Income Taxes

Earnings before income taxes and discontinued operations are as follows for fiscal 2012, 2011 and 2010:



(in millions)	2012		2011		2010
U.S. Operations	$	1,514	$	1,299	$	980
Non-U.S. Operations	184		219		232
Earnings before income taxes and discontinued operations	$	1,698	$	1,518	$	1,212

The provision for income taxes from continuing operations consists of the following for fiscal 2012, 2011 and 2010:



(in millions)	2012		2011		2010
Current:
Federal	$	430	$	387	$	430
State and local	27		20		63
Non-U.S.	13		17		12
Total current	$	470	$	424	$	505
Deferred:
Federal	124		92		103
State and local	28		29		18
Non-U.S.	6		7		(1		)
Total deferred	$	158	$	128	$	120
Provision for income taxes	$	628	$	552	$	625

A reconciliation of the provision based on the federal statutory income tax rate to our effective income tax rate from continuing operations is as follows for fiscal 2012, 2011 and 2010:



	2012		2011		2010
Provision at Federal statutory rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal benefit	2.3		2.6		4.2
Foreign tax rate differential	(2.3	)	(2.5	)	(3.3	)
Nondeductible/nontaxable items	—		0.6		0.2
Change in measurement of an uncertain tax position and an IRS settlement	0.9		2.4		1.3
Valuation allowances	0.1		(0.6	)	(2.3	)
Unremitted foreign earnings	(0.2	)	(0.1	)	13.9
Other	1.2		(1.0	)	2.6
Effective income tax rate	37.0	%	36.4	%	51.6	%

As of June 30, 2012, we had $2.2 billion of total undistributed earnings from non-U.S. subsidiaries, of which $1.5 billion are intended to be permanently reinvested in non-U.S. operations. We recorded a charge of $168 million during fiscal 2010 to reflect the anticipated repatriation of certain foreign earnings. With respect to the earnings that are considered permanently reinvested, no U.S. tax provision has been accrued related to the repatriation of these earnings. It is not practicable to estimate the amount of U.S. tax that might be payable on the eventual remittance of such earnings.

Deferred income taxes arise from temporary differences between financial reporting and tax reporting bases of assets and liabilities and operating loss and tax credit carryforwards for tax purposes. The components of the deferred income tax assets and liabilities as of June 30, 2012 and 2011 are as follows:



(in millions)	2012			2011
Deferred income tax assets:
Receivable basis difference	$	46		$	46
Accrued liabilities	107			105
Share-based compensation	90			97
Loss and tax credit carryforwards	120			199
Deferred tax assets related to uncertain tax positions	118			157
Other	85			97
Total deferred income tax assets	$	566		$	701
Valuation allowance for deferred income tax assets	(86		)	(158		)
Net deferred income tax assets	$	480		$	543
Deferred income tax liabilities:
Inventory basis differences	$	(1,067	)	$	(980	)
Property-related	(180		)	(159		)
Goodwill and other intangibles	(146		)	(70		)
Unremitted foreign earnings	(64		)	(140		)
Other	(5		)	(3		)
Total deferred income tax liabilities	$	(1,462	)	$	(1,352	)
Net deferred income tax liability	$	(982	)	$	(809	)

Deferred tax assets and liabilities in the preceding table, after netting by taxing jurisdiction, are in the following captions in the consolidated balance sheet at June 30, 2012 and 2011:



(in millions)	2012			2011
Current deferred income tax asset (1)	$	27		$	29
Noncurrent deferred income tax asset (2)	6			10
Current deferred income tax liability (3)	(858		)	(763		)
Noncurrent deferred income tax liability (4)	(157		)	(85		)
Net deferred income tax liability	$	(982	)	$	(809	)


(1)	Included in Prepaid expenses and other in the consolidated balance sheets.


(2)	Included in Other assets in the consolidated balance sheets.


(3)	Included in Other accrued liabilities in the consolidated balance sheets.


(4)	Included in Deferred income taxes and other liabilities in the consolidated balance sheets.

At June 30, 2012, we had gross federal, state and international loss and credit carryforwards of $37 million, $523 million and $135 million, respectively, the tax effect of which is an aggregate deferred tax asset of $120 million. Substantially all of these carryforwards are available for at least three years or have an indefinite carryforward period. Approximately $74 million of the valuation allowance at June 30, 2012 applies to certain federal, state and international loss carryforwards that, in our opinion, are more likely than not to expire unutilized. However, to the extent that tax benefits related to these carryforwards are realized in the future, the reduction in the valuation allowance would reduce income tax expense.

We had $654 million, $747 million and $731 million of unrecognized tax benefits at June 30, 2012, 2011 and 2010, respectively. The June 30, 2012, 2011 and 2010 balances include $337 million, $332 million and $311 million, respectively, of unrecognized tax benefits that, if recognized, would have an impact on the effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility. Recognition of these tax benefits would not affect our effective tax rate. We include the full amount of unrecognized tax benefits in deferred income taxes and other liabilities in the consolidated balance sheets. A reconciliation of the beginning and ending amounts of unrecognized tax benefits for fiscal 2012, 2011 and 2010 is as follows:



(in millions)	2012			2011			2010
Balance at beginning of fiscal year	$	747		$	731		$	849
Additions for tax positions of the current year	16			16			43
Additions for tax positions of prior years	68			58			90
Reductions for tax positions of prior years	(3		)	(20		)	(240		)
Settlements with tax authorities	(172		)	(36		)	(10		)
Expiration of the statute of limitations	(2		)	(2		)	(1		)
Balance at end of fiscal year	$	654		$	747		$	731

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2012, 2011 and 2010, we had $209 million, $267 million and $233 million, respectively, accrued for the payment of interest and penalties. These balances are gross amounts before any tax benefits and are included in deferred income taxes and other liabilities in the consolidated balance sheet. For fiscal 2012, we recognized $28 million of benefit for interest and penalties in income tax expense. For fiscal 2011 and 2010, we recognized $36 million and $35 million of interest and penalties in income tax expense, respectively.

We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. With few exceptions, we are subject to audit by taxing authorities for fiscal 2003 through the current fiscal year.

The IRS closed its audits of fiscal 2001 and 2002 during fiscal 2012 and is currently conducting audits of fiscal 2003 through 2010. We have received proposed adjustments from the IRS for fiscal years 2003 through 2007 related to our transfer pricing arrangements between foreign and domestic subsidiaries and the transfer of intellectual property among subsidiaries of an acquired entity prior to its acquisition by us. The IRS has proposed additional taxes of $849 million, excluding penalties and interest. If this tax ultimately must be paid, CareFusion is liable under the tax matters agreement for $592 million of the total amount. We disagree with these proposed adjustments, which we are contesting, and have accounted for the unrecognized tax benefits related to them.

It is reasonably possible that there could be a change in the amount of unrecognized tax benefits within the next 12 months due to activities of the IRS or other taxing authorities, including proposed assessments of additional tax, possible settlement of audit issues (primarily IRS audits of fiscal 2003 through 2005), or the expiration of applicable statutes of limitations. We estimate that the range of the possible change in unrecognized tax benefits within the next 12 months is a decrease of approximately zero to $275 million, exclusive of penalties and interest.