Income Taxes

Earnings before income taxes of $3.0 billion, $2.9 billion and $2.5 billion for fiscal years 2012, 2011 and 2010, 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:	2012		2011			2010
Federal	$	447	$	353		$	451
State	66		104			58
Subtotal Current	513		457			509

Deferred:
Federal	530		614			372
State	62		(5		)	102
Subtotal Deferred	592		609			474
Total	$	1,105	$	1,066		$	983

Income tax expense reconciled to the tax computed at statutory rates is presented in the table below. During 2012, the effective income tax rate was impacted by a state legislative change and the resolution of other federal and state tax matters which caused the Company to record an income tax benefit of $20 million (which is included in the state income tax and other lines in the table below). The 2011 effective income tax rate was impacted primarily by several state legislative changes resulting in the recognition of a $14 million net benefit (which is included in the state income tax line in the table below). The 2010 effective income tax rate includes 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)	2012					2011					2010
Federal Income Taxes	$	1,037		35.0	%	$	1,011		35.0	%	$	891		35.0	%
State Income Taxes	80			2.7	%	63			2.2	%	85			3.4	%
Corporate Reorganization	—			—	%	—			—	%	16			0.6	%
Other	(12		)	(0.4	)%	(8		)	(0.3	)%	(9		)	(0.4	)%
Income Tax Expense/Rate	$	1,105		37.3	%	$	1,066		36.9	%	$	983		38.6	%

NOTE 11. Income Taxes, continued

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



	2012				2011
(Dollars in Millions)	Assets		Liabilities		Assets		Liabilities
Pension Plans	$	249	$	—	$	300	$	—
Other Employee Benefit Plans	292		—		309		—
Accelerated Depreciation	—		8,544		—		8,148
Other	278		252		354		234
Total	$	819	$	8,796	$	963	$	8,382
Net Deferred Income Tax Liabilities			$	7,977			$	7,419

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 year 2012. Federal examinations of original federal income tax returns for all years through 2010 are resolved.

As of December 2012, 2011 and 2010, the Company had approximately $24 million, $22 million and $20 million, respectively, of total net unrecognized tax benefits. After consideration of the impact of federal tax benefits, $17 million, $15 million and $15 million in 2012, 2011 and 2010, respectively, could favorably affect the effective income tax rate in each year. The Company estimates that approximately $3 million of the unrecognized tax benefits as of December 2012 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 2012 is reconciled as follows:



Uncertain Tax Positions:	Fiscal Year
(Dollars in Millions)	2012			2011			2010
Balance at beginning of the year	$	22		$	20		$	50
Additions based on tax positions related to current year	6			1			3
Additions based on tax positions related to prior years	3			10			17
Reductions based on tax positions related to prior years	(1		)	(3		)	(41		)
Settlements with taxing authorities	—			(5		)	—
Lapse of statute of limitations	(6		)	(1		)	(9		)
Balance at end of the year	$	24		$	22		$	20

NOTE 11. Income Taxes, continued

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 benefits of $8 million in 2012 and expenses of $1 million and $7 million in 2011 and 2010, respectively, for changes to reserves for interest and penalties for all prior year tax positions. The current year benefit for interest and penalties is 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 $3 million, $11 million and $6 million accrued for interest and penalties at 2012, 2011 and 2010, respectively, for all prior year tax positions.