INCOME TAXES

12 Months Ended

Jun. 28, 2019

NOTE 22: INCOME TAXES

Income Tax Provision

The provisions for current and deferred income taxes are summarized as follows:



	2019			2018			2017

	(In millions)
Current:
United States	$	105		$	(141	)	$	117
International	9			12			9
State and local	8			(11		)	6
	122			(140		)	132
Deferred:
United States	15			324			121
International	(3		)	(3		)	1
State and local	26			25			7
	38			346			129
	$	160		$	206		$	261

The total income tax provision is summarized as follows:



	2019			2018			2017

	(In millions)
Continuing operations	$	160		$	206		$	261
Discontinued operations	(1		)	(5		)	(110		)
Total income tax provision	$	159		$	201		$	151

A reconciliation of the U.S. statutory income tax rate to our effective income tax rate follows:



	2019		2018		2017
U.S. statutory income tax rate	21.0	%	28.1	%	35.0	%
State taxes	2.4		1.9		1.0
International income	(0.5	)	(0.5	)	(1.3	)
Research and development tax credit	(4.5	)	(2.9	)	(2.0	)
Foreign derived intangibles income deduction	(1.3	)	—		—
Change in valuation allowance	(1.8	)	0.2		(0.2	)
U.S. production activity benefit	—		(0.9	)	(0.5	)
Excess tax benefits on equity-based compensation	(2.2	)	(1.8	)	(2.6	)
Settlement of tax audits	—		(2.2	)	—
U.S. tax reform	—		0.4		—
Other items	1.3		0.4		(0.1	)
Effective income tax rate	14.4	%	22.7	%	29.3	%

As of June 28, 2019, we have accumulated undistributed earnings of international subsidiaries of approximately $82 million and our intention is to reinvest these earnings indefinitely. Determination of unrecognized deferred U.S. tax liability on outside basis differences is not practicable at this time.

Tax Law Changes

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into U.S. law. Among other provisions, the Tax Act reduced the U.S. statutory corporate income tax rate from a maximum 35 percent to a flat 21 percent, effective January 1, 2018. Based on our fiscal year end, our blended U.S. statutory corporate income tax rate for fiscal 2018 was 28.1 percent. This drop in the tax rate resulted in a one-time benefit of $26 million ($.21 per diluted share) at the date of enactment. Additionally, we recognized expense of $8 million in fiscal 2018 to revalue our existing net deferred income tax balances.

During the second quarter of fiscal 2019, we completed our accounting for the income tax impact of enactment of the Tax Act and there were no material changes from the estimates reported in our Current Report on Form 8-K filed with the SEC on December 13, 2018.

The implementation of a modified territorial tax system under the Tax Act subjects us to tax on our Global Intangible Low-Taxed Income (GILTI) starting with fiscal 2019. The FASB has permitted companies to make an accounting policy decision to either (1) treat taxes due on future GILTI inclusions in U.S. taxable income as a current-period expense when incurred (“period cost method”) or (2) factor such amounts into the measurement of its deferred taxes (“deferred method”). We have elected to use the period cost method.

Deferred Income Tax Assets (Liabilities)

The components of deferred income tax assets (liabilities) were as follows:



	June 28, 2019			June 29, 2018

	(In millions)
Deferred tax assets:
Inventory valuations	$	24		$	21
Accruals	152			178
Deferred revenue	12			7
Domestic tax loss and credit carryforwards	54			86
International tax loss and credit carryforwards	38			33
Share-based compensation	28			26
Capital loss carryforwards	95			101
Pension and other post-employment benefits	305			188
Unrealized loss on interest rate hedges	13			7
Unrecognized tax benefits	4			4
Other	10			13
Total deferred tax assets	735			664
Less: valuation allowance⁽¹⁾	(159		)	(181		)
Total deferred tax assets, net of valuation allowance	576			483

Deferred tax liabilities:
Property, plant and equipment	(71		)	(65		)
Unbilled receivables	(65		)	(86		)
Acquired intangibles	(260		)	(268		)
Unremitted earnings of foreign subsidiaries	(19		)	(24		)
Total deferred tax liabilities	(415		)	(443		)
Total deferred tax assets, net of valuation allowance	$	161		$	40

_______________

(1) The valuation allowance has been established to offset certain domestic and foreign deferred tax assets due to uncertainty regarding our ability to realize them in the future.

