Income Taxes

Earnings before income taxes of $2.9 billion, $3.0 billion and $2.9 billion for fiscal years 2013, 2012 and 2011, respectively, represent earnings from domestic operations.

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



	Fiscal Years
(Dollars in Millions)	2013		2012 ^(a)		2011 ^(a)
Current:
Federal	$	671	$	450	$	370
State	87		66		107
Subtotal Current	758		516		477

Deferred:
Federal	285		530		614
State	15		62		(5		)
Subtotal Deferred	300		592		609
Total	$	1,058	$	1,108	$	1,086

(a) See the revision of prior period financial statements in Note 1. Nature of Operations and Significant Accounting Policies.

Income tax expense reconciled to the tax computed at statutory rates is presented in the table below. The Company recorded a tax benefit of $42 million, $20 million and $14 million in 2013, 2012 and 2011, respectively, primarily as a result of federal and state legislative changes as well as the resolution of other federal and state tax matters. Each year's benefit is included in the state income tax and other lines in the table below.



	Fiscal Years
(Dollars In Millions)	2013					2012 ^(a)					2011 ^(a)

Federal Income Taxes	$	1,023		35.0	%	$	1,040		35.0	%	$	1,029		34.9	%
State Income Taxes	65			2.2	%	81			2.8	%	65			2.2	%
Other	(30		)	(1.0	)%	(13		)	(0.4	)%	(8		)	(0.3	)%
Income Tax Expense/Rate	$	1,058		36.2	%	$	1,108		37.4	%	$	1,086		36.8	%

(a) See the revision of prior period financial statements in Note 1. Nature of Operations and Significant Accounting Policies.

In September 2013, the Internal Revenue Service issued final regulations governing the income tax treatment of the acquisition, disposition and repair of tangible property. The regulations are effective beginning in 2014. The Company does not expect these new regulations to have a material impact on the financial statements.

NOTE 11. Income Taxes, continued

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



	2013				2012
(Dollars in Millions)	Assets		Liabilities		Assets		Liabilities
Pension Plans	$	67	$	—	$	249	$	—
Other Employee Benefit Plans	299		—		292		—
Accelerated Depreciation	—		8,868		—		8,544
Other	257		262		278		252
Total	$	623	$	9,130	$	819	$	8,796
Net Deferred Income Tax Liabilities			$	8,507			$	7,977

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.

The Company files a consolidated federal income tax return, which includes its principal domestic subsidiaries. Income tax incurred on the operations of 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 2013. Federal examinations of original federal income tax returns for all years through 2011 are resolved.

As of December 2013, 2012 and 2011, the Company had approximately $23 million, $24 million and $22 million, respectively, of total net unrecognized tax benefits. After consideration of the impact of federal tax benefits, $15 million, $17 million and $15 million in 2013, 2012 and 2011, 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 2013 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 2013 is reconciled as follows:



Uncertain Tax Positions:	Fiscal Year
(Dollars in Millions)	2013			2012			2011
Balance at beginning of the year	$	24		$	22		$	20
Additions based on tax positions related to current year	2			6			1
Additions based on tax positions related to prior years	5			3			10
Reductions based on tax positions related to prior years	(6		)	(1		)	(3		)
Settlements with taxing authorities	—			—			(5		)
Lapse of statute of limitations	(2		)	(6		)	(1		)
Balance at end of the year	$	23		$	24		$	22

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 $1 million and $8 million in 2013 and 2012, respectively, and expense of $1 million in 2011 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 $2 million, $3 million and $11 million accrued for interest and penalties at 2013, 2012 and 2011, respectively, for all prior year tax positions.