Income Taxes (Unaudited)

9 Months Ended

Sep. 30, 2016



	Three Months Ended September 30						Nine Months Ended September 30
$ in millions	2016			2015			2016			2015
Federal and foreign income tax expense	$	167		$	213		$	500		$	638
Effective income tax rate	21.7		%	29.2		%	23.0		%	29.4		%

Current Quarter

The company’s effective tax rate for the three months ended September 30, 2016 was lower than the comparable 2015 period primarily due to a $42 million benefit recognized in connection with resolution of the Internal Revenue Service (IRS) examination of the company’s 2007-2011 tax returns as well as the extension of the research tax credit.

Year to Date

The company’s effective tax rate for the nine months ended September 30, 2016 was lower than the comparable 2015 period primarily due to $85 million of excess tax benefits related to employee share-based payment transactions recognized in 2016 resulting from the adoption of ASU No. 2016-09 described in Note 1 and a $42 million benefit recognized in connection with resolution of the IRS examination of the company’s 2007-2011 tax returns.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. Our 2012-2013 federal tax returns are currently under IRS examination. The company believes it is reasonably possible that within the next twelve months we may resolve certain tax matters related to the years under examination, which may result in reductions of our unrecognized tax benefits up to $70 million and income tax expense up to $40 million.

Undistributed Foreign Earnings

As of September 30, 2016, the company has accumulated undistributed earnings generated by its foreign subsidiaries of approximately $430 million. We are currently evaluating options to repatriate a majority of these earnings due, in part, to recent changes in foreign exchange rates, which have improved the tax efficiency of any such repatriation. No provision has been made for deferred taxes on these earnings as we currently expect this potential repatriation would generate a net tax benefit resulting from foreign tax credits in excess of U.S. income taxes due on these earnings.

We intend to permanently reinvest the remaining undistributed earnings as well as future earnings from our foreign subsidiaries to fund our international operations. In addition, we expect U.S. cash generation will continue to be sufficient to meet our future U.S. cash needs.