S. INCOME TAXES

				(In Millions)
	2015			2014			2013
Income from continuing operations before income taxes:
U.S.	$	496		$	270		$	231
Foreign		193			237			155

	$	689		$	507		$	386


Income tax expense (benefit) on income from continuing operations:
Currently payable:
U.S. Federal	$	10		$	3		$	3
State and local		27			1			2
Foreign		56			67			58
Deferred:
U.S. Federal		192			(401	)		22
State and local		3			(21	)		3
Foreign		5			(10	)		(2	)

	$	293		$	(361	)	$	86


Deferred tax assets at December 31 (1):
Receivables	$	9		$	9
Inventories		17			25
Other assets, principally stock-based Compensation		78			77
Accrued liabilities		118			102
Long-term liabilities		225			284
Net operating loss carryforward		39			194
Tax credit carryforward		55			44

		541			735
Valuation allowance		(49	)		(66	)

		492			669

Deferred tax liabilities at December 31 (1):
Property and equipment		104			118
Intangibles		212			387
Investment in foreign subsidiaries		8			4
Other		1			13

		325			522

Net deferred tax asset at December 31	$	167		$	147


(1)	2014 amounts have not been recasted to exclude discontinued operations.

The net deferred tax asset consisted of net long-term deferred tax liabilities (included in other liabilities) of $17 million and $17 million, and net long-term deferred tax assets (included in other assets) of $184 million and $293 million, at December 31, 2015 and 2014, respectively, and net long-term liabilities (included in liabilities held for sale) of $129 million at December 31, 2014.

The tax benefit from certain stock-based compensation is not recognized as a deferred tax asset until the tax deduction reduces cash taxes. During 2015, we recorded a $53 million deferred tax asset to paid-in capital related to additional net operating losses, previously not recognized, that were used to reduce cash taxes on our 2015 taxable income.

As a result of recording the separation of TopBuild due to its spin off, as of June 30, 2015, our net deferred tax asset increased by $190 million.

The current portion of the state and local income tax includes a $5 million, $8 million and $8 million tax benefit from the reversal of an accrual for uncertain tax positions resulting primarily from the expiration of applicable statutes of limitations and favorable settlements on state audits in 2015, 2014 and 2013, respectively. The deferred portion of the state and local taxes includes a $(1) million, $(29) million and $19 million tax (benefit) expense resulting from a change in the valuation allowance against state and local deferred tax assets in 2015, 2014 and 2013, respectively. The deferred portion of the foreign taxes includes $12 million and $(6) million tax expense (benefit) from a change in the valuation allowance against foreign deferred tax assets in 2015 and 2014, respectively.

During 2015 we recorded a $21 million valuation allowance against certain deferred tax assets related to TopBuild as a non-cash charge to income tax expense. The TopBuild deferred tax assets have been impaired by our decision to spin off TopBuild into a separate company that on a stand-alone basis as of June 30, 2015, the spin off date, will unlikely be able to realize the value of such deferred tax assets as a result of its history of losses.

Our capital management strategy includes the repurchase of Masco common stock, the payment of dividends, the pay-down of debt and the funding of potential acquisitions both within and outside the U.S. In order to provide greater flexibility in the execution of our capital management strategy, we determined in the fourth quarter of 2015 that we may repatriate earnings from certain foreign subsidiaries that were previously considered permanently reinvested. As a result, we recorded a $19 million charge to income tax expense in 2015 to recognize the required taxes on foreign earnings, including those previously considered permanently reinvested. Our December 31, 2015 deferred tax balance on investment in foreign subsidiaries reflects the impact of all taxable temporary differences, including those related to substantially all undistributed foreign earnings, except those that are legally restricted.

The accounting guidance for income taxes requires that the future realization of deferred tax assets depends on the existence of sufficient taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period and projected future taxable income.

If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company's three-year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable, and the accounting guidance restricts the amount of reliance the company can place on projected taxable income to support the recovery of the deferred tax assets.

In 2010, we recorded a $372 million valuation allowance against our U.S. Federal deferred tax assets as a non-cash charge to income tax expense. In reaching this conclusion, we considered the weaker retail sales of certain of our building products and the slower than anticipated recovery in the U.S. housing market which led to U.S. operating losses and significant U.S. goodwill impairment charges, that primarily occurred in the fourth quarter of 2010, causing us to be in a three-year cumulative U.S. loss position.

