Income Taxes

As a result of the Tax Reform Act, Altria Group, Inc. recorded net tax benefits of approximately $3.4 billion in the fourth quarter of 2017 as discussed below. The main provisions of the Tax Reform Act that impact Altria Group, Inc. include: (i) a reduction in the U.S. federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018, and (ii) changes in the treatment of foreign-source income, commonly referred to as a modified territorial tax system.

The transition to a modified territorial tax system requires Altria Group, Inc. to record a deemed repatriation tax and an associated tax basis benefit in 2017. Substantially all of the deemed repatriation tax is related to Altria Group, Inc.’s share of AB InBev’s accumulated earnings. As a result of the deemed repatriation tax, no tax was due on the dividends Altria Group, Inc. received from AB InBev in 2017.

Earnings before income taxes and (benefit) provision for income taxes consisted of the following for the years ended December 31, 2017, 2016 and 2015:



(in millions)	2017			2016			2015
Earnings before income taxes:
United States	$	9,809		$	21,867		$	8,078
Outside United States	19			(15		)	—
Total	$	9,828		$	21,852		$	8,078
Provision (benefit) for income taxes:
Current:
Federal	$	2,346		$	4,093		$	2,516
State and local	366			390			451
Outside United States	15			6			—
	2,727			4,489			2,967
Deferred:
Federal	(3,213		)	3,102			(140		)
State and local	86			20			8
Outside United States	1			(3		)	—
	(3,126		)	3,119			(132		)
Total (benefit) provision for income taxes	$	(399	)	$	7,608		$	2,835

Altria Group, Inc.’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The U.S. federal income tax statute of limitations remains open for the year 2010 and forward, with years 2014 and 2015 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 2013 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, 2017, 2016 and 2015 was as follows:



(in millions)	2017			2016			2015
Balance at beginning of year	$	169		$	158		$	258
Additions based on tax positions related to the current year	—			15			15
Additions for tax positions of prior years	129			29			57
Reductions for tax positions due to lapse of statutes of limitations	(4		)	(4		)	(4		)
Reductions for tax positions of prior years	(208		)	(28		)	(86		)
Settlements	(20		)	(1		)	(82		)
Balance at end of year	$	66		$	169		$	158

Unrecognized tax benefits and Altria Group, Inc.’s consolidated liability for tax contingencies at December 31, 2017 and 2016 were as follows:



(in millions)	2017			2016
Unrecognized tax benefits	$	66		$	169
Accrued interest and penalties	9			23
Tax credits and other indirect benefits	(1		)	(6		)
Liability for tax contingencies	$	74		$	186

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2017 was $43 million, along with $23 million affecting deferred taxes. 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.

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, 2017, 2016 and 2015, Altria Group, Inc. recognized in its consolidated statements of earnings $(13) million, $9 million and $(36) 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 $5 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, 2017, 2016 and 2015:



	2017		2016		2015
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	3.5		1.2		3.7
Re-measurement of net deferred tax liabilities	(31.2	)	—		—
Tax basis in foreign investments	(7.8	)	—		—
Deemed repatriation tax	4.2		—		—
Uncertain tax positions	(0.9	)	—		(0.8	)
AB InBev/SABMiller dividend benefit	(5.9	)	(0.6	)	(0.5	)
Domestic manufacturing deduction	(1.8	)	(0.8	)	(2.0	)
Other	0.8		—		(0.3	)
Effective tax rate	(4.1	)%	34.8	%	35.1	%

The tax benefit in 2017 included net tax benefits of $3,367 million related to the Tax Reform Act recorded in the fourth quarter of 2017 as follows: (i) a tax benefit of $3,017 million to re-measure Altria Group, Inc. and its consolidated subsidiaries’ net deferred tax liabilities based on the new U.S. federal statutory rate; and (ii) a net tax benefit of $763 million for a tax basis adjustment associated with the deemed repatriation tax, partially offset by tax expense of $413 million for the deemed repatriation tax.

The amounts above related to the tax basis adjustment and the deemed repatriation tax were based on provisional estimates as of January 18, 2018, substantially all of which are related to Altria Group, Inc.’s share of AB InBev’s accumulated earnings and associated taxes. Altria Group, Inc. may be required to adjust these provisional estimates based on (i) additional guidance related to, or interpretation of, the Tax Reform Act and associated tax laws and (ii) additional information to be received from AB InBev, including information regarding AB InBev’s accumulated earnings and associated taxes for the 2016 and 2017 tax years. This additional guidance and information could result in increases or decreases to the provisional estimates, which may be significant in relation to these estimates. Altria Group, Inc. will record any such adjustments in 2018.

The tax benefit in 2017 also included tax benefits of $232 million for the release of a valuation allowance in the third quarter of 2017 related to deferred income tax assets for foreign tax credit carryforwards, which is included in AB InBev/SABMiller dividend benefit in the table above; and tax benefits of $152 million related primarily to the effective settlement in the second quarter of 2017 of the IRS audit of Altria Group, Inc. and its consolidated subsidiaries’ 2010-2013 tax years, partially offset by tax expense of $114 million in the third quarter of 2017 for tax reserves related to the calculation of certain foreign tax credits.

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.

Under tax sharing agreements between Altria Group, Inc. and its former subsidiary PMI, entered into in connection with the 2008 spin-off, PMI is responsible for its pre-spin-off tax obligations. Altria Group, Inc., however, remained 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 2015, Altria Group, Inc. recorded tax benefits of $41 million for PMI tax matters, primarily 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 in Altria Group, Inc.’s consolidated statement of earnings. Due to the offset, the PMI tax matters had no impact on Altria Group, Inc.’s net earnings for the year ended December 31, 2015.

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following at December 31, 2017 and 2016:



(in millions)	2017			2016
Deferred income tax assets:
Accrued postretirement and postemployment benefits	$	539		$	952
Settlement charges	614			1,446
Accrued pension costs	136			330
Net operating losses and tax credit carryforwards	18			288
Total deferred income tax assets	1,307			3,016
Deferred income tax liabilities:
Property, plant and equipment	(261		)	(429		)
Intangible assets	(2,674		)	(4,032		)
Investment in AB InBev	(2,859		)	(5,546		)
Finance assets, net	(404		)	(708		)
Other	(121		)	(125		)
Total deferred income tax liabilities	(6,319		)	(10,840		)
Valuation allowances	—			(240		)
Net deferred income tax liabilities	$	(5,012	)	$	(8,064	)

At December 31, 2017, Altria Group, Inc. had estimated gross state tax net operating losses of $569 million that, if unused, will expire in 2018 through 2037.