INCOME TAXES

12 Months Ended

May 31, 2020

INCOME TAXES [Abstract]

INCOME TAXES

NOTE 15. INCOME TAXESThe 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		2020		2019		2018
Earnings before income taxes and after-tax earnings from joint ventures:
United States	$	2,402.1	$	1,788.2	$	1,884.0
Foreign		198.1		293.8		251.6
Total earnings before income taxes and after-tax earnings from joint ventures	$	2,600.2	$	2,082.0	$	2,135.6
Income taxes:
Currently payable:
Federal	$	381.0	$	151.9	$	441.2
State and local		55.3		35.3		35.2
Foreign		73.8		84.6		85.2
Total current		510.1		271.8		561.6
Deferred:
Federal		67.8		86.7		(478.5)
State and local		(56.6)		21.6		15.7
Foreign		(40.8)		(12.3)		(41.5)
Total deferred		(29.6)		96.0		(504.3)
Total income taxes	$	480.5	$	367.8	$	57.3

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

	Fiscal Year
	2020		2019		2018
United States statutory rate	21.0	%	21.0	%	29.4	%
State and local income taxes, net of federal tax benefits	2.0		2.5		1.7
Foreign rate differences	(0.8)		-		(2.0)
Provisional net tax benefit	-		(0.4)		(24.5)
Stock based compensation	(1.1)		(1.2)		(1.2)
Subsidiary reorganization (a)	(2.0)		-		-
Capital loss (b)	-		(3.7)		-
Prior period tax adjustment	-		-		1.9
Domestic manufacturing deduction	-		-		(1.9)
Other, net	(0.6)		(0.5)		(0.7)
Effective income tax rate	18.5	%	17.7	%	2.7	%

During fiscal 2020, we recorded a $53.1 million decrease to our deferred income tax liabilities associated with the reorganization of certain wholly owned subsidiaries.During fiscal 2019, we recorded a discrete benefit related to a capital loss carryback of $72.9 million.The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:

In Millions		May 31, 2020		May 26, 2019
Accrued liabilities	$	61.8	$	50.9
Compensation and employee benefits		171.4		196.6
Pension		148.2		103.2
Tax credit carryforwards		12.5		7.3
Stock, partnership, and miscellaneous investments		80.2		104.2
Capital losses		65.9		73.1
Net operating losses		146.6		141.7
Other		87.0		71.3
Gross deferred tax assets		773.6		748.3
Valuation allowance		214.2		213.7
Net deferred tax assets		559.4		534.6
Brands		1,415.0		1,472.6
Fixed assets		378.3		377.8
Intangible assets		246.8		259.7
Tax lease transactions		21.5		23.9
Inventories		33.0		39.0
Stock, partnership, and miscellaneous investments		338.1		330.0
Unrealized hedges		22.4		27.9
Other		51.4		34.7
Gross deferred tax liabilities		2,506.5		2,565.6
Net deferred tax liability	$	1,947.1	$	2,031.0

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 carryforward period to allow us to realize these deferred tax benefits.

Information about our valuation allowance follows:

In Millions		May 31, 2020
Pillsbury acquisition losses	$	108.3
State and foreign loss carryforwards		28.2
Capital loss carryforwards		65.8
Other		11.9
Total	$	214.2

As of May 31, 2020, we believe it is more-likely-than-not that the remainder of our deferred tax assets are realizable.

Information about our tax loss carryforwards follows:

In Millions		May 31, 2020
Foreign loss carryforwards	$	143.5
State operating loss carryforwards		12.1
Total tax loss carryforwards	$	155.6

Our foreign loss carryforwards expire as follows:

In Millions		May 31, 2020
Expire in fiscal 2021 and 2022	$	3.7
Expire in fiscal 2023 and beyond		20.8
Do not expire		119.0
Total foreign loss carryforwards	$	143.5

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments and estimated income tax payments that we expect to defer to future periods. We expect the deferral of certain payroll tax payments to continue into fiscal 2021. We do not currently expect the CARES Act to have a material impact on our financial results, including on our annual estimated effective tax rate or on our liquidity. We will continue to monitor and assess the impact the CARES Act and similar legislation in other countries may have on our business and financial results.

