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,
	2016		2015		2014
Domestic	$	420,546	$	530,268	$	789,689
Foreign	268,786		270,342		304,518
Total	$	689,332	$	800,610	$	1,094,207

Income tax expense (benefit) relating to continuing operations for the years ended December 31, 2016, 2015 and 2014 is comprised of the following:



	Years Ended December 31,
	2016			2015			2014
Current:
U.S. federal	$	139,117		$	115,130		$	231,939
State and local	21,213			11,706			8,434
Foreign	85,273			79,982			97,037
Total current	245,603			206,818			337,410
Deferred:
U.S. federal	(14,438		)	19,238			7,386
State and local	(1,232		)	(3,433		)	11,250
Foreign	(49,493		)	(17,894		)	(39,979		)
Total deferred	(65,163		)	(2,089		)	(21,343		)
Total expense	$	180,440		$	204,729		$	316,067

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



	Years Ended December 31,
	2016		2015		2014
U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal income tax benefit	1.9		1.6		1.3
Foreign operations tax effect	(7.1	)	(4.3	)	(3.7	)
Research and experimentation tax credits	(0.6	)	(0.4	)	(0.3	)
Domestic manufacturing deduction	(2.2	)	(3.0	)	(3.0	)
Foreign tax credits	(0.1	)	(2.4	)	0.4
Branch income (losses)	0.3		(0.2	)	(0.7	)
Release of valuation allowance	—		—		(0.6	)
Other	(1.0	)	(0.7	)	0.5
Effective tax rate from continuing operations	26.2	%	25.6	%	28.9	%

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



	December 31, 2016			December 31, 2015
Deferred Tax Assets:
Accrued compensation, principally postretirement and other employee benefits	$	121,909		$	133,000
Accrued expenses, principally for state income taxes, interest and warranty	40,256			42,213
Net operating loss and other carryforwards	325,721			210,396
Inventories, principally due to reserves for financial reporting purposes and capitalization for tax purposes	15,730			12,329
Accounts receivable, principally due to allowance for doubtful accounts	8,337			4,937
Accrued insurance	6,483			4,365
Long-term liabilities, principally warranty, environmental and exit cost	5,273			4,509
Other assets	(18,872		)	(36,576		)
Total gross deferred tax assets	504,837			375,173
Valuation allowance	(289,642		)	(171,365		)
Total deferred tax assets, net of valuation allowances	215,195			203,808
Deferred Tax Liabilities:
Intangible assets, principally due to different tax and financial reporting bases and amortization lives	(814,242		)	(699,876		)
Property, plant and equipment, principally due to differences in depreciation	(74,713		)	(56,872		)
Accounts receivable	(10,086		)	(8,236		)
Total gross deferred tax liabilities	(899,041		)	(764,984		)
Net deferred tax liability	$	(683,846	)	$	(561,176	)

Classified as follows in the Consolidated Balance Sheets:
Other assets and deferred charges	$	26,327		$	14,533
Deferred income taxes	(710,173		)	(575,709		)
	$	(683,846	)	$	(561,176	)

As of December 31, 2016, the Company had non-U.S loss carryforwards of $1,198 million primarily resulting from restructuring undertaken to effect the Knowles spin-off and non-operating activities. The entire balance of the non-U.S. losses as of December 31, 2016 is available to be carried forward, with $187 million of these losses beginning to expire during the years 2017 through 2036. The remaining $1,011 million of such losses can be carried forward indefinitely.

The Company has $84.2 million and $104.8 million of state tax loss carryforwards as of December 31, 2016 and 2015, respectively, that are available for use by the Company between 2017 and 2036.

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 $1.3 billion at December 31, 2016, 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., federal, 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 $18.9 million. 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 2009. 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, 2014	$	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				10,722				66,088
Additions based on tax positions related to the current year	7,929				—				7,929
Additions for tax positions of prior years	9,076				—				9,076
Reductions for tax positions of prior years	(3,067		)		—				(3,067		)
Settlements	(3,106		)		—				(3,106		)
Lapse of statutes	(6,605		)		—				(6,605		)
Unrecognized tax benefits at December 31, 2016	$	59,593		⁽²⁾	$	10,722		⁽³⁾	$	70,315


⁽¹⁾	The settlement of certain income tax examinations of 2011 and 2012 tax years (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 $55.3 million. During the years ended December 31, 2016, 2015 and 2014, the Company recorded expense (income) of $0.7 million, $(4.3) million and $(1.3) million, respectively, as a component of provision for income taxes related to the accrued interest and penalties on unrecognized tax benefits. The Company had accrued interest and penalties of $14.6 million at December 31, 2016 and $13.9 million at December 31, 2015, 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 continuing operations.