Income Taxes

Earnings before income taxes of $2.7 billion, $3.1 billion and $3.0 billion for fiscal years 2016, 2015 and 2014, respectively, represent earnings from domestic operations. The breakdown of income tax expense between current and deferred is as follows:



	Fiscal Years
(Dollars in Millions)	2016		2015		2014
Current:
Federal	$	540	$	619	$	729
State	82		95		90
Subtotal Current	622		714		819

Deferred:
Federal	355		414		291
State	50		42		7
Subtotal Deferred	405		456		298
Total	$	1,027	$	1,170	$	1,117

NOTE 11. Income Taxes, continued

Income tax expense reconciled to the tax computed at statutory rates is presented in the table below. In 2016, the Company recorded an income tax expense adjustment of $10 million as a result of a change in the apportionment of state income taxes and the related impact on the valuation of deferred taxes. The Company recorded a tax benefit of $7 million, $4 million and $31 million in 2016, 2015 and 2014, 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)	2016					2015					2014

Federal Income Taxes	$	959		35.0	%	$	1,098		35.0	%	$	1,066		35.0	%
State Income Taxes	83			3.0	%	86			2.7	%	61			2.0	%
Other	(15		)	(0.5	)%	(14		)	(0.4	)%	(10		)	(0.3	)%
Income Tax Expense/Rate	$	1,027		37.5	%	$	1,170		37.3	%	$	1,117		36.7	%

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.

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



	2016				2015
(Dollars in Millions)	Assets		Liabilities		Assets		Liabilities
Pension Plans	$	125	$	—	$	207	$	—
Other Employee Benefit Plans	272		—		258		—
Accelerated Depreciation	—		9,925		—		9,614
Other	225		293		261		291
Total	$	622	$	10,218	$	726	$	9,905
Net Deferred Income Tax Liabilities			$	9,596			$	9,179

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. 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 IRS audit of tax year 2016. Federal examinations of original federal income tax returns for all years through 2015 are resolved.

NOTE 11. Income Taxes, continued

As of December 2016, 2015 and 2014, the Company had approximately $25 million, $23 million and $21 million, respectively, of total unrecognized tax benefits. Net tax benefits of $16 million, $15 million and $13 million in 2016, 2015 and 2014, respectively, could favorably impact the effective income tax rate in each year. The Company does not expect that unrecognized tax benefits as of December 2016 for various state and federal income tax matters will significantly change over the next 12 months. 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 2016 is reconciled in the table below.



Uncertain Tax Positions:	Fiscal Year
(Dollars in Millions)	2016			2015			2014
Balance at beginning of the year	$	23		$	21		$	23
Additions based on tax positions related to current year	1			1			2
Additions based on tax positions related to prior years	4			4			3
Reductions based on tax positions related to prior years	—			—			—
Settlements with taxing authorities	—			1			—
Lapse of statute of limitations	(3		)	(4		)	(7		)
Balance at end of the year	$	25		$	23		$	21

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 expenses of $2 million in 2016, $2 million in 2015 and $1 million in 2014, respectively, for changes to reserves for interest and penalties for all prior year tax positions. The Company had $6 million, $4 million and $1 million accrued for interest and penalties at 2016, 2015 and 2014, respectively, for all prior year tax positions.