11. Income Taxes

Income taxes have been based on the following components of “Earnings before provision for income taxes and discontinued operations” in the Consolidated Statements of Earnings:



	Years Ended December 31,
	2015		2014		2013
Domestic	$	530,268	$	789,689	$	714,723
Foreign	270,342		304,518		331,263
	$	800,610	$	1,094,207	$	1,045,986

Income tax expense (benefit) relating to continuing operations for the years ended December 31, 2015, 2014, and 2013 is comprised of the following:



	Years Ended December 31,
	2015			2014			2013
Current:
U.S. Federal	$	115,130		$	231,939		$	114,218
State and local	11,706			8,434			17,468
Foreign	79,982			97,037			89,702
Total current	206,818			337,410			221,388
Deferred:
U.S. Federal	$	19,238		$	7,386		$	35,315
State and local	(3,433		)	11,250			(4,556		)
Foreign	(17,894		)	(39,979		)	(3,688		)
Total deferred	(2,089		)	(21,343		)	27,071
Total expense	$	204,729		$	316,067		$	248,459

Differences between the effective income tax rate and the U.S. federal income statutory rate are as follows:



	Years Ended December 31,
	2015		2014		2013
U.S. Federal income tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of Federal income tax benefit	1.6		1.3		1.2
Foreign operations tax effect	(4.3	)	(3.7	)	(3.3	)
Research & experimentation tax credits ⁽¹⁾	(0.4	)	(0.3	)	(0.7	)
Domestic manufacturing deduction	(3.0	)	(3.0	)	(2.2	)
Foreign tax credits	(2.4	)	0.4		0.3
Branch losses	(0.2	)	(0.7	)	(0.2	)
Release of valuation allowance	—		(0.6	)	—
Resolution of tax contingencies	(1.8	)	(0.5	)	(7.2	)
Other, principally non-tax deductible items	1.1		1.0		0.9
Effective rate from continuing operations	25.6	%	28.9	%	23.8	%


⁽¹⁾	On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, and this legislation retroactively extended the R&E tax credit for two years, from January 1, 2012 through December 31, 2013. Income tax expense for 2013 includes $4.8 million for the entire benefit of the R&E tax credit attributable to 2012.

The tax effects of temporary differences that give rise to future deferred tax assets and liabilities are as follows:



	December 31, 2015			December 31, 2014
Deferred Tax Assets:
Accrued compensation, principally postretirement and other employee benefits	$	133,000		$	151,640
Accrued expenses, principally for state income taxes, interest, and warranty	42,213			45,262
Net operating loss and other carryforwards	210,396			190,298
Inventories, principally due to reserves for financial reporting purposes and capitalization for tax purposes	12,329			13,285
Accounts receivable, principally due to allowance for doubtful accounts	4,937			4,323
Accrued insurance	4,365			5,529
Long-term liabilities, principally warranty, environmental, and exit costs	4,509			4,096
Other assets	(36,576		)	(26,793		)
Total gross deferred tax assets	375,173			387,640
Valuation allowance	(171,365		)	(141,252		)
Total deferred tax assets	$	203,808		$	246,388

Deferred Tax Liabilities:
Intangible assets, principally due to different tax and financial reporting bases and amortization lives	$	(699,876	)	$	(676,647	)
Plant and equipment, principally due to differences in depreciation	(56,872		)	(55,012		)
Accounts receivable	(8,236		)	(6,481		)
Total gross deferred tax liabilities	(764,984		)	(738,140		)
Net deferred tax liability	$	(561,176	)	$	(491,752	)

Classified as follows in the consolidated balance sheets:
Non-current deferred tax asset	14,533			12,866
Non-current deferred tax liability	(575,709		)	(504,618		)
	$	(561,176	)	$	(491,752	)

As of December 31, 2015, the Company has loss carryforwards for U.S. Federal purposes totaling approximately $28.1 million attributed to the 2011 Anthony acquisition, and loss carryforwards for non-U.S. purposes totaling $625.8 million primarily resulting from restructuring undertaken to effect the Knowles spin-off. As of December 31, 2014, the Company had non-U.S loss carryforwards of $519.4 million. The federal loss carryforwards are available for use against the Company's consolidated federal taxable income and begin to expire in 2024. The entire balance of the non-U.S. losses as of December 31, 2015 is available to be carried forward, with $22.6 million of these losses beginning to expire during the years 2016 through 2035. The remaining $603.2 million of such losses can be carried forward indefinitely.

