Income Taxes

The following is a reconciliation of the federal statutory income tax rate to income tax expense in fiscal 2014, 2013 (11-month) and 2012 ($ in millions):



	12-Month			11-Month			12-Month
	2014			2013			2012
Federal income tax at the statutory rate	$	380		$	(70	)	$	758
State income taxes, net of federal benefit	25			(2		)	47
(Benefit) expense from foreign operations	(13		)	49			(63		)
Other	6			5			—
Goodwill impairments (non-deductible)	—			287			—
Income tax expense	$	398		$	269		$	742
Effective income tax rate	36.7		%	(135.8		)%	34.3		%

Earnings (loss) from continuing operations before income tax expense and equity in income (loss) of affiliates by jurisdiction was as follows in fiscal 2014, 2013 (11-month) and 2012 ($ in millions):



	12-Month		11-Month			12-Month
	2014		2013			2012
United States	$	687	$	279		$	1,644
Outside the United States	400		(477		)	522
Earnings (loss) from continuing operations before income tax expense and equity in income (loss) of affiliates	$	1,087	$	(198	)	$	2,166

Income tax expense was comprised of the following in fiscal 2014, 2013 (11-month) and 2012 ($ in millions):



	12-Month			11-Month			12-Month
	2014			2013			2012
Current:
Federal	$	306		$	204		$	520
State	45			(1		)	61
Foreign	64			66			72
	415			269			653
Deferred:
Federal	(21		)	26			86
State	1			(3		)	11
Foreign	3			(23		)	(8		)
	(17		)	—			89
Income tax expense	$	398		$	269		$	742

Deferred taxes are the result of differences between the bases of assets and liabilities for financial reporting and income tax purposes. Deferred tax assets and liabilities were comprised of the following ($ in millions):



	February 1, 2014			February 2, 2013
Accrued property expenses	$	162		$	194
Other accrued expenses	133			119
Deferred revenue	81			153
Compensation and benefits	114			95
Stock-based compensation	110			137
Loss and credit carryforwards	176			266
Other	103			125
Total deferred tax assets	879			1,089
Valuation allowance	(158		)	(228		)
Total deferred tax assets after valuation allowance	721			861
Property and equipment	(286		)	(343		)
Goodwill and intangibles	(75		)	(127		)
Inventory	(60		)	(90		)
Other	(16		)	(22		)
Total deferred tax liabilities	(437		)	(582		)
Net deferred tax assets	$	284		$	279

Deferred tax assets and liabilities included in our Consolidated Balance Sheets were as follows ($ in millions):



	February 1, 2014			February 2, 2013
Other current assets	$	261		$	228
Other assets	44			66
Other current liabilities	—			(5		)
Other long-term liabilities	(21		)	(10		)
Net deferred tax assets	$	284		$	279

At February 1, 2014, we had total net operating loss carryforwards from international operations of $125 million, of which $117 million will expire in various years through 2024 and the remaining amounts have no expiration. Additionally, we had acquired U.S. federal net operating loss carryforwards of $23 million which expire between 2023 and 2030, U.S. federal foreign tax credit carryforwards of $12 million which expire between 2022 and 2023, state credit carryforwards of $12 million which expire in 2023, and state capital loss carryforwards of $4 million which expire in 2019.

At February 1, 2014, a valuation allowance of $158 million had been established, of which $11 million is against U.S. federal foreign tax credit carryforwards, $13 million is against U.S. federal and state capital loss carryforwards, $3 million is against state credit carryforwards, and $131 million is against certain international net operating loss carryforwards and other international deferred tax assets. The $70 million decrease from February 2, 2013, is primarily due to the decrease in the valuation allowance against the U.S. federal foreign tax credit carryforward and international net operating loss carryforwards, partially offset by the increase in valuation allowances against federal and state capital loss carryforwards and state credit carryforwards.

We have not provided deferred taxes on unremitted earnings attributable to foreign operations that have been considered to be reinvested indefinitely. These earnings relate to ongoing operations and were $1.4 billion at February 1, 2014. It is not practicable to determine the income tax liability that would be payable if such earnings were not indefinitely reinvested.

The following table provides a reconciliation of changes in unrecognized tax benefits for fiscal 2014, 2013 (11-month) and 2012 ($ in millions):



	12-Month			11-Month			12-Month
	2014			2013			2012
Balance at beginning of period	$	383		$	387		$	359
Gross increases related to prior period tax positions	38			10			69
Gross decreases related to prior period tax positions	(67		)	(22		)	(35		)
Gross increases related to current period tax positions	34			37			43
Settlements with taxing authorities	(3		)	(10		)	(20		)
Lapse of statute of limitations	(15		)	(19		)	(29		)
Balance at end of period	$	370		$	383		$	387

Unrecognized tax benefits of $228 million, $231 million and $239 million at February 1, 2014, February 2, 2013, and March 3, 2012, respectively, would favorably impact our effective income tax rate if recognized.

We recognize interest and penalties (not included in the "unrecognized tax benefits" above), as well as interest received from favorable tax settlements, as components of income tax expense. Interest expense of $8 million and penalties expense of $2 million were recognized in fiscal 2014. At February 1, 2014, February 2, 2013, and March 3, 2012, we had accrued interest of $91 million, $85 million and $79 million, respectively, along with accrued penalties of $2 million, $0 million and $0 million at February 1, 2014, February 2, 2013, and March 3, 2012, respectively.

We file a consolidated U.S. federal income tax return, as well as income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before fiscal 2005.

Because existing tax positions will continue to generate increased liabilities for us for unrecognized tax benefits over the next 12 months, and since we are routinely under audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months. An estimate of the amount or range of such change cannot be made at this time. However, we do not expect the change, if any, to have a material effect on our consolidated financial condition, results of operations or cash flows within the next 12 months.