Income Taxes

The components of Income before Income Taxes follow:



(In millions)	2014		2013		2012
U.S.	$	400	$	396	$	146
Foreign	287		417		294
	$	687	$	813	$	440

A reconciliation of income taxes at the U.S. statutory rate to United States and Foreign Tax (Benefit) Expense follows:



(In millions)	2014			2013			2012
U.S. Federal income tax expense (benefit) at the statutory rate of 35%	$	240		$	284		$	154
Release of U.S. valuation allowance	(2,318		)	—			—
Provision for undistributed foreign earnings	131			—			—
Net establishment (release) of foreign valuation allowances	51			(8		)	4
Deferred tax impact of enacted tax rate and law changes	33			(13		)	2
Net foreign losses with no tax benefit due to valuation allowances	49			42			83
Adjustment for foreign income taxed at different rates	(37		)	(2		)	(6		)
State income taxes, net of U.S. Federal benefit	12			—			—
Net (resolution) establishment of uncertain tax positions	3			10			10
U.S. (income) with no tax due to valuation allowance	—			(136		)	(49		)
Poland special enterprise zone tax credit	—			(42		)	—
Other	2			3			5
United States and Foreign Tax (Benefit) Expense	$	(1,834	)	$	138		$	203

The components of United States and Foreign Tax (Benefit) Expense by taxing jurisdiction, follow:



(In millions)	2014			2013			2012
Current:
Federal	$	—		$	(6	)	$	—
Foreign	135			176			184
State	1			2			3
	136			172			187
Deferred:
Federal	(2,103		)	2			2
Foreign	84			(36		)	13
State	49			—			1
	(1,970		)	(34		)	16
United States and Foreign Tax (Benefit) Expense	$	(1,834	)	$	138		$	203

At December 31, 2014, our U.S. operations were in a position of cumulative profits for the most recent three-year period. We concluded that as a consequence of our three-year cumulative profits, achieving full year profitability in 2013 and 2014, our successful completion of labor negotiations with the United Steelworkers in 2013, our full funding of our U.S. pension plans during 2013 and 2014, and our business plan for 2015 and beyond showing continued profitability, that it is more likely than not that a significant portion of our U.S. deferred tax assets will be realized. In 2014, income tax benefit of $1,834 million was favorably impacted by net discrete tax adjustments of $1,980 million, due primarily to a net tax benefit of $2,179 million from the December 31, 2014 release of substantially all of the valuation allowance on our net U.S. deferred tax assets and a charge of $131 million to establish a provision for potential U.S. Federal taxation of certain undistributed earnings of certain foreign subsidiaries. The 2014 income tax benefit also included charges of $37 million to establish valuation allowances on the net deferred tax assets of our Venezuelan and Brazilian subsidiaries, due to continuing operating losses and currency devaluations in Venezuela, a charge of $9 million to establish a valuation allowance on the net deferred tax assets of a Luxembourg subsidiary and a charge of $11 million due to a recently enacted law change in Chile.

In 2013, income tax expense included net tax benefits of $43 million unrelated to current year income, due primarily to a $33 million benefit from a Poland special enterprise zone tax credit and a $13 million benefit related to enacted law changes.

In 2012, income tax expense included net tax charges of $19 million unrelated to current year income, primarily consisting of $10 million of increased tax reserves for prior years. The additional $9 million relates to various other discrete items.

Temporary differences and carryforwards giving rise to deferred tax assets and liabilities at December 31 follow:



(In millions)	2014			2013
Tax loss carryforwards and credits	$	1,550		$	1,275
Capitalized research and development expenditures	622			606
Accrued expenses deductible as paid	583			603
Postretirement benefits and pensions	388			755
Alternative minimum tax credit carryforwards(1)	85			91
Rationalizations and other provisions	49			69
Vacation and sick pay	36			38
Other	100			80
	3,413			3,517
Valuation allowance	(632		)	(2,968		)
Total deferred tax assets	2,781			549
Property basis differences	(448		)	(430		)
Tax on undistributed earnings of subsidiaries	(170		)	(51		)
Total net deferred tax assets	$	2,163		$	68

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(1)	Primarily unlimited carryforward period.

At December 31, 2014, we had $508 million of tax assets for net operating loss, capital loss and tax credit carryforwards related to certain foreign subsidiaries. These carryforwards are primarily from countries with unlimited carryforward periods, but include $27 million of special enterprise zone tax credits subject to expiration in 2017. A valuation allowance totaling $618 million has been recorded against these and other deferred tax assets where recovery of the asset or carryforward is uncertain. In addition, we had $935 million of Federal and $107 million of state tax assets for net operating loss and tax credit carryforwards. The Federal carryforwards consist of $380 million of Federal tax assets for net operating losses that expire from 2029 to 2034, $499 million of foreign tax credits that are subject to expiration from 2016 to 2024 and $56 million of tax assets related to research and development credits that are subject to expiration from 2027 to 2034. The amount of deferred tax assets reflected in the table above has been reduced by $51 million related to unrealized stock option deductions. The state carryforwards are subject to expiration from 2015 to 2034. A valuation allowance of $14 million has been recorded against Federal and state deferred tax assets where recovery is uncertain.

Our losses in various foreign taxing jurisdictions in recent periods represented sufficient negative evidence to require us to maintain a full valuation allowance against certain of our net foreign deferred tax assets. However, it is reasonably possible that sufficient positive evidence required to release all, or a portion, of certain valuation allowances will exist during 2015. This may result in a reduction of the valuation allowance by up to $80 million.

At December 31, 2014, we had unrecognized tax benefits of $81 million that if recognized, would have a favorable impact on our tax expense of $65 million. We had accrued interest of $15 million as of December 31, 2014, which included a current year charge of $2 million. If not favorably settled, $26 million of the unrecognized tax benefits and all of the accrued interest would require the use of our cash. It is reasonably possible that $15 million of our unrecognized tax benefits and $5 million of our accrued interest will be paid or favorably settled during 2015. We do not expect those changes will have a significant impact on our financial position or results of operations.



Reconciliation of Unrecognized Tax Benefits
(In millions)	2014			2013			2012
Balance at January 1	$	88		$	82		$	90
Increases related to prior year tax positions	15			27			12
Decreases related to prior year tax positions	(12		)	(6		)	(7		)
Settlements	(6		)	(9		)	(6		)
Foreign currency impact	(4		)	(6		)	(4		)
Increases related to current year tax positions	—			1			—
Lapse of statute of limitations	—			(1		)	(3		)
Balance at December 31	$	81		$	88		$	82

Generally, years from 2009 onward are still open to examination by foreign taxing authorities. We are open to examination in Germany from 2006 onward and in the United States for 2014.

As of December 31, 2014, we changed our assertion regarding the potential U.S. Federal taxation of certain undistributed earnings of certain foreign subsidiaries that previously we did not intend to subject to U.S. taxation and, accordingly, recorded a provision of $131 million. This change is to account for potential strategies which may be implemented to utilize certain U.S. tax attributes.

We also have undistributed earnings of foreign subsidiaries of approximately $2.6 billion, including a portion of which has already been subject to U.S. Federal income taxation. No provision for Federal income or foreign withholding tax on any of these undistributed earnings is required because such earnings have been or will be reinvested in property, plant and equipment and working capital. Quantification of the deferred tax liability net of applicable foreign tax credits, if any, associated with these undistributed earnings is not practicable.

Net cash payments for income taxes were $127 million, $186 million and $204 million in 2014, 2013 and 2012, respectively.