During 2012 and 2011, objective and verifiable negative evidence, such as U.S. operating losses and significant impairment charges for U.S. goodwill and other intangible assets, continued to outweigh positive evidence necessary to reduce the valuation allowance. As a result, we recorded increases of $65 million and $87 million in the valuation allowance related to our U.S. Federal deferred tax assets in 2012 and 2011, respectively.

In the third quarter of 2014, we recorded a $517 million tax benefit from the release of the valuation allowance against our U.S. Federal and certain state deferred tax assets due primarily to a return to sustainable profitability in our U.S. operations. In reaching this conclusion, we considered the continued improvement in both the new home construction market and repair and remodel activity in the U.S. and our progress on strategic initiatives to reduce costs and expand our product leadership positions which contributed to the continued improvement in our U.S. operations over the past few years.

In the fourth quarter of 2014, we recorded an additional $12 million tax benefit from the release of the valuation allowances against certain U.K. and Mexican deferred tax assets primarily resulting from a return to sustainable profitability in these jurisdictions.

We continue to maintain a valuation allowance on certain state and foreign deferred tax assets as of December 31, 2015. Should we determine that we would not be able to realize our remaining deferred tax assets in these jurisdictions in the future, an adjustment to the valuation allowance would be recorded in the period such determination is made.

Of the $94 million and $238 million deferred tax asset related to the net operating loss and tax credit carryforwards at December 31, 2015 and December 31, 2014, $67 million and $233 million will expire between 2021 and 2033 and $27 million and $5 million are unlimited, respectively.

A reconciliation of the U.S. Federal statutory tax rate to the income tax expense (benefit) on income from continuing operations was as follows:

	2015			2014			2013
U.S. Federal statutory tax rate – expense		35	%		35	%		35	%
State and local taxes, net of U.S. Federal tax benefit		3			(2	)		1
Lower taxes on foreign earnings		(1	)		(5	)		—
U.S. and foreign taxes on distributed and undistributed foreign earnings		3			—			—
U.S. Federal valuation allowance		3			(98	)		(13	)
Other, net		—			(1	)		(1	)

Effective tax rate – expense (benefit)		43	%		(71	)%		22	%

Income taxes paid were $107 million, $80 million and $77 million in 2015, 2014 and 2013, respectively.

A reconciliation of the beginning and ending liability for uncertain tax positions, including related interest and penalties, is as follows, in millions:

	Uncertain Tax Positions			Interest and Penalties			Total
Balance at January 1, 2014	$	46		$	13		$	59
Current year tax positions:
Additions		9			—			9
Reductions		(1	)		—			(1	)
Prior year tax positions:
Additions		1			—			1
Reductions		(5	)		—			(5	)
Settlements with tax authorities		(1	)		—			(1	)
Lapse of applicable statute of limitations		(10	)		—			(10	)
Interest and penalties recognized in income tax expense		—			(4	)		(4	)

Balance at December 31, 2014	$	39		$	9		$	48


Current year tax positions:
Additions		10			—			10
Prior year tax positions:
Additions		1			—			1
Reductions		(1	)		—			(1	)
Lapse of applicable statute of limitations		(6	)		—			(6	)
Interest and penalties recognized in income tax expense		—			1			1

Balance at December 31, 2015	$	43		$	10		$	53

If recognized, $28 million and $26 million of the liability for uncertain tax positions at December 31, 2015 and 2014, respectively, net of any U.S. Federal tax benefit, would impact our effective tax rate.

Of the $53 million and $48 million total liability for uncertain tax positions (including related interest and penalties) at December 31, 2015 and 2014, $52 million and $48 million are recorded in other liabilities, respectively, and $1 million is recorded as a net offset to other assets at December 31, 2015.

We file income tax returns in the U.S. Federal jurisdiction, and various local, state and foreign jurisdictions. We continue to participate in the Compliance Assurance Program ("CAP"). CAP is a real-time audit of the U.S. Federal income tax return that allows the Internal Revenue Service ("IRS"), working in conjunction with us, to determine tax return compliance with the U.S. Federal tax law prior to filing the return. This program provides us with greater certainty about our tax liability for a given year within months, rather than years, of filing our annual tax return and greatly reduces the need for recording a liability for U.S. Federal uncertain tax positions. The IRS has completed their examination of our consolidated U.S. Federal tax returns through 2014. With few exceptions, we are no longer subject to state or foreign income tax examinations on filed returns for years before 2005.

As a result of tax audit closings, settlements and the expiration of applicable statutes of limitations in various jurisdictions within the next 12 months, we anticipate that it is reasonably possible the liability for uncertain tax positions could be reduced by approximately $8 million.