INCOME TAXES

Federal and foreign income tax expense consisted of the following:



	Year Ended December 31
$ in millions	2014		2013		2012
Income Taxes
Currently payable
Federal income taxes	$	701	$	803	$	912
Foreign income taxes	10		28		15
Total federal and foreign income taxes currently payable	711		831		927
Deferred federal and foreign income taxes	157		80		60
Total federal and foreign income taxes	$	868	$	911	$	987

Earnings from foreign operations before income taxes are not material for all periods presented.

Income tax expense differs from the amount computed by multiplying the statutory federal income tax rate times earnings before income taxes due to the following:



	Year Ended December 31
$ in millions	2014			2013			2012
Income tax expense at statutory rate	$	1,028		$	1,002		$	1,038
Settlements with taxing authorities	(51		)	—			—
Manufacturing deduction	(48		)	(63		)	(42		)
Research tax credit	(43		)	(37		)	—
Other, net	(18		)	9			(9		)
Total federal and foreign income taxes	$	868		$	911		$	987

2014 – The effective tax rate for 2014 was 29.6 percent, as compared with 31.8 percent in 2013. The company's lower effective tax rate for 2014 reflects a $51 million benefit for the partial resolution of its 2007-2009 Internal Revenue Service (IRS) examination.

2013 – The effective tax rate for 2013 was 31.8 percent, as compared with 33.3 percent in 2012. The company's lower effective tax rate for 2013 includes a $37 million benefit for the American Taxpayer Relief Act, enacted in January 2013, which reinstated research tax credits for 2012 and 2013, and a $21 million benefit for higher section 199 manufacturing deductions than in prior year.

Income tax payments, net of refunds received, were $727 million, $880 million and $1.1 billion for the years ended December 31, 2014, 2013 and 2012, respectively.

Uncertain Tax Positions

The company files income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. In the first quarter of 2014, the U.S. Congressional Joint Committee on Taxation approved a partial resolution of the IRS examination of the company’s 2007-2009 tax returns. As a result, the company recorded a reduction of income tax expense of $51 million. The company also reduced its unrecognized tax benefits by $59 million and related accrued interest by $12 million. During the fourth quarter of 2014, the company filed appeals with the IRS for the unresolved 2007-2009 tax return matters and for unresolved 2010-2011 examination matters.

The company believes it is reasonably possible that during the next twelve months, we will resolve the remaining matters on our 2007-2011 tax returns. The combined resolution of these items, excluding interest, could result in a reduction in our unrecognized tax benefits up to $75 million and a reduction of our income tax expense up to $40 million. Open tax years related to state and foreign jurisdictions remain subject to examination, but are not considered material.

The change in unrecognized tax benefits during 2014, 2013 and 2012, excluding interest, is as follows:



	December 31
$ in millions	2014			2013			2012
Unrecognized tax benefits at beginning of the year	$	241		$	156		$	118
Additions based on tax positions related to the current year	62			56			12
Additions for tax positions of prior years	9			44			28
Settlements with taxing authorities	(61		)	(1		)	(1		)
Other, net	(41		)	(14		)	(1		)
Net change in unrecognized tax benefits	(31		)	85			38
Unrecognized tax benefits at end of the year	$	210		$	241		$	156

These liabilities, along with $25 million of accrued interest and penalties, are included in other current and non-current liabilities in the consolidated statements of financial position. If the income tax benefits from these tax positions are ultimately realized, $145 million of federal and foreign tax benefits would reduce the company’s effective tax rate.

Net interest expense within the company's federal, foreign and state income tax provisions was not material for all years presented.

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax purposes. Such amounts are classified in the consolidated statements of financial position as current or non-current assets or liabilities, based upon the classification of the related assets and liabilities.

The tax effects of significant temporary differences and carryforwards that gave rise to year-end deferred federal, state and foreign tax balances, as presented in the consolidated statements of financial position, are as follows:



	December 31
$ in millions	2014			2013
Deferred Tax Assets
Retiree benefits	$	2,745		$	1,308
Accrued employee compensation	311			333
Provisions for accrued liabilities	392			313
Stock-based compensation	91			109
Other	104			144
Gross deferred tax assets	3,643			2,207
Less valuation allowance	(53		)	(55		)
Net deferred tax assets	3,590			2,152
Deferred Tax Liabilities
Goodwill	787			806
Property, plant and equipment, net	315			348
Contract accounting differences	332			134
Other	130			50
Gross deferred tax liabilities	1,564			1,338
Total net deferred tax assets	$	2,026		$	814

Realization of deferred tax assets is primarily dependent on generating sufficient taxable income in future periods. The company believes it is more-likely-than-not all deferred tax assets will be realized, net of any valuation allowances currently established.

At December 31, 2014, the company has available unused net operating losses of $211 million that may be applied against future taxable income, primarily in the United Kingdom, that may be used indefinitely. A valuation allowance of $53 million has been recorded against certain deferred tax assets due to the uncertainty of the realization of these net operating losses and other deferred tax assets, principally in foreign jurisdictions.

Undistributed Foreign Earnings

As of December 31, 2014, the company has accumulated undistributed earnings generated by its foreign subsidiaries. No deferred tax liability has been recorded on these earnings since the company intends to permanently reinvest these earnings. Should these earnings be distributed in the form of dividends or otherwise, the distributions would be subject to U.S. federal income tax at the statutory rate of 35 percent, less foreign tax credits available to offset such distributions, if any. In addition, such distributions may be subject to withholding taxes in the various tax jurisdictions.