Note 9 – Income Taxes

Our provision for federal and foreign income tax expense for continuing operations consisted of the following (in millions):


	2015			2014			2013
Federal income tax expense (benefit):
Current	$	1,817		$	2,020		$	1,204
Deferred		(473	)		(387	)		3
Total federal income tax expense		1,344			1,633			1,207
Foreign income tax expense (benefit):
Current		46			24			6
Deferred		28			(13	)		(8)
Total foreign income tax expense (benefit)		74			11			(2)
Total income tax expense	$	1,418		$	1,644		$	1,205

State income taxes are included in our operations as general and administrative costs and, under U.S. Government regulations, are allowable costs in establishing prices for the products and services we sell to the U.S. Government. Therefore, a substantial portion of state income taxes is included in our net sales and cost of sales. As a result, the impact of certain transactions on our operating profit and of other matters presented in these financial statements is disclosed net of state income taxes. Our total net state income tax expense was $127 million for 2015, $207 million for 2014, and $121 million for 2013.

Our reconciliation of the 35% U.S. federal statutory income tax rate to actual income tax expense for continuing operations is as follows (in millions):


	2015			2014			2013
Income tax expense at the U.S. federal statutory tax rate	$	1,758		$	1,840		$	1,454
U.S. manufacturing deduction benefit		(126	)		(127	)		(100)
Tax deductible dividends		(87	)		(82	)		(77)
Research and development tax credit		(71	)		(66	)		(96)
Goodwill impairment – non-deductible portion		—			30			50
Other, net		(56	)		49			(26)
Income tax expense	$	1,418		$	1,644		$	1,205

We recognized tax benefits of $71 million in 2015, $66 million in 2014, and $96 million in 2013 from U.S. research and development (R&D) tax credits, including benefits attributable to prior periods. In 2015, the R&D tax credit was permanently extended and reinstated, retroactive to the beginning of 2015, which reduced income tax expenses by approximately $71 million. In 2014, the R&D tax credit was temporarily reinstated for one year, retroactive to the beginning of 2014, which reduced income tax expense by approximately $45 million. In 2013, the R&D tax credit was temporarily reinstated for two years, retroactive to the beginning of 2012. As a result, income tax expense for 2013 reflects the credit for all of 2013 and 2012, which reduced income tax expense by approximately $76 million.

We receive a tax deduction for dividends paid on shares of our common stock held by certain of our defined contribution plans with an employee stock ownership plan feature. The amount of the tax deduction has increased as we increased our dividend over the last three years, partially offset by a decline in the number of shares in these plans.

A limited amount of the 2014 and 2013 non-cash goodwill impairment charges will be deductible for tax purposes. Accordingly, the 2014 and 2013 non-cash goodwill impairment charges (Note 1) of $119 million and $195 million, respectively, increased our 2014 and 2013 effective tax rates.

As a result of a decision in 2015 to divest Lockheed Martin Commercial Flight Training in 2016, we recorded an asset impairment charge of approximately $90 million. This charge was partially offset by a net deferred tax benefit of about $80 million. The net impact of the resulting tax benefit reduced the effective income tax rate by 1.0 percentage point in 2015.

We participate in the IRS Compliance Assurance Process program. The IRS examination of the year 2012 was completed in the fourth quarter of 2013. The examinations of the years 2013 and 2014 remain under review.

The primary components of our federal and foreign deferred income tax assets and liabilities at December 31 were as follows (in millions):


	2015			2014
Deferred tax assets related to:
Accrued compensation and benefits	$	961		$	965
Pensions ^(a)		4,462			4,317
Other postretirement benefit obligations		375			386
Contract accounting methods		1,039			989
Foreign company operating losses and credits		70			59
Other		434			198
Valuation allowance ^(b)		(76	)		(9)
Deferred tax assets, net		7,265			6,905
Deferred tax liabilities related to:
Goodwill and purchased intangibles		474			454
Property, plant and equipment		457			514
Exchanged debt securities and other ^(c)		409			485
Deferred tax liabilities		1,340			1,453
Net deferred tax assets ^(d)	$	5,925		$	5,452

^(a)	The increase in 2015 was primarily due to the negative investment return on postretirement plan assets (Note 11).

^(b)	A valuation allowance was provided against certain foreign company deferred tax assets arising from carryforwards of unused tax benefits.

^(c)	Includes deferred taxes associated with the exchange of debt securities in prior years.

^(d)	Includes net foreign current deferred tax liabilities, which are included on the Balance Sheets in other current liabilities.

As of December 31, 2015 and 2014, our liabilities associated with unrecognized tax benefits are not material.

We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various foreign jurisdictions. With few exceptions, the statute of limitations is no longer open for U.S. federal or non-U.S. income tax examinations for the years before 2012, other than with respect to refunds.

U.S. income taxes and foreign withholding taxes have not been provided on earnings of $353 million, $291 million, and $222 million that have not been distributed by our non-U.S. companies as of December 31, 2015, 2014, and 2013. Our intention is to permanently reinvest these earnings, thereby indefinitely postponing their remittance to the U.S. If these earnings had been remitted, we estimate that the additional income taxes after foreign tax credits would have been approximately $48 million in 2015, $55 million in 2014, and $50 million in 2013.

Our federal and foreign income tax payments, net of refunds received, were $1.8 billion in 2015, $1.5 billion in 2014, and $787 million in 2013. Our 2014 net payments reflect a $200 million refund from the IRS primarily attributable to our tax-deductible discretionary pension contributions during the fourth quarters of 2013.