Income Taxes
The provision for federal and foreign income taxes consisted of the following:
|
| | | | | | | | | | | |
(In millions) | 2013 |
| | 2012 |
| | 2011 |
|
Current income tax expense | | | | | |
Federal | $ | 723 |
| | $ | 753 |
| | $ | 360 |
|
Foreign | 17 |
| | 32 |
| | 46 |
|
Deferred income tax expense (benefit) | | | | | |
Federal | 36 |
| | 74 |
| | 387 |
|
Foreign | 32 |
| | 19 |
| | (11 | ) |
Total | $ | 808 |
| | $ | 878 |
| | $ | 782 |
|
The expense for income taxes differs from the U.S. statutory rate due to the following:
|
| | | | | | | | |
| 2013 |
| | 2012 |
| | 2011 |
|
Statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Research and development (R&D) tax credit | (1.8 | ) | | — |
| | (1.0 | ) |
Tax settlements and refund claims | (0.8 | ) | | (0.8 | ) | | (2.6 | ) |
Domestic manufacturing deduction benefit | (2.1 | ) | | (1.9 | ) | | (1.8 | ) |
Other, net | (1.0 | ) | | (0.7 | ) | | (0.2 | ) |
Effective tax rate | 29.3 | % | | 31.6 | % | | 29.4 | % |
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. During 2013, the IRS completed its examination of our 2009 and 2010 tax years and we received final approval from the U.S. Congressional Joint Committee on Taxation (JCT) of a refund claim related to the 2011 tax year which completed IRS examinations through 2011. As a result of closing the federal audit examinations, our unrecognized tax benefits decreased by approximately $70 million, inclusive of interest, the majority of which did not impact our income from continuing operations. During 2012, we received final approval from the IRS and the U.S. Congressional Joint Committee on Taxation of an IRS Appeals Division settlement for the 2006–2008 IRS examination cycle (2012 Tax Settlement). As a result, our unrecognized tax benefits decreased by approximately $24 million, inclusive of interest, all of which increased our income from continuing operations. In 2011, we received final approval from the IRS and the U.S. Congressional Joint Committee on Taxation of a Minimum Tax Refund claim for the 2006–2008 IRS examination cycle. As a result, our unrecognized tax benefits decreased by approximately $60 million, inclusive of interest, all of which increased our income from continuing operations. We are participating in the IRS Compliance Assurance Process (CAP) program for the 2012 and 2013 tax years. We are also under audit by multiple state and foreign tax authorities.
|
| | | | | | | | | | | |
(In millions) | 2013 |
| | 2012 |
| | 2011 |
|
Domestic income from continuing operations before taxes | $ | 2,612 |
| | $ | 2,630 |
| | $ | 2,574 |
|
Foreign income from continuing operations before taxes | 145 |
| | 149 |
| | 86 |
|
At December 31, 2013, foreign earnings of approximately $509 million have been retained by foreign subsidiaries for reinvestment. In the first quarter of 2014, a foreign subsidiary authorized and completed a transaction which resulted in a taxable dividend of approximately $115 million. The transaction does not affect our indefinite reinvestment assertion because it generated a net tax benefit of approximately $80 million. No provision has been made for deferred taxes on undistributed earnings of non-U.S. subsidiaries as these earnings have been indefinitely invested or are expected to be remitted substantially free of additional tax. Determination of the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable because of the complexity of laws and regulations, the varying tax treatment of alternative repatriation scenarios, and the variation due to multiple potential assumptions relating to the timing of any future repatriation. We made the following net tax payments during the years ended December 31:
|
| | | | | | | | | | | |
(In millions) | 2013 |
| | 2012 |
| | 2011 |
|
Federal | $ | 628 |
| | $ | 826 |
| | $ | 332 |
|
Foreign | 22 |
| | 13 |
| | 94 |
|
State | 39 |
| | 78 |
| | 12 |
|
We believe that our income tax reserves are adequate; however, amounts asserted by taxing authorities could be greater or less than amounts accrued and reflected in our consolidated balance sheets. Accordingly, we could record adjustments to the amounts for federal, foreign and state tax-related liabilities in the future as we revise estimates or we settle or otherwise resolve the underlying matters. In the ordinary course of business, we may take new positions that could increase or decrease our unrecognized tax benefits in future periods.
