Income Taxes

Earnings before income taxes of $3.0 billion, $2.9 billion and $3.0 billion for fiscal years 2014, 2013 and 2012, respectively, represent earnings from domestic operations. The breakdown of income tax expense between current and deferred is as follows:



	Fiscal Years
(Dollars in Millions)	2014		2013		2012
Current:
Federal	$	729	$	671	$	450
State	90		87		66
Subtotal Current	819		758		516

Deferred:
Federal	291		285		530
State	7		15		62
Subtotal Deferred	298		300		592
Total	$	1,117	$	1,058	$	1,108

Income tax expense reconciled to the tax computed at statutory rates is presented in the table below. The Company recorded a tax benefit of $31 million, $42 million and $20 million in 2014, 2013 and 2012, 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)	2014					2013					2012

Federal Income Taxes	$	1,066		35.0	%	$	1,023		35.0	%	$	1,040		35.0	%
State Income Taxes	61			2.0	%	65			2.2	%	81			2.8	%
Other	(10		)	(0.3	)%	(30		)	(1.0	)%	(13		)	(0.4	)%
Income Tax Expense/Rate	$	1,117		36.7	%	$	1,058		36.2	%	$	1,108		37.4	%

In September 2013, the IRS issued final regulations governing the income tax treatment of the acquisition, disposition and repair of tangible property. The regulations were effective beginning in 2014. These new regulations did not have a material impact on the financial statements.

NOTE 11. Income Taxes, continued

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



	2014				2013
(Dollars in Millions)	Assets		Liabilities		Assets		Liabilities
Pension Plans	$	188	$	—	$	67	$	—
Other Employee Benefit Plans	306		—		299		—
Accelerated Depreciation	—		9,133		—		8,868
Other	256		334		257		262
Total	$	750	$	9,467	$	623	$	9,130
Net Deferred Income Tax Liabilities			$	8,717			$	8,507

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 the Company are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. CSX participated in a contemporaneous IRS audit of tax year 2014. Federal examinations of original federal income tax returns for all years through 2013 are resolved.

As of December 2014, 2013 and 2012, the Company had approximately $21 million, $23 million and $24 million, respectively, of total unrecognized tax benefits. After consideration of the impact of federal tax benefits, $13 million, $15 million and $17 million in 2014, 2013 and 2012, respectively, could favorably affect the effective income tax rate in each year. The Company estimates that approximately $2 million of the unrecognized tax benefits as of December 2014 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 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 2014 is reconciled as follows:



Uncertain Tax Positions:	Fiscal Year
(Dollars in Millions)	2014			2013			2012
Balance at beginning of the year	$	23		$	24		$	22
Additions based on tax positions related to current year	2			2			6
Additions based on tax positions related to prior years	3			5			3
Reductions based on tax positions related to prior years	—			(6		)	(1		)
Settlements with taxing authorities	—			—			—
Lapse of statute of limitations	(7		)	(2		)	(6		)
Balance at end of the year	$	21		$	23		$	24

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 expense of $1 million in 2014 and benefits of $1 million and $8 million in 2013 and 2012, respectively, for changes to reserves for interest and penalties for all prior year tax positions. The current year expense for interest and penalties is due to state tax settlements of prior period tax audits where the Company had previously accrued a liability for interest and penalties. The Company had $1 million, $2 million and $3 million accrued for interest and penalties at 2014, 2013 and 2012, respectively, for all prior year tax positions.