Total deferred tax assets, net of valuation allowance, were classified as follows in our Consolidated Balance Sheet:



	June 28, 2019			June 29, 2018

	(In millions)
Non-current deferred income tax assets	$	173		$	119
Non-current deferred income tax liabilities	(12		)	(79		)
	$	161		$	40

Tax loss and credit carryforwards at June 28, 2019 have expiration dates ranging between two years and no expiration in certain instances. The amounts of federal, international, and state and local operating loss carryforwards at June 28, 2019 were $24 million, $108 million and $369 million, respectively. The amount of U.S. capital loss carryforwards as of June 28, 2019 was $352 million. Income from continuing operations before income taxes of international subsidiaries was $37 million, $43 million and $42 million in fiscal 2019, 2018 and 2017, respectively. We paid $137 million in income tax, net of refunds received, in fiscal 2019, received $8 million in income tax refunds, net of income taxes paid, in fiscal 2018, and paid $51 million, net of refunds received, in fiscal 2017. The successful completion, during the second half of calendar year 2019, of the sales of entities currently held-for-sale may result in capital gains that would allow us to realize a substantial portion of our capital loss carryforwards. A related reversal of valuation allowance on these deferred tax assets would be recognized as an income tax benefit upon such utilization.

Tax Uncertainties

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



	2019			2018			2017

	(In millions)
Balance at beginning of fiscal year	$	102		$	90		$	63
Additions based on tax positions taken during current fiscal year	31			17			52
Additions based on tax positions taken during prior fiscal years	80			23			—
Decreases based on tax positions taken during prior fiscal years	(9		)	(28		)	(25		)
Balance at end of fiscal year	$	204		$	102		$	90

As of June 28, 2019, we had $204 million of unrecognized tax benefits, of which $162 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized. Upon recognition of a portion of these benefits, we also expect to recognize an additional $9 million of current expense which will offset the favorable rate impact from the unrecognized tax benefits. As of June 29, 2018, we had $102 million of unrecognized tax benefits, of which $92 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized.

We recognize accrued interest and penalties related to unrecognized tax benefits as part of our income tax expense. We had accrued $3 million for the potential payment of interest and penalties as of June 28, 2019 (and this amount was not included in the $204 million of unrecognized tax benefits balance at June 28, 2019 shown above) and $3 million of this total could favorably impact future tax rates. We had accrued $4 million for the potential payment of interest and penalties as of June 29, 2018 (and this amount was not included in the $102 million of unrecognized tax benefits balance at June 29, 2018 shown above) and $3 million of this total could favorably impact future tax rates.

We file numerous separate and consolidated income tax returns reporting our financial results and, where appropriate, those of our subsidiaries and affiliates, in the U.S. Federal jurisdiction and various state, local and foreign jurisdictions. Pursuant to the Compliance Assurance Process, the IRS is examining our returns for fiscal 2014 through fiscal 2018. The Canadian Revenue Agency is currently examining our returns for fiscal 2014 through fiscal 2016, and we are still negotiating the provincial portions of a Canadian assessment relating to fiscal 2000 through fiscal 2006. We are currently under examination or contesting proposed adjustments by various state and international tax authorities for fiscal years ranging from 2012 through 2018. It is reasonably possible that there could be a significant decrease or increase to our unrecognized tax benefit balance during the course of the next twelve months as these examinations continue, other tax examinations commence or various statutes of limitations expire. An estimate of the range of possible changes cannot be made for remaining unrecognized tax benefits because of the significant number of jurisdictions in which we do business and the number of open tax periods.