INCOME TAXES

Total income tax expense (benefit) was as follows:



	Year Ended December 31,
(in millions)	2015			2014		2013
Income tax expense (benefit)		$423			$403		($42	)
Tax effect of changes in OCI	(12		)	154		(194		)
Total comprehensive income tax expense (benefit)		$411			$557		($236	)

Components of income tax expense (benefit) are as follows:



(in millions)	Current		Deferred			Total
Year Ended December 31, 2015
U.S. federal		$162		$225			$387
State and local	12		24			36
Total		$174		$249			$423
Year Ended December 31, 2014
U.S. federal		$224		$145			$369
State and local	38		(4		)	34
Total		$262		$141			$403
Year Ended December 31, 2013
U.S. federal		$3		($47	)		($44	)
State and local	8		(6		)	2
Total		$11		($53	)		($42	)

The effective income tax rate differed from the U.S. federal income tax rate of 35% in 2015, 2014 and 2013 as follows:



	Year Ended December 31,
	2015					2014					2013
(dollars in millions)	Amount			Rate		Amount			Rate		Amount			Rate
U.S. Federal income tax expense (benefit) and tax rate		$442		35.0	%		$444		35.0	%		($1,214	)	35.0	%
Increase (decrease) resulting from:
Goodwill impairment	—			—		—			—		1,217			(35.1	)
State and local income taxes (net of federal benefit)	27			2.1		22			1.7		1			—
Bank-owned life insurance	(20		)	(1.6	)	(17		)	(1.3	)	(17		)	0.5
Tax-exempt interest	(17		)	(1.3	)	(15		)	(1.2	)	(13		)	0.4
Tax credits	(16		)	(1.2	)	(27		)	(2.1	)	(11		)	0.3
Non-deductible expenses	8			0.6		—			—		—			—
Other	(1		)	(0.1	)	(4		)	(0.3	)	(5		)	0.1
Total income tax expense (benefit) and tax rate		$423		33.5	%		$403		31.8	%		($42	)	1.2	%

The effective income tax rate for the year ended December 31, 2015 reflected the adoption of ASU No. 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects.” The application of this guidance resulted in the reclassification of the amortization of these investments to income tax expense from noninterest income. See Note 6 “Variable Interest Entities,” for further information.

The increase in the effective tax rate from 2014 to 2015 is primarily attributable to the Company’s adoption of ASU 2014-01 effective January 1, 2015. Additionally, the 2015 effective tax rate was affected by the impact of non-deductible permanent expense items incurred by the Company in 2015.

The effective tax rate in 2013 was primarily due to the tax rate impact of the goodwill impairment charge taken in 2013. Goodwill not deductible for tax purposes accounted for 78.4% of the total goodwill impairment charge and generated a reduction of 35.1% in our effective tax rate for the year ended December 31, 2013.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:



	December 31,
(in millions)	2015			2014
Deferred tax assets:
Other comprehensive income		$241			$232
Allowance for credit losses	465			456
Net operating loss carryforwards	137			155
Accrued expenses not currently deductible	135			170
Deferred income	40			45
Fair value marks	36			34
Other	5			1
Total deferred tax assets	1,059			1,093
Valuation allowance	(123		)	(157		)
Deferred tax assets, net of valuation allowance	936			936
Deferred tax liabilities:
Leasing transactions	882			825
Amortization of intangibles	455			380
Depreciation	213			164
Pension and other employee compensation plans	69			14
MSRs	47			46
Total deferred tax liabilities	1,666			1,429
Net deferred tax liability		$730			$493

At December 31, 2015, the Company had state tax net operating loss carryforwards of $1.9 billion. Limitations on the ability to realize these carryforwards are reflected in the associated valuation allowance. Additionally, RBS divested its remaining ownership interest in CFG in 2015. The change in ownership resulting from this divestiture generated an annual limitation on the amount of carryforwards that can be utilized. These net operating losses will expire, if not utilized, in the years 2016 - 2035.

At December 31, 2015, the Company had a valuation allowance of $123 million against the deferred tax assets related to certain state temporary differences and net operating losses, as it is management’s current assessment that it is more likely than not that the Company will not recognize a portion of the deferred tax asset related to these items. The valuation allowance decreased $34 million during the year ended December 31, 2015.

Effective with the fiscal year ended September 30, 1997, the reserve method for bad debts was no longer permitted for tax purposes. The repeal of the reserve method required the recapture of the reserve balance in excess of certain base year reserve amounts attributable to years ended prior to 1988. At December 31, 2015, the Company’s base year loan loss reserves attributable to years ended prior to 1988, for which no deferred income taxes have been provided, was $557 million. This base year reserve may become taxable if certain distributions are made with respect to the stock of the Company or if the Company ceases to qualify as a bank for tax purposes. No actions are planned that would cause this reserve to become wholly or partially taxable.

The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state and local income tax examinations by major tax authorities for years before 2011.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	December 31,
(in millions)	2015			2014			2013
Balance at the beginning of the year, January 1		$72			$33			$34
Gross (decrease) increase for tax positions related to prior years	(6		)	60			—
Decreases for tax positions as a result of the lapse of the statutes of limitations	(3		)	(1		)	—
Decreases for tax positions related to settlements with taxing authorities	(1		)	(20		)	(1		)
Balance at end of year		$62			$72			$33

Included in the total amount of unrecognized tax benefits at December 31, 2015, are potential benefits of $43 million that, if recognized, would impact the effective tax rate.

The Company classifies interest and penalties related to unrecognized tax benefits as a component of income taxes. The Company accrued less than $1 million, $1 million, and $2 million of interest expense through December 31, 2015, 2014, and 2013, respectively. The Company had approximately $14 million, $15 million, and $14 million accrued for the payment of interest at December 31, 2015, 2014, and 2013, respectively. There were no amounts accrued for penalties as of December 31, 2015, 2014, and 2013, and there were no penalties recognized during 2015, 2014, and 2013.

The Company expects to enter into settlement agreements with certain state taxing authorities regarding its passive investment companies. Settlement of these uncertainties would reduce the unrecognized tax benefit by $55 million. During 2015, the Company settled nexus issues with various state taxing authorities for the years 2004 through 2013. Settlement of these uncertainties combined with the lapse of statutes of limitations reduced the unrecognized tax benefit by $4 million.