Income Taxes

Earnings before income taxes and provision for income taxes consisted of the following for the years ended December 31, 2016, 2015 and 2014:



(in millions)	2016			2015			2014
Earnings before income taxes:
United States	$	21,867		$	8,078		$	7,763
Outside United States	(15		)	—			11
Total	$	21,852		$	8,078		$	7,774
Provision for income taxes:
Current:
Federal	$	4,093		$	2,516		$	2,350
State and local	390			451			480
Outside United States	6			—			3
	4,489			2,967			2,833
Deferred:
Federal	3,102			(140		)	(124		)
State and local	20			8			(5		)
Outside United States	(3		)	—			—
	3,119			(132		)	(129		)
Total provision for income taxes	$	7,608		$	2,835		$	2,704

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 2010 and forward, with years 2010 to 2013 currently under examination by the Internal Revenue Service (“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 2012 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, 2016, 2015 and 2014 was as follows:



(in millions)	2016			2015			2014
Balance at beginning of year	$	158		$	258		$	227
Additions based on tax positions related to the current year	15			15			15
Additions for tax positions of prior years	29			57			29
Reductions for tax positions due to lapse of statutes of limitations	(4		)	(4		)	(2		)
Reductions for tax positions of prior years	(28		)	(86		)	—
Settlements	(1		)	(82		)	(11		)
Balance at end of year	$	169		$	158		$	258

Unrecognized tax benefits and Altria Group, Inc.’s consolidated liability for tax contingencies at December 31, 2016 and 2015 were as follows:



(in millions)	2016			2015
Unrecognized tax benefits	$	169		$	158
Accrued interest and penalties	23			14
Tax credits and other indirect benefits	(6		)	(3		)
Liability for tax contingencies	$	186		$	169

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2016 was $67 million, along with $102 million affecting deferred taxes. 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.

Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision.

For the years ended December 31, 2016, 2015 and 2014, Altria Group, Inc. recognized in its consolidated statements of earnings $9 million, $(36) million and $14 million, respectively, of gross interest expense (income) 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 $116 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, 2016, 2015 and 2014:



	2016		2015		2014
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	1.2		3.7		4.0
Uncertain tax positions	—		(0.8	)	0.5
AB InBev/SABMiller dividend benefit	(0.6	)	(0.5	)	(2.3	)
Domestic manufacturing deduction	(0.8	)	(2.0	)	(2.4	)
Other	—		(0.3	)	—
Effective tax rate	34.8	%	35.1	%	34.8	%

The tax provision in 2016 included increased tax benefits associated with the cumulative SABMiller and AB InBev dividends and tax expense of $4.9 billion (approximately 35%) for the gain on the Transaction.

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 audit of Altria Group, Inc. and its consolidated subsidiaries’ 2007-2009 tax years (“IRS 2007-2009 Audit”); and (ii) $41 million for Philip Morris International Inc. (“PMI”) tax matters discussed below, 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 the 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 International, Inc. (“Mondelēz”) tax matters discussed below.

Under tax sharing agreements between Altria Group, Inc. and its former subsidiaries Kraft Foods Inc. (now known as Mondelēz) and PMI, entered into in connection with the 2007 and 2008 spin-offs, respectively, Mondelēz and PMI are responsible for their respective pre-spin-off tax obligations. Altria Group, Inc., however, remained 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 were no remaining pre-spin-off tax reserves for Mondelēz and PMI.

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

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following at December 31, 2016 and 2015:



(in millions)	2016			2015
Deferred income tax assets:
Accrued postretirement and postemployment benefits	$	952		$	953
Settlement charges	1,446			1,393
Accrued pension costs	330			512
Net operating losses and tax credit carryforwards	288			335
Total deferred income tax assets	3,016			3,193
Deferred income tax liabilities:
Property, plant and equipment	(429		)	(441		)
Intangible assets	(4,032		)	(3,968		)
Investment in AB InBev/SABMiller	(5,546		)	(1,794		)
Finance assets, net	(708		)	(909		)
Other	(125		)	(116		)
Total deferred income tax liabilities	(10,840		)	(7,228		)
Valuation allowances	(240		)	(260		)
Net deferred income tax liabilities	$	(8,064	)	$	(4,295	)

At December 31, 2016, Altria Group, Inc. had estimated gross state tax net operating losses of $532 million that, if unused, will expire in 2017 through 2036, state tax credit carryforwards of $14 million that, if unused, will expire in 2017, and foreign tax credit carryforwards of $296 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 AB InBev. A valuation allowance of $240 million has been established for those benefits that more-likely-than-not will not be realized. Altria Group, Inc. may be required to change the valuation allowance with respect to foreign tax credit carryforwards, based upon additional information to be received from AB InBev in 2017.

In the fourth quarter of 2016, Altria Group, Inc. retroactively adopted ASU No. 2015-17, which requires that deferred tax assets and liabilities be classified as noncurrent on a classified statement of financial position. As a result of the adoption, at December 31, 2015, current deferred income tax assets of approximately $1.2 billion were reclassified to noncurrent deferred income tax liabilities ($1.0 billion) and noncurrent deferred income tax assets ($0.2 billion) on Altria Group, Inc.’s consolidated balance sheet.