Income Taxes

Earnings from continuing operations before income taxes of $2.9 billion, $2.5 billion and $1.7 billion for fiscal years 2011, 2010 and 2009, respectively, represent earnings from domestic operations.

The breakdown of income tax expense between current and deferred is as follows:



(Dollars in Millions)	Fiscal Years
Current:	2011			2010		2009
Federal	$	353		$	451	$	151
State	104			58		37
Total Current	$	457		$	509	$	188

Deferred:
Federal	614			372		407
State ^(a)	(5		)	102		23
Total Deferred	$	609		$	474	$	430
Total	$	1,066		$	983	$	618

(a) The decrease in 2011 deferred state income tax expense is a result of several state legislative changes and the favorable impact of changes in state apportionment factors. The increase in 2010 deferred state income tax expenses is attributable to the unfavorable impact of changes in state apportionment factors and the unfavorable impact of the reorganization of intermodal operations.

Income tax expense reconciled to the tax computed at statutory rates is presented in the table below. The change in the 2011 effective income tax rate compared to the prior year is primarily attributed to several state legislative changes resulting in the recognition of a $14 million net benefit included in the state income tax line in the table below. The change in the 2010 effective income tax rate compared to the prior year is primarily attributed to an income tax charge of $16 million related to the merger of the Company’s former Intermodal subsidiary with CSXT.



	Fiscal Years
(Dollars In Millions)	2011					2010					2009
Federal Income Taxes	$	1,011		35.0	%	$	891		35.0	%	$	610		35.0	%
State Income Taxes	63			2.2	%	85			3.4	%	37			2.1	%
Corporate Reorganization	—			—	%	16			0.6	%	—			—	%
Other Items^(a)	(8		)	(0.3	)%	(9		)	(0.4	)%	(29		)	(1.6	)%
Income Tax Expense/Rate	$	1,066		36.9	%	$	983		38.6	%	$	618		35.5	%

(a) Other items primarily include tax impacts from equity in Conrail and other partially owned subsidiaries’ earnings.

The significant components of deferred income tax assets and liabilities include:



	2011				2010
(Dollars in Millions)	Assets		Liabilities		Assets		Liabilities
Pension Plans	$	300	$	—	$	243	$	—
Other Employee Benefit Plans	309		—		311		—
Accelerated Depreciation	—		8,148		—		7,557
Other	354		234		353		211
Total	$	963	$	8,382	$	907	$	7,768
Net Deferred Income Tax Liabilities			$	7,419			$	6,861

Note 12. Income Taxes, continued

The primary factors in the change in year-end net deferred income tax liability balances include:


•	Annual provision for deferred income tax expense; and


•	Accumulated other comprehensive loss and other capital adjustments.

The Company files a consolidated federal income tax return, which includes its principal domestic subsidiaries. CSX and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. CSX participated in a contemporaneous Internal Revenue Service (“IRS”) audit of tax years 2010 and 2011. During 2010, the Company resolved the final issue on the 2008 IRS Audit Appeal. This settlement had no material impact on the financial statements. Federal examinations of original federal income tax returns for all years through 2009 are resolved.

As of December 2011 and 2010, the Company had approximately $22 million and $20 million, respectively, of total net unrecognized tax benefits. After consideration of the impact of federal tax benefits, $15 million in 2011 and 2010 could favorably affect the effective income tax rate in each year. The Company estimates that approximately $4 million of the unrecognized tax benefits as of December 2011 for various state and federal income tax matters will be resolved over the next 12 months upon the expiration of statutes of limitations. The final outcome of these uncertain tax positions, however, is not yet determinable. The change to the total gross unrecognized tax benefits and prior year audit resolutions of the Company during the fiscal year ended December 2011 is reconciled as follows:



Uncertain Tax Positions:	Fiscal Year
(Dollars in Millions)	2011			2010
Balance at beginning of the year	$	20		$	50
Additions based on tax positions related to current year	1			3
Additions based on tax positions related to prior years	10			17
Reductions based on tax positions related to prior years	(3		)	(41		)
Settlements with taxing authorities	(5		)	—
Lapse of statute of limitations	(1		)	(9		)
Balance at end of the year	$	22		$	20

CSX’s continuing practice is to recognize net interest and penalties related to income tax matters in income tax expense. Included in the consolidated income statements are expense or (benefits) of $1 million, $7 million and $(6) million for fiscal years 2011, 2010 and 2009, respectively, for the reduction to reserves for interest and penalties for all prior year tax positions. Prior year benefits for interest and penalties are due to favorable tax settlements of prior period tax audits where the Company had previously accrued a liability for interest and penalties. The Company had $11 million and $6 million accrued for interest and penalties at 2011 and 2010, respectively, for all prior year tax positions.