The Company has $104.8 million and $109.2 million of state tax loss carryforwards as of December 31, 2015 and 2014, respectively, that are available for use by the Company between 2016 and 2035.

As of December 31, 2015 and 2014, the Company has research and development credit carryforwards for U.S. Federal purposes of $0.8 million attributable to the 2011 Anthony acquisition. The research and development credits begin to expire in 2025.

The Company maintains valuation allowances by jurisdiction against the deferred tax assets related to certain of these carryforwards as utilization of these tax benefits is not assured for certain jurisdictions.

The Company has not provided for U.S. federal income taxes or tax benefits on the undistributed earnings of its international subsidiaries, totaling approximately $1.1 billion at December 31, 2015, because such earnings are reinvested and it is currently intended that they will continue to be reinvested indefinitely. It is not practicable to estimate the amount of tax that might be payable if some or all of such earnings were to be repatriated, and the amount of foreign tax credits that would be available to reduce or eliminate the resulting U.S. income tax liability.

Unrecognized Tax Benefits

The Company files U.S., state, local, and foreign tax returns. The Company is routinely audited by the tax authorities in these jurisdictions, and a number of audits are currently underway. It is reasonably possible during the next twelve months that uncertain tax positions may be settled, which could result in a decrease in the gross amount of unrecognized tax benefits. This decrease may result in an income tax benefit. Due to the potential for resolution of federal, state, and foreign examinations, and the expiration of various statutes of limitation, the Company's gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $18 million. Some portion of any such change may be reported as discontinued operations. The Company is no longer subject to examinations of its federal income tax returns for years through 2012. All significant state, local, and international matters have been concluded for years through 2008. The Company believes adequate provision has been made for all income tax uncertainties.

The following table is a reconciliation of the beginning and ending balances of the Company’s unrecognized tax benefits:



	Continuing				Discontinued				Total
Unrecognized tax benefits at January 1, 2013	$	121,864			$	54,225			$	176,089
Additions based on tax positions related to the current year	9,056				1				9,057
Additions for tax positions of prior years	7,584				3,315				10,899
Reductions for tax positions of prior years ⁽¹⁾	(62,610		)		(40,240		)		(102,850		)
Settlements	(2,823		)		(2,523		)		(5,346		)
Lapse of statutes	(7,845		)		(1,564		)		(9,409		)
Unrecognized tax benefits at December 31, 2013	65,226				13,214				78,440
Additions based on tax positions related to the current year	11,751				14				11,765
Additions for tax positions of prior years	1,065				499				1,564
Reductions for tax positions of prior years	(5,782		)		(265		)		(6,047		)
Settlements	(843		)		(155		)		(998		)
Lapse of statutes	(5,050		)		(2,585		)		(7,635		)
Unrecognized tax benefits at December 31, 2014	66,367				10,722				77,089
Additions based on tax positions related to the current year	17,131				—				17,131
Additions for tax positions of prior years	2,900				—				2,900
Reductions for tax positions of prior years ⁽¹⁾	(17,135		)		—				(17,135		)
Settlements	(1,153		)		—				(1,153		)
Lapse of statutes	(12,744		)		—				(12,744		)
Unrecognized tax benefits at December 31, 2015	$	55,366		⁽²⁾	$	10,722		⁽³⁾	$	66,088


⁽¹⁾	The settlement of certain income tax examinations of the 2009 and 2010 tax years (in the year ended December 31, 2013) and 2011 and 2012 (in the year ended December 31, 2015) resulted in a significant decrease in unrecognized tax benefits.

⁽²⁾

If recognized, the net amount of potential tax benefits that would impact the Company’s effective tax rate is $50.3 million. During the years ended December 31, 2015, 2014, and 2013, the Company recorded income of $4.3 million, $1.3 million and $5.5 million, respectively, as a component of provision for income taxes related to the reversal of previously accrued interest and penalties on unrecognized tax benefits. The Company had accrued interest and penalties of $13.9 million at December 31, 2015 and $15.5 million at December 31, 2014, which are not included in the above table.


⁽³⁾	The Company had recorded $10.7 million of unrecognized tax benefits related to operations previously classified as Discontinued Operations. Upon disposal of the Discontinued Operations, these unrecognized tax benefits were transferred to Continuing Operations. If recognized, the potential tax benefits will be recorded in Discontinued Operations.