We are subject to federal income taxes in the United States as well as various state, local, and foreign jurisdictions. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our liabilities for income taxes reflect the most likely outcome. We adjust these liabilities, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position would usually require the use of cash.

The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions include the United States (federal and state) and Canada. The IRS has completed its review of our federal income tax returns for fiscal years 2008 and prior and has proposed adjustments related to the amount of research and development tax credits claimed. We have appealed these proposed adjustments

Various tax examinations by United States state taxing authorities could be conducted for any open tax year, which vary by jurisdiction, but are generally from 3 to 5 years. Currently, several state examinations are in progress. The Canada Revenue Agency (CRA) has completed its review of our income tax returns in Canada for fiscal years 2003 to 2005. The CRA has raised assessments for these years that we are currently appealing. We believe our positions are supported by substantial technical authority and are vigorously defending our positions. We do not anticipate that any United States or Canadian tax adjustments will have a significant impact on our financial position or results of operations.

The components of earnings before income taxes and after-tax earnings from joint ventures and the corresponding income taxes thereon are as follows:

		Fiscal Year
In Millions		2011		2010		2009
Earnings before income taxes and after-tax earnings from joint ventures:
United States	$	2,144.8	$	2,060.4	$	1,717.5
Foreign		283.4		144.1		224.7
Total earnings before income taxes and after-tax earnings from joint ventures	$	2,428.2	$	2,204.5	$	1,942.2
Income taxes:
Currently payable:
Federal	$	370.0	$	616.0	$	457.8
State and local		76.9		87.4		37.3
Foreign		68.9		45.5		9.5
Total current		515.8		748.9		504.6
Deferred:
Federal		178.9		38.5		155.7
State and local		30.8		(4.9)		36.3
Foreign		(4.4)		(11.3)		23.8
Total deferred		205.3		22.3		215.8
Total income taxes	$	721.1	$	771.2	$	720.4

The following table reconciles the United States statutory income tax rate with our effective income tax rate:

	Fiscal Year
	2011		2010		2009
United States statutory rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal tax benefits	2.7		2.5		2.9
Foreign rate differences	(2.0)		(1.8)		(2.3)
Enactment date effect of health care reform	-		1.3		-
Court decisions and audit settlements	(3.7)		-		2.7
Domestic manufacturing deduction	(1.6)		(1.8)		(1.1)
Other, net	(0.7)		(0.2)		(0.1)
Effective income tax rate	29.7	%	35.0	%	37.1	%

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

In Millions		May 29, 2011		May 30, 2010
Accrued liabilities	$	129.5	$	148.5
Compensation and employee benefits		582.9		584.9
Pension liability		74.1		183.8
Tax credit carryforwards		62.0		-
Stock, partnership, and miscellaneous investments		500.6		474.9
Capital losses		92.1		93.1
Net operating losses		140.9		119.9
Other		123.7		150.7
Gross deferred tax assets		1,705.8		1,755.8
Valuation allowance		404.5		392.0
Net deferred tax assets		1,301.3		1,363.8
Brands		1,289.1		1,279.5
Fixed assets		394.6		307.6
Intangible assets		122.3		107.4
Tax lease transactions		63.0		68.7
Inventories		53.0		55.6
Stock, partnership, and miscellaneous investments		424.5		348.2
Unrealized hedges		34.9		11.4
Other		20.0		17.3
Gross deferred tax liabilities		2,401.4		2,195.7
Net deferred tax liability	$	1,100.1	$	831.9

In fiscal 2011, we changed the classification of certain gross deferred tax assets and liabilities to better reflect current components and reclassified the components for fiscal 2010 to conform to the current year presentation.

We have established a valuation allowance against certain of the categories of deferred tax assets described above as current evidence does not suggest we will realize sufficient taxable income of the appropriate character (e.g., ordinary income versus capital gain income) within the carry forward period to allow us to realize these deferred tax benefits.