The balance of unrecognized tax benefits, exclusive of interest, was $118 million and $129 million at December 31, 2013 and December 31, 2012, respectively, the majority of which would affect earnings if recognized. We accrue interest and penalties related to unrecognized tax benefits in tax expense. During 2013, primarily as a result of the completion of the IRS and state examinations, we recorded $13 million of income related to interest which, net of the federal tax expense, was $9 million. In the twelve months ended December 31, 2012 and December 31, 2011, respectively, we recorded $2 million of interest income and $14 million of interest income which, net of the federal tax, was $1 million and $9 million of interest income in 2012 and 2011, respectively. At December 31, 2013 and December 31, 2012, we had $5 million and $17 million of interest accrued related to unrecognized tax benefits, which, net of the federal tax benefit, was approximately $3 million and $11 million, respectively.
A rollforward of our unrecognized tax benefits was as follows:
|
| | | | | | | | | | | |
(In millions) | 2013 |
| | 2012 |
| | 2011 |
|
Unrecognized tax benefits, beginning of year | $ | 129 |
| | $ | 167 |
| | $ | 188 |
|
Additions based on current year tax positions | 104 |
| | 1 |
| | 22 |
|
Additions based on prior year tax positions | — |
| | — |
| | 12 |
|
Reductions based on prior year tax positions | (64 | ) | | (39 | ) | | (55 | ) |
Settlements based on prior year tax positions | (51 | ) | | — |
| | — |
|
Unrecognized tax benefits, end of year | $ | 118 |
| | $ | 129 |
| | $ | 167 |
|
It is reasonably possible that within the next 12 months our unrecognized tax benefits, exclusive of interest, may decrease by up to $115 million, as a result of resolving various issues in the currently open cycles, including the R&D tax credit. We expect that the majority of the decrease would affect the effective tax rate, if recognized.
We generally account for our state income tax expense as a deferred contract cost, as we can generally recover this expense through the pricing of our products and services to the U.S. Government. We include this deferred amount in contracts in process, net until allocated to our contracts, which generally occurs upon payment or when otherwise agreed as allocable with the U.S. Government. Net state income tax expense allocated to our contracts was $42 million, $78 million and $16 million in 2013, 2012 and 2011, respectively. We include state income tax expense allocated to our contracts in administrative and selling expenses.
Deferred income taxes consisted of the following at December 31: |
| | | | | | | |
(In millions) | 2013 |
| | 2012 |
|
Current deferred tax assets (liabilities) | | | |
Accrued employee compensation and benefits | $ | 240 |
| | $ | 226 |
|
Other accrued expenses and reserves | 191 |
| | 181 |
|
Contracts in process and inventories | (513 | ) | | (311 | ) |
Deferred income taxes-current | $ | (82 | ) | | $ | 96 |
|
Noncurrent deferred tax assets (liabilities) | | | |
Pension benefits | $ | 934 |
| | $ | 2,490 |
|
Other retiree benefits | 113 |
| | 118 |
|
Net operating loss and tax credit carryforwards | 116 |
| | 148 |
|
Depreciation and amortization | (1,346 | ) | | (1,312 | ) |
Other | (74 | ) | | (86 | ) |
Deferred income taxes-noncurrent | $ | (257 | ) | | $ | 1,358 |
|
As of December 31, 2013, we had foreign net operating loss carryforwards of approximately $468 million, of which $446 million was generated in the U.K. We believe that we will have sufficient taxable income to realize this deferred tax asset, as any net operating loss generated in the U.K. may be carried forward indefinitely.
The tax expense (benefit) related to discontinued operations was $(5) million, $1 million and $2 million in 2013, 2012 and 2011, respectively.
