Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes

Income Taxes

Note 10. Income Taxes:

The income tax rate of 41.9% for the nine months ended September 30, 2011 increased 11.1 percentage points from 30.8% for the nine months ended September 30, 2010. The increase in the income tax rate was due in part to a $312 million charge that primarily represents a permanent charge for interest on tax underpayments, associated with the previously discussed PMCC Leveraged Lease Charge which was recorded during the second quarter of 2011 (see Note 8. Finance Assets, net and Note 11. Contingencies for further discussion of matters related to this charge). The increase in the income tax rate was also attributable in part to the reversal of tax reserves and associated interest in 2010 following the resolution of various tax matters arising out of the 2000-2003 IRS audit as discussed below, partially offset by the reversal of tax accruals no longer required in 2011. The income tax rate of 34.5% for the three months ended September 30, 2011 increased 1.7 percentage points from 32.8% for the three months ended September 30, 2010 due primarily to the expiration of statutes of limitations in 2010, partially offset by the reversal of tax accruals no longer required in 2011. In addition, the income tax rate for the nine and three months ended September 30, 2011 was further impacted by $19 million of additional tax provision and associated interest related to various tax matters for Altria Group, Inc.'s former subsidiary Kraft Foods Inc. ("Kraft").

As discussed in Note 11. Contingencies, Altria Group, Inc. and the IRS executed a closing agreement during the second quarter of 2010 in connection with the IRS's examination of Altria Group, Inc.'s consolidated federal income tax returns for the years 2000-2003, which resolved various tax matters for Altria Group, Inc. and its subsidiaries, including its former subsidiaries - Kraft and Philip Morris International Inc. ("PMI"). As a result of the closing agreement, Altria Group, Inc. paid the IRS approximately $945 million of tax and associated interest during the third quarter of 2010 with respect to certain PMCC leveraged lease transactions entered into during the 1996-2003 years. During the first quarter of 2011, Altria Group, Inc. filed claims for a refund of the approximately $945 million paid to the IRS. The IRS disallowed the claims during the third quarter of 2011.

In addition, as a result of this closing agreement, in the second quarter of 2010, Altria Group, Inc. recorded (i) a $47 million income tax benefit primarily attributable to the reversal of tax reserves and associated interest related to Altria Group, Inc. and its current subsidiaries; and (ii) an income tax benefit of $169 million attributable to the reversal of federal income tax reserves and associated interest related to the resolution of certain Kraft and PMI tax matters.

Under the Tax Sharing agreements entered into in connection with the spin-offs between Altria Group, Inc. and its former subsidiaries, Kraft and PMI are responsible for their respective pre-spin-off tax obligations. Altria Group, Inc., however, remains severally liable for Kraft's and PMI's pre-spin-off federal tax obligations pursuant to regulations governing federal consolidated income tax returns. As a result, Altria Group, Inc. continues to include the pre-spin-off federal income tax reserves of Kraft and PMI in its liability for uncertain tax positions, and also includes corresponding receivables from Kraft and PMI in its assets. The additional 2011 tax provision of $19 million was offset by an increase to the corresponding receivable from Kraft, which was recorded as an increase to operating income on Altria Group, Inc.'s condensed consolidated statements of earnings for the nine and three months ended September 30, 2011. The 2010 tax benefit of $169 million was offset by a reduction to the corresponding receivables from Kraft and PMI, which was recorded as a reduction to operating income on Altria Group, Inc.'s condensed consolidated statement of earnings for the nine months ended September 30, 2010. There was no impact on Altria Group, Inc.'s net earnings associated with the Kraft and PMI tax matters discussed above.

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, since such timing is not entirely within the control of Altria Group, Inc. During the next twelve months, management believes that it is reasonably possible that the liability for uncertain tax positions could decrease by as much as $248 million, the majority of which includes uncertain tax positions related to Kraft and PMI, for which Altria Group, Inc. is indemnified.