Income Taxes

The components of earnings before income taxes were:



Years ended December 31,	2015		2014		2013
U.S.		$6,828		$6,829		$5,946
Non-U.S.	327		308		286
Total		$7,155		$7,137		$6,232

Income tax expense/(benefit) consisted of the following:



Years ended December 31,	2015			2014			2013
Current tax expense
U.S. federal		$2,102			$676			($82	)
Non-U.S.	122			91			76
U.S. state	21			69			11
Total current	2,245			836			5
Deferred tax expense
U.S. federal	(297		)	828			1,531
Non-U.S.	4			34			41
U.S. state	27			(7		)	69
Total deferred	(266		)	855			1,641
Total income tax expense		$1,979			$1,691			$1,646

Net income tax payments were $1,490, $355 and $209 in 2015, 2014 and 2013, respectively.

The following is a reconciliation of the U.S. federal statutory tax rate of 35% to our effective income tax rates:



Years ended December 31,	2015		2014		2013
U.S. federal statutory tax	35.0	%	35.0	%	35.0	%
Research and development credits ⁽¹⁾	(3.4	)	(2.9	)	(4.9	)
Amendments to the R&E regulations ⁽²⁾					(3.4	)
Tax basis adjustment ⁽³⁾			(3.6	)
U.S. manufacturing activity tax benefit	(2.9	)	(1.2	)	(0.6	)
Tax on international activities	(0.6	)	(0.2	)	(0.1	)
Federal audit settlements⁽⁴⁾			(3.6	)
Other provision adjustments	(0.4	)	0.2		0.4
Effective income tax rate	27.7	%	23.7	%	26.4	%


⁽¹⁾	In the fourth quarter of 2015 and 2014, we recorded tax benefits of $235 and $188, respectively related to the reinstatement of the research tax credit. Research tax credits for the 2013 and 2012 tax years were both recorded in 2013.


⁽²⁾	In 2013, we recorded $212 for the issuance of favorable regulations related to research and experimental (R&E) expenditures.


⁽³⁾	In the second quarter of 2014 we recorded an incremental tax benefit of $265 related to the application of a 2012 Federal Court of Claims decision which held that the tax basis in certain assets could be increased and realized upon the assets' disposition (tax basis adjustment).


⁽⁴⁾	In the second quarter of 2014, tax benefits of $116 and $143 were recorded as a result of the 2007-2008 and 2009-2010 federal tax audit settlements.

Federal income tax audits have been settled for all years prior to 2011. The years 2011-2012 are currently being examined by the IRS. We are also subject to examination in major state and international jurisdictions for the 2001-2015 tax years. We believe appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.

Prior year balances of deferred tax (liabilities)/assets have been revised to reflect current year presentation. Significant components of our deferred tax (liabilities)/assets at December 31 were as follows:



	2015			2014
Inventory and long-term contract methods of income recognition	(10,401		)	(10,156		)
Pension benefits	6,303			6,145
Retiree health care benefits	2,513			2,572
Fixed assets, intangibles and goodwill (net of valuation allowance $16 and $18)	(1,837		)	(1,782		)
Other employee benefits	1,339			1,477
Customer and commercial financing	(777		)	(853		)
Accrued expenses and reserves	609			733
Net operating loss, credit and capital loss carryovers (net of valuation allowance of $89 and $63)⁽¹⁾	216			266
Other	(92		)	(292		)
Net deferred tax (liabilities)/assets⁽²⁾		($2,127	)		($1,890	)


⁽¹⁾	Of the deferred tax asset for net operating loss and credit carryovers, $208 expires in years ending from December 31, 2016 through December 31, 2035 and $8 may be carried over indefinitely.


⁽²⁾	Included in the net deferred tax (liabilities)/assets as of December 31, 2015 and 2014 are deferred tax assets in the amounts of $7,277 and $8,007 related to Accumulated other comprehensive loss.

Net deferred tax (liabilities)/assets at December 31 were as follows:



	2015			2014
Deferred tax assets		$13,128			$14,219
Deferred tax liabilities	(15,150		)	(16,028		)
Valuation allowance	(105		)	(81		)
Net deferred tax (liabilities)/assets		($2,127	)		($1,890	)

The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

As discussed in Note 1, during the year ended December 31, 2015, the Company retrospectively adopted ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The effects of the accounting change on the December 31, 2014 Statement of Financial Position were as follows:



	2014
	Revised			As Reported
Current deferred tax asset					$18
Non-current deferred tax asset	317			6,576
Current deferred tax liability				(8,484		)
Non-current deferred tax liability	(2,207		)
Net deferred tax (liabilities)/assets		($1,890	)		($1,890	)

We have provided for U.S. deferred income taxes and foreign withholding tax in the amount of $35 on undistributed earnings not considered indefinitely reinvested in our non-U.S. subsidiaries. We have not provided for U.S. deferred income taxes or foreign withholding tax on the remainder of undistributed earnings from our non-U.S. subsidiaries of approximately $700 because such earnings are considered to be indefinitely reinvested and it is not practicable to estimate the amount of tax that may be payable upon distribution.

As of December 31, 2015 and 2014, the amounts accrued for the payment of income tax-related interest and penalties included in the Consolidated Statements of Financial Position were not significant. The amounts of interest benefit included in the Consolidated Statements of Operations were not significant for the years ended December 31, 2015, 2014 and 2013.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2015			2014			2013
Unrecognized tax benefits – January 1		$1,312			$1,141			$1,055
Gross increases – tax positions in prior periods	38			403			10
Gross decreases – tax positions in prior periods	(25		)	(251		)	(125		)
Gross increases – current-period tax positions	292			217			202
Gross decreases – current-period tax positions							(1		)
Settlements				(197		)
Lapse of statute of limitations				(1		)
Unrecognized tax benefits – December 31		$1,617			$1,312			$1,141

As of December 31, 2015, 2014 and 2013, the total amount of unrecognized tax benefits was $1,617, $1,312 and $1,141, respectively, of which $1,479, $1,180 and $1,018 would affect the effective tax rate, if recognized. As of December 31, 2015, these amounts are primarily associated with U.S. federal tax issues such as the amount of research tax credits claimed, the U.S. manufacturing activity tax benefit, tax basis adjustments and U.S. taxation of foreign earnings. Also included in these amounts are accruals for domestic state tax issues such as the allocation of income among various state tax jurisdictions and the amount of state tax credits claimed.

Audit outcomes and the timing of audit settlements are subject to significant uncertainty. It is reasonably possible that within the next 12 months we will resolve the matters presently under consideration for the 2011-2012 tax years with the IRS. Depending on the timing and outcome of that audit settlement, unrecognized tax benefits could decrease by up to $115 based on current estimates.