

(In millions)	2019			2018			2017
Current income tax expense (benefit)
Federal	$	638		$	245		$	822
Foreign	48			43			40
State	—			—			—
Deferred income tax expense (benefit)
Federal	(26		)	(42		)	235
Foreign	1			15			18
State	(3		)	3			(1		)
Total	$	658		$	264		$	1,114



	2019		2018		2017
Statutory tax rate	21.0	%	21.0	%	35.0	%
Foreign derived intangible income (FDII)	(3.3	)	(4.2	)	—
Research and development tax credit (R&D tax credit)	(2.3	)	(2.4	)	(1.5	)
Equity compensation	(0.3	)	(1.0	)	(1.2	)
Foreign income tax rate differential	0.8		1.3		0.2
Prior year true-up	0.4		(1.1	)	0.1
Tax benefit related to discretionary pension contributions	—		(3.0	)	—
R&D tax credit claims related to the 2014–2017 tax years	—		(2.1	)	—
Irish restructuring	—		(2.0	)	—
Change in valuation allowance	—		2.0		—
Domestic manufacturing deduction benefit	—		—		(2.5	)
Remeasurement of deferred taxes	—		—		3.2
One-time transition tax on previously undistributed foreign earnings	—		—		2.3
Other items, net	0.2		(0.1	)	0.2
Effective tax rate	16.5	%	8.4	%	35.8	%

In the fourth quarter of 2018, Forcepoint completed an Irish restructuring transaction resulting in a deferred tax asset of approximately $63 million. We have evaluated both the positive and negative evidence to support our ability to realize the deferred tax asset associated with the restructuring. We believe it is more likely than not that the benefit from this restructuring transaction will not be realized. Accordingly, we provided a valuation allowance of $63 million in the fourth quarter of 2018 on the deferred tax asset related to this transaction.

In the third quarter of 2018, the Company recognized a net tax benefit of $110 million related to the completion of the 2017 tax return and additional amended R&D tax credit claims related to the 2014–2016 tax years.

Also in the third quarter of 2018, we made a discretionary contribution to our pension plans of $1.25 billion. In the second quarter of 2018, we determined we would make this contribution and as a result recorded a net tax benefit of $95 million in the second quarter of 2018. This was primarily due to the remeasurement of the related deferred tax asset balance at the 2017 tax rate of 35% versus the 2018 tax rate of 21% since the discretionary contribution was deductible on our 2017 tax return.

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. All IRS examinations related to originally filed returns are closed through the 2016 tax year. In 2018, we amended tax returns for tax years 2014–2016 to reflect refund claims related to increased R&D tax credits, which will be subject to audit. We are also under audit by multiple state and foreign tax authorities.

We will generally be free of additional U.S. federal tax consequences on distributed foreign subsidiary earnings due to a dividends received deduction implemented as part of the move to a territorial tax system for earnings distributed after January 1, 2018. We provide for foreign withholding taxes to the extent applicable to distributions of foreign earnings. We continue to assert indefinite reinvestment on outside basis differences generated on or before December 31, 2017. No provision has been made for U.S. deferred taxes related to any remaining historical outside basis differences in our non-U.S. subsidiaries. Determination of the amount of unrecognized deferred tax liability on outside basis differences is not practicable because these differences primarily relate to non-earnings and profits (E&P) book tax differences, such as acquisition accounting, and could be recognized upon a sale or other transactions of a subsidiary.

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 as 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 our unrecognized tax benefits, exclusive of interest, was $227 million and $92 million at December 31, 2019 and December 31, 2018, respectively, the majority of which would affect our earnings if recognized. The increase in the balance of our unrecognized tax benefits is related to positions taken on state tax returns.

We accrue interest and penalties related to unrecognized tax benefits in tax expense. Interest and penalties recognized during 2019, 2018 and 2017 and accrued as of December 31, 2019 and December 31, 2018 were de minimis.



(In millions)	2019			2018			2017
Unrecognized tax benefits, beginning of year	$	92		$	9		$	7
Additions based on current year tax positions	46			20			1
Additions based on prior year tax positions	90			68			4
Reductions based on prior year tax positions	—			(5		)	(1		)
Settlements based on prior year tax positions	(1		)	—			(2		)
Unrecognized tax benefits, end of year	$	227		$	92		$	9

With the exception of Forcepoint, we generally defer our state income tax expense to the extent we can recover this expense through the pricing of our products and services to the U.S. government. We include this deferred amount in prepaid expenses and other current assets until allocated to our contracts, which generally occurs upon payment or when otherwise agreed as allocable with the U.S. government. Current state income tax expense allocated to our contracts was $31 million, $18 million and $32 million in 2019, 2018 and 2017, 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)	2019			2018
Noncurrent deferred tax assets (liabilities)
Accrued employee compensation and benefits	$	246		$	209
Other accrued expenses and reserves	(21		)	77
Contract balances and inventories	(611		)	(494		)
Pension benefits	1,701			1,306
Other retiree benefits	68			67
Operating lease right-of-use assets	(204		)	(187		)
Operating lease liabilities	214			196
Net operating loss and tax credit carryforwards	405			83
Depreciation and amortization	(921		)	(827		)
Partnership outside basis difference	(25		)	(29		)
Other	21			12
Valuation allowance	(360		)	(84		)
Deferred income taxes—noncurrent	$	513		$	329

As of December 31, 2019, we had U.S. federal, foreign and state net operating loss (NOL) carryforwards related to Forcepoint of $106 million, $67 million and $285 million, respectively, which expire at various dates through 2037. We believe it is more likely than not that the majority of the deferred tax asset will be realized to the extent of existing deferred tax liabilities.

