Taxes

Income tax expense is as follows:



	2014							2013							2012
	Current		Deferred			Total		Current		Deferred			Total		Current		Deferred			Total
	(millions)
Federal	$	767	$	5		$	772	$	859	$	(98	)	$	761	$	697	$	2		$	699
State and local	95		(3		)	92		107		(64		)	43		70		(2		)	68
	$	862	$	2		$	864	$	966	$	(162	)	$	804	$	767	$	—		$	767

The income tax expense reported differs from the expected tax computed by applying the federal income tax statutory rate of 35% for 2014, 2013 and 2012 to income before income taxes. The reasons for this difference and their tax effects are as follows:



	2014			2013			2012
	(millions)
Expected tax	$	836		$	801		$	736
State and local income taxes, net of federal income tax benefit	59			45			47
Historic rehabilitation tax credit	(20		)	(16		)	—
Change in valuation allowance	1			(16		)	(2		)
Other	(12		)	(10		)	(14		)
	$	864		$	804		$	767

The Company participates in the Internal Revenue Service (“IRS”) Compliance Assurance Program ("CAP"). As part of the CAP, tax years are audited on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. The IRS has completed examinations of 2013 and all prior tax years.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:



	January 31, 2015			February 1, 2014
	(millions)
Deferred tax assets
Post employment and postretirement benefits	$	586		$	392
Accrued liabilities accounted for on a cash basis for tax purposes	320			289
Long-term debt	83			90
Unrecognized state tax benefits and accrued interest	76			84
State operating loss and credit carryforwards	80			79
Other	160			160
Valuation allowance	(24		)	(23		)
Total deferred tax assets	1,281			1,071
Deferred tax liabilities
Excess of book basis over tax basis of property and equipment	(1,510		)	(1,569		)
Merchandise inventories	(585		)	(587		)
Intangible assets	(294		)	(263		)
Post employment benefits	—			(28		)
Other	(335		)	(297		)
Total deferred tax liabilities	(2,724		)	(2,744		)
Net deferred tax liability	$	(1,443	)	$	(1,673	)

The valuation allowance at January 31, 2015 and February 1, 2014 relates to net deferred tax assets for state net operating loss and credit carryforwards. The net change in the valuation allowance amounted to an increase of $1 million for 2014 and a decrease of $16 million for 2013.

As of January 31, 2015, the Company had no federal net operating loss carryforwards, state net operating loss carryforwards of $595 million and state credit carryforwards of $29 million, which will expire between 2015 and 2034.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	January 31, 2015			February 1, 2014			February 2, 2013
	(millions)
Balance, beginning of year	$	189		$	170		$	179
Additions based on tax positions related to the current year	33			37			18
Additions for tax positions of prior years	—			—			18
Reductions for tax positions of prior years	(15		)	(1		)	(19		)
Settlements	(23		)	(1		)	(9		)
Statute expirations	(12		)	(16		)	(17		)
Balance, end of year	$	172		$	189		$	170
Amounts recognized in the Consolidated Balance Sheets at January 31, 2015, February 1, 2014 and February 2, 2013
Current income taxes	$	11		$	31		$	20
Long-term deferred income taxes	6			11			23
Other liabilities	155			147			127
	$	172		$	189		$	170

As of January 31, 2015 and February 1, 2014, the amount of unrecognized tax benefits, net of deferred tax assets, that, if recognized would affect the effective income tax rate, was $112 million and $123 million, respectively.

The Company classifies unrecognized tax benefits not expected to be settled within one year as other liabilities on the Consolidated Balance Sheets.

The Company classifies federal, state and local interest and penalties not expected to be settled within one year as other liabilities on the Consolidated Balance Sheets and follows a policy of recognizing all interest and penalties related to unrecognized tax benefits in income tax expense. Federal, state and local interest and penalties, which amounted to a credit of $3 million for 2014, an expense of $9 million for 2013, and a credit of $10 million for 2012, are reflected in income tax expense.

The Company had $52 million and $63 million accrued for the payment of federal, state and local interest and penalties at January 31, 2015 and February 1, 2014, respectively. The accrued federal, state and local interest and penalties primarily relates to state tax issues and the amount of penalties paid in prior periods, and the amount of penalties accrued at January 31, 2015 and February 1, 2014 are insignificant. At January 31, 2015, $49 million of federal, state and local interest and penalties is included in other liabilities and $3 million is included in current income taxes on the Consolidated Balance Sheets.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2011. With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for years before 2005. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been accrued for any adjustments that are expected to result from the years still subject to examination.