Of the total valuation allowance of $404.5 million, $168.2 million relates to a deferred tax asset for losses recorded as part of the Pillsbury acquisition. Of the remaining valuation allowance, $92.1 million relates to capital loss carryforwards and $140.9 million relates to state and foreign operating loss carryforwards. We have approximately $60.2 million of U.S. foreign tax credit carryforwards for which no valuation allowance has been recorded. As of May 29, 2011, we believe it is more likely than not that the remainder of our deferred tax assets are realizable.

The carryforward periods on our foreign loss carryforwards are as follows: $102.0 million do not expire; $8.9 million expire in fiscal 2012 and 2013; and $18.3 million expire in fiscal 2014 and beyond.

We have not recognized a deferred tax liability for unremitted earnings of $2.4 billion from our foreign operations because our subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings will be remitted in a tax-free transaction. It is not practicable for us to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings. Deferred taxes are recorded for earnings of our foreign operations when we determine that such earnings are no longer indefinitely reinvested.

During fiscal 2011, we reached a settlement with the IRS concerning certain corporate income tax adjustments for fiscal years 2002 to 2008. The adjustments primarily relate to the amount of capital loss, depreciation, and amortization we reported as a result of the sale of noncontrolling interests in our GMC subsidiary. As a result, we recorded a $108.1 million reduction in our total liabilities for uncertain tax positions in fiscal 2011. We made payments totaling $385.3 million in fiscal 2011 related to this settlement. In addition, we made a payment of $17.6 million in fiscal 2009 related to adjustments made in connection with IRS audits of fiscal years 2004 to 2006.

During 2011, the Superior Court of the State of California issued an adverse decision concerning our state income tax apportionment calculations. As a result, we recorded an $11.5 million increase in our total liabilities for uncertain tax positions. We believe our positions are supported by substantial technical authority and have appealed this decision. We do not expect to make a payment related to this matter until it is definitively resolved.

In fiscal 2009, the U.S. Court of Appeals for the Eighth Circuit issued an opinion reversing a district court decision rendered in fiscal 2008. As a result, we recorded $52.6 million (including interest) of income tax expense in fiscal 2009 related to the reversal of cumulative income tax benefits from this uncertain tax matter recognized in fiscal years 1992 through 2008. All outstanding liabilities associated with this matter were paid during fiscal 201

We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly we recognize the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. Future changes in judgment related to the expected ultimate resolution of uncertain tax positions will affect earnings in the quarter of such change.

The following table sets forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for fiscal 2011. Approximately $152 million of this total represents the amount that, if recognized, would affect our effective income tax rate in future periods. This amount differs from the gross unrecognized tax benefits presented in the table because certain of the liabilities below would impact deferred taxes if recognized or are the result of stock compensation items impacting additional paid-in capital. We also would record a decrease in U.S. federal income taxes upon recognition of the state tax benefits included therein.

	Fiscal Year
In Millions		2011		2010
Balance, beginning of year	$	552.9	$	570.1
Tax positions related to current year:
Additions		25.0		19.7
Tax positions related to prior years:
Additions		75.6		7.1
Reductions		(131.2)		(37.6)
Settlements		(287.9)		(1.9)
Lapses in statutes of limitations		(8.2)		(4.5)
Balance, end of year	$	226.2	$	552.9

As of May 29, 2011, we do not expect to pay any unrecognized tax benefit liabilities within the next 12 months. We are not able to reasonably estimate the timing of future cash flows beyond 12 months due to uncertainties in the timing of tax audit outcomes. The remaining amount of our unrecognized tax liability was classified in other liabilities.

We report accrued interest and penalties related to unrecognized tax benefit liabilities in income tax expense. For fiscal 2011, we recognized a net benefit of $10.5 million associated with tax-related net interest and penalties, and had $53.4 million of accrued interest and penalties as of May 29, 2011. For fiscal 2010, we recognized a net $16.2 million of tax-related interest and penalties, and had $174.8 million of accrued interest and penalties as of May 30, 2010.