We also had foreign NOL carryforwards unrelated to Forcepoint of $87 million as of December 31, 2019, of which the majority may be carried forward indefinitely. The NOL carryforwards are primarily generated in the U.K., France, Saudi Arabia, and Guam. We have sufficient taxable income to realize these deferred tax assets in the U.K.; however, we believe it is more likely than not that the benefit from the foreign NOL carryforwards in France, Saudi Arabia and Guam will not be realized and provided a valuation allowance of $18 million related to these deferred tax assets. The total valuation allowance recorded in 2019 related to NOL carryforwards was $14 million.

As of December 31, 2019, we also had state tax credit carryforwards of $336 million, of which $326 million expire at various dates through 2039 and $10 million may be carried forward indefinitely. We believe it is more likely than not that the benefit from the majority of these state tax credit carryforwards will not be realized and have provided a valuation allowance of

$241 million on the deferred tax asset related to these carryforwards in 2019, which was recorded through administrative and selling expenses. If or when recognized, the tax benefits related to any reversal of the valuation allowance on deferred tax assets as of December 31, 2019, will be recognized through administrative and selling expenses as these benefits can generally be recovered through the pricing of products and services to the U.S. government in the period in which the credit is utilized.

On December 22, 2017, the President signed the Tax Cuts and Jobs Act of 2017 (2017 Act) which enacted a wide range of changes to the U.S. corporate income tax system. The 2017 Act reduced the U.S. corporate statutory federal tax rate to 21% effective in 2018, eliminated the domestic manufacturing deduction benefit and introduced other tax base broadening measures, changed rules for expensing and capitalizing business expenditures, established a territorial tax system for foreign earnings as well as a minimum tax on certain foreign earnings, provided for a one-time transition tax on previously undistributed foreign earnings, and introduced new rules for the treatment of certain foreign income, including FDII.

Also on December 22, 2017, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 118 (SAB 118), which provided companies with additional guidance on how to account for the 2017 Act in their financial statements, allowing companies to use a measurement period. As of December 31, 2017, we made a reasonable estimate of the effects on our existing deferred tax balances to reflect the new 21% corporate income tax rate under the 2017 Act and the one-time transition tax on previously undistributed foreign earnings and recognized provisional amounts totaling $171 million in accordance with SAB 118, which was included as a component of income tax expense from continuing operations. As of December 31, 2018, we had finalized our provisional estimates for the remeasurement of our existing U.S. deferred tax balances and the one-time transition tax for which we recorded a $1 million tax benefit in 2018.

Deferred tax assets and liabilities—At the date of enactment, the Company had a net deferred tax asset for the difference between the tax basis and the book basis of the U.S. assets and liabilities. Due to the 2017 Act, the future impact associated with the reversal of the net deferred tax asset will be subject to tax at a lower corporate tax rate. Consequently in 2017, we recorded a tax expense of $100 million to reduce the Company’s deferred tax asset due to the remeasurement of the U.S. deferred tax assets and liabilities for the reduction in the corporate tax rate from 35% to 21%. At December 31, 2018, we finalized our provisional estimate for the remeasurement of our existing deferred tax balances with no additional adjustment.

Transition tax—The one-time transition tax is based on our total post-1986 E&P for which we have previously deferred U.S. income taxes. In 2017, we recorded a provisional amount for our one-time transition tax liability, using an applicable tax rate of 15.5%, resulting in an increase in income tax expense of $71 million after accounting for foreign tax credits. In 2018, we recorded a $1 million tax benefit to finalize our provisional calculation for the one-time transition tax for foreign E&P. This refinement was a result of completing the data gathering and analysis based on the 2017 Act and guidance issued to date in 2018, including IRS Notices 2018-07, 2018-13 and 2018-26. No provision has been made for deferred taxes related to any remaining historical outside basis differences in our non-U.S. subsidiaries as we continue to assert indefinite reinvestment on outside basis differences not related to amounts that have been previously taxed in the U.S. or undistributed earnings generated after December 31, 2017.

In addition to the changes described above, the 2017 Act imposes a U.S. tax on global intangible low taxed income (GILTI) that is earned by certain foreign affiliates owned by a U.S. shareholder. The computation of GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. The Company made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred.