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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes
7. INCOME TAXES
Federal and foreign income tax expense consisted of the following:
 Year Ended December 31
$ in millions202120202019
Federal income tax expense:
Current$1,398 $246 $758 
Deferred518 288 (474)
Total federal income tax expense1,916 534 284 
Foreign income tax expense:
Current6 3 10 
Deferred11 2 6 
Total foreign income tax expense17 5 16 
Total federal and foreign income tax expense$1,933 $539 $300 
Earnings from foreign operations before income taxes are not material for all periods presented.
Income tax expense differs from the amount computed by multiplying earnings before income taxes by the statutory federal income tax rate due to the following:
 Year Ended December 31
$ in millions202120202019
Income tax expense at statutory rate$1,877 21.0 %$783 21.0 %$535 21.0 %
Research credit(192)(2.2)(206)(5.5)(216)(8.5)
Foreign derived intangible income(50)(0.6)(55)(1.5)(28)(1.1)
IT services divestiture nondeductible goodwill250 2.8 — — — — 
Other, net48 0.6 17 0.5 9 0.4 
Total federal and foreign income taxes$   1,933 21.6 %$   539 14.5 %$   300 11.8 %
The year to date 2021 ETR increased to 21.6 percent from 14.5 percent in the same period of 2020 primarily due to federal income taxes resulting from the IT services divestiture, including $250 million of income tax expense related to $1.2 billion of nondeductible goodwill in the divested business. The company’s 2021 MTM benefit did not significantly impact the 2021 ETR; however, MTM expense in 2020 reduced the 2020 ETR by 1.3 percentage points.
The year to date 2020 ETR increased to 14.5 percent from 11.8 percent in the same period of 2019. MTM expense reduced the 2020 ETR by 1.3 percentage points and the 2019 ETR by 3.7 percentage points.
Income tax payments, net of refunds received, were $1.3 billion, $312 million and $324 million for the years ended December 31, 2021, 2020 and 2019, respectively. Taxes receivable, which are included in Prepaid expenses and other current assets in the consolidated statements of financial position, were $571 million and $792 million as of December 31, 2021 and 2020, respectively.
Uncertain Tax Positions
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2017-2018 federal tax returns are currently under Internal Revenue Service (IRS) examination. During the third quarter of 2021, the company requested an appeal with the IRS for the Northrop Grumman 2014-2016 federal income tax returns and refund claims related to its 2007-2016 federal tax returns. In addition, legacy OATK federal tax returns for the years ended March 31, 2014 and 2015, the nine-month transition period ended December 31, 2015 and calendar years 2016-2017 (the “OATK 2014 to 2017 tax years”) are currently under appeal with the IRS.
Tax returns for open tax years related to state and foreign jurisdictions remain subject to examination. As state income taxes are generally considered allowable and allocable costs, any individual or aggregate state examination impacts are not expected to have a material impact on our financial results. Amounts currently subject to examination related to foreign jurisdictions are not material.
The change in unrecognized tax benefits during 2021, 2020 and 2019, excluding interest, is as follows:
 December 31
$ in millions202120202019
Unrecognized tax benefits at beginning of the year$1,481 $1,223 $748 
Additions based on tax positions related to the current year355 187 158 
Additions for tax positions of prior years47 270 400 
Reductions for tax positions of prior years(251)(190)(65)
Settlements with taxing authorities(1)(7)(15)
Other, net(1)(2)(3)
Net change in unrecognized tax benefits149 258 475 
Unrecognized tax benefits at end of the year$1,630 $1,481 $1,223 
Our 2021 increase in unrecognized tax benefits was primarily related to our methods of accounting associated with the timing of revenue recognition and related costs and the 2017 Tax Cuts and Jobs Act, which includes related final revenue recognition regulations issued in December 2020 under IRC Section 451(b) and procedural guidance issued in August 2021. As of December 31, 2021, we have approximately $1.6 billion in unrecognized tax benefits, including $399 million related to our position on IRC Section 451(b). If these matters, including our position on IRC Section 451(b), are unfavorably resolved, there could be a material impact on our future cash flows. It is reasonably possible that within the next 12 months unrecognized tax benefits may increase by approximately $120 million. Additionally, it is reasonably possible that within the next twelve months, unrecognized tax benefits claimed in legacy OATK’s 2014 to 2017 tax years may decline by up to $110 million through administrative resolution with IRS Appeals.
Our current unrecognized tax benefits, which are included in Other current liabilities in the consolidated statements of financial position, were $590 million and $433 million as of December 31, 2021 and 2020, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities. These liabilities include $175 million of accrued interest and penalties. If the income tax benefits from these tax positions are ultimately realized, $664 million of federal and foreign tax benefits would reduce the company’s ETR.
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. Net deferred tax assets and liabilities are classified as non-current in the consolidated statements of financial position.
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 millions20212020
Deferred Tax Assets
Retiree benefits$804 $1,738 
Accrued employee compensation371 360 
Provisions for accrued liabilities156 232 
Inventory649 849 
Stock-based compensation39 40 
Operating lease liabilities493 435 
Tax credits431 343 
Other135 112 
Gross deferred tax assets3,078 4,109 
Less: valuation allowance(349)(307)
Net deferred tax assets2,729 3,802 
Deferred Tax Liabilities
Goodwill533 533 
Purchased intangibles 148 201 
Property, plant and equipment, net755 737 
Operating lease right-of-use assets444 423 
Contract accounting differences1,036 1,513 
Other103 84 
Deferred tax liabilities3,019 3,491 
Total net deferred tax (liabilities) assets$   (290)$311 
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 our net deferred tax assets will be realized.
At December 31, 2021, the company has available tax credits and unused net operating losses of $524 million and $316 million, respectively, that may be applied against future taxable income. The majority of tax credits and net
operating losses expire in 2022 through 2046, however, some may be carried forward indefinitely. Due to the uncertainty of the realization of the tax credits and net operating losses, the company has recorded valuation allowances of $230 million and $40 million as of December 31, 2021, respectively.
Undistributed Foreign Earnings
As of December 31, 2021, the company has accumulated undistributed earnings generated by our foreign subsidiaries and most have been taxed in the U.S. We intend to indefinitely reinvest these earnings, as well as future earnings from our foreign subsidiaries to fund our international operations. In addition, we expect future U.S. cash generation will be sufficient to meet future U.S. cash needs.