Income Taxes

The provision for income taxes from continuing operations consisted of the following for the periods indicated:



	Twelve Months Ended July 31,
(In millions)	2011		2010			2009
Current:
Federal	$	268	$	231		$	160
State	43		44			7
Foreign	5		33			12
Total current	316		308			179
Deferred:
Federal	3		(15		)	24
State	7		(1		)	7
Foreign	6		(16		)	(4		)
Total deferred	16		(32		)	27
Total provision for income taxes from continuing operations	$	332	$	276		$	206

Excess tax benefits associated with share-based compensation deductions are credited to stockholders’ equity. The reductions of income taxes payable resulting from share-based compensation deductions that were credited to stockholders’ equity were approximately $81 million for the twelve months ended July 31, 2011, $36 million for the twelve months ended July 31, 2010, and $18 million for the twelve months ended July 31, 2009.

The sources of income from continuing operations before the provision for income taxes consisted of the following for the periods indicated:



	Twelve Months Ended July 31,
(In millions)	2011		2010		2009
United States	$	919	$	779	$	627
Foreign	47		36		26
Total	$	966	$	815	$	653

Differences between income taxes calculated using the federal statutory income tax rate of 35% and the provision for income taxes from continuing operations were as follows for the periods indicated:



	Twelve Months Ended July 31,
(In millions)	2011			2010			2009
Income from continuing operations before income taxes	$	966		$	815		$	653

Statutory federal income tax	$	338		$	285		$	229
State income tax, net of federal benefit	33			27			