On December 22, 2017, the TCJA was signed into law. The TCJA resulted in significant revisions to the U.S. corporate income tax system, including a reduction in the U.S. corporate income tax rate, implementation of a territorial system, and a one-time deemed repatriation tax on untaxed foreign earnings. As a result of the TCJA, we recorded a provisional benefit of $523.5 million during fiscal 2018. During fiscal 2019, we completed our accounting for the tax effects of the TCJA and recorded a benefit of $7.2 million which included adjustments to the transition tax and the measurement of our net U.S. deferred tax liability. While our accounting for the recorded impact of the TCJA is deemed to be complete, these amounts were based on prevailing regulations and currently available information, and any additional guidance issued by the Internal Revenue Service (IRS) could impact the aforementioned amounts in future periods.

The legislation also included provisions that affected our fiscal 2019 and forward results, including but not limited to: a reduction in the U.S. corporate tax rate on domestic operations; the creation of a new minimum tax called the base erosion anti-abuse tax; a new provision that taxes U.S. allocated expenses as well as currently taxes certain income from foreign operations (Global Intangible Low Tax Income or GILTI); a new limitation on deductible interest expense; the repeal of the domestic manufacturing deduction; and limitations on the deductibility of certain executive compensation.

As of May 31, 2020, we have not recognized a deferred tax liability for unremitted earnings of approximately $2.3 billion from our foreign operations because we currently believe our subsidiaries have invested the undistributed earnings indefinitely or the earnings will be remitted in a tax-neutral transaction. It is not practicable for us to determine the amount of unrecognized tax expense on these reinvested earnings. Deferred taxes are recorded for earnings of our foreign operations when we determine that such earnings are no longer indefinitely reinvested. As a result of the TCJA, we re-evaluated our assertion and have concluded that although earnings prior to fiscal 2018 will remain permanently reinvested, we will no longer make a permanent reinvestment assertion beginning with our fiscal 2018 earnings. As part of the accounting for the TCJA, we recorded local country withholding taxes related to certain entities from which we began repatriating undistributed earnings and will continue to record local country withholding taxes on all future earnings.

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 jurisdiction is the United States (federal and state). 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.

Several state and foreign examinations are currently in progress. We do not expect these examinations to result in a material impact on our results of operations or financial position. We have effectively settled all issues with the IRS for fiscal years 2015 and prior.

During fiscal 2017, the Brazilian tax authority, Secretaria da Receita Federal do Brasil (RFB), concluded audits of our 2012 and 2013 tax return years. These audits included a review of our determinations of amortization of certain goodwill arising from the acquisition of Yoki Alimentos S.A. The RFB has proposed adjustments that effectively eliminate the goodwill amortization benefits related to this transaction. During fiscal 2020, we received proposed adjustments related to the goodwill amortization benefits for our 2014 and 2015 tax return years. We believe we have meritorious defenses and intend to contest the disallowance.

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 period of such change.

The following table sets forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for fiscal 2020 and fiscal 2019. Approximately $79.3 million of this total in fiscal 2020 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. 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		2020		2019
Balance, beginning of year	$	139.1	$	196.3
Tax positions related to current year:
Additions		18.7		19.5
Reductions		-		(0.1)
Tax positions related to prior years:
Additions		2.3		3.8
Reductions		(6.0)		(13.2)
Settlements		(2.9)		(41.0)
Lapses in statutes of limitations		(3.3)		(26.2)
Balance, end of year	$	147.9	$	139.1

As of May 31, 2020, we expect to pay approximately $0.1 million of unrecognized tax benefit liabilities and accrued interest 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 2020, we recognized $3.2 million of tax-related net interest and penalties, and had $27.9 million of accrued interest and penalties as of May 31, 2020. For fiscal 2019, we recognized $0.5 million of tax-related net interest and penalties, and had $26.0 million of accrued interest and penalties as of May 26, 2019.