Income Taxes:

The income tax rate of 35.4% for the nine months ended September 30, 2016 increased 0.8 percentage points from the nine months ended September 30, 2015. The income tax rate of 36.7% for the three months ended September 30, 2016 increased 3.5 percentage points from the three months ended September 30, 2015. The increases were due primarily to the following:


▪	the reversal of $59 million of tax reserves and associated interest due primarily to the closure in August 2015 of the Internal Revenue Service audit of Altria Group, Inc. and its consolidated subsidiaries’ 2007-2009 tax years (“IRS 2007-2009 Audit”) that was recorded during the third quarter of 2015; and


▪	the resolution of various Philip Morris International Inc. (“PMI”) tax matters in the third quarter of 2015;

partially offset by:


▪	a $41 million reversal of foreign tax credits primarily associated with SABMiller dividends that was recorded during the third quarter of 2015.

Under a tax sharing agreement entered into in connection with the 2008 spin-off between Altria Group, Inc. and PMI, its former subsidiary, PMI is responsible for its pre-spin-off tax obligations. Altria Group, Inc., however, remains severally liable for 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 PMI in its liability for uncertain tax positions. As of December 31, 2015, there were no remaining pre-spin-off tax reserves for PMI.

During the third quarter of 2015, net tax benefits of $41 million were recorded for PMI tax matters relating to the IRS 2007-2009 Audit. These net tax benefits were offset by a reduction of a PMI tax-related receivable, which was recorded as a decrease to operating income on Altria Group, Inc.’s condensed consolidated statement of earnings. Due to the offset, the PMI tax matters had no impact on Altria Group, Inc.’s net earnings for the nine and three months ended September 30, 2015.

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. At September 30, 2016, Altria Group, Inc.’s total unrecognized tax benefits were $184 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at September 30, 2016 was $82 million, along with $102 million affecting deferred taxes. 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 $140 million. At December 31, 2015, Altria Group, Inc.’s total unrecognized tax benefits were $158 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2015 was $76 million, along with $82 million affecting deferred taxes.