off tax obligations. Altria Group, Inc., however, remains severally liable for Mondelēz’s and PMI’s pre-spin-off federal tax obligations pursuant to regulations governing federal consolidated income tax returns, and continued to include the pre-spin-off federal income tax reserves of Mondelēz and PMI in its liability for uncertain tax positions. As of December 31, 2015, there are no remaining pre-spin-off tax reserves for Mondelēz and PMI.

During 2015, 2014 and 2013, Altria Group, Inc. recorded net tax benefits of $41 million, $2 million and $22 million, respectively, for Mondelēz and PMI tax matters, primarily relating to the IRS audit of Altria Group, Inc. and its consolidated subsidiaries’ 2007-2009 tax years (“IRS 2007-2009 Audit”). These net tax benefits were offset by changes to Mondelēz and PMI tax-related receivables/payables, which were recorded as decreases to operating income on Altria Group, Inc.’s consolidated statements of earnings. Due to the respective offsets, the Mondelēz and PMI tax matters had no impact on Altria Group, Inc.’s net earnings for the years ended December 31, 2015, 2014 and 2013.

Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision. At December 31, 2015, Altria Group, Inc. had $14 million of accrued interest and penalties. At December 31, 2014, Altria Group, Inc. had $57 million of accrued interest and penalties, of which approximately $7 million related to PMI, for which PMI is responsible under its tax sharing agreement. The corresponding receivable from PMI was included in other assets on Altria Group, Inc.’s consolidated balance sheet at December 31, 2014.

For the years ended December 31, 2015, 2014 and 2013, Altria Group, Inc. recognized in its consolidated statements of earnings $(36) million, $14 million and $5 million, respectively, of gross interest (income) expense associated with uncertain tax positions.

Altria Group, Inc. is subject to income taxation in many jurisdictions. Uncertain tax positions reflect the difference between tax positions taken or expected to be taken on income tax returns and the amounts recognized in the financial statements. Resolution of the related tax positions with the relevant tax authorities may take many years to complete, and such timing is not entirely within the control of Altria Group, Inc. It is reasonably possible that within the next 12 months certain examinations will be resolved, which could result in a decrease in unrecognized tax benefits of approximately $6 million.

The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years ended December 31, 2015, 2014 and 2013:



	2015		2014		2013
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
State and local income taxes, net of federal tax benefit	3.7		4.0		3.8
Uncertain tax positions	(0.8	)	0.5		0.7
SABMiller dividend benefit	(0.5	)	(2.3	)	(2.0	)
Domestic manufacturing deduction	(2.0	)	(2.4	)	(2.7	)
Other	(0.3	)	—		(0.1	)
Effective tax rate	35.1	%	34.8	%	34.7	%

The tax provision in 2015 included net tax benefits of (i) $59 million from the reversal of tax reserves and associated interest due primarily to the closure in the third quarter of 2015 of the IRS 2007-2009 Audit; and (ii) $41 million for Mondelēz and PMI tax matters discussed above, partially offset by the reversal of foreign tax credits primarily associated with SABMiller dividends that were recorded during the third quarter of 2015 ($41 million) and fourth quarter of 2015 ($24 million). The tax provision in 2015 also included decreased recognition of foreign tax credits associated with SABMiller dividends.

The tax provision in 2014 included net tax benefits of (i) $14 million from the reversal of tax accruals no longer required that was recorded during the third quarter of 2014 ($19 million), partially offset by additional tax provisions recorded during the fourth quarter of 2014 ($5 million); and (ii) $2 million for Mondelēz tax matters discussed above.

The tax provision in 2013 included net tax benefits of (i) $39 million from the reversal of tax accruals no longer required that was recorded during the third quarter of 2013 ($25 million) and fourth quarter of 2013 ($14 million); (ii) $25 million related to the recognition of previously unrecognized foreign tax credits primarily associated with SABMiller dividends that were recorded during the fourth quarter of 2013; and (iii) $22 million for Mondelēz tax matters discussed above. The tax provision in 2013 also included a reduction in certain consolidated tax benefits resulting from the 2013 debt tender offer that is discussed further in Note 9. Long-Term Debt.

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following at December 31, 2015 and 2014:



(in millions)	2015			2014
Deferred income tax assets:
Accrued postretirement and postemployment benefits	$	953		$	1,054
Settlement charges	1,393			1,379
Accrued pension costs	512			410
Net operating losses and tax credit carryforwards	335			357
Total deferred income tax assets	3,193			3,200
Deferred income tax liabilities:
Property, plant and equipment	(441		)	(468		)
Intangible assets	(3,968		)	(3,915		)
Investment in SABMiller	(1,794		)	(2,039		)
Finance assets, net	(909		)	(1,123		)
Other	(116		)	(190		)
Total deferred income tax liabilities	(7,228		)	(7,735		)
Valuation allowances	(260		)	(211		)
Net deferred income tax liabilities	$	(4,295	)	$	(4,746	)

At December 31, 2015, Altria Group, Inc. had estimated gross state tax net operating losses of $610 million that, if unused, will expire in 2016 through 2035, state tax credit carryforwards of $57 million that, if unused, will expire in 2016 through 2017, and foreign tax credit carryforwards of $301 million that, if unused, will expire in 2020 through 2025. Realization of these benefits is dependent upon various factors such as generating sufficient taxable income in the applicable states and receiving sufficient amounts of lower-taxed foreign dividends from SABMiller. A valuation allowance of $260 million has been established for those benefits that more-likely-than-not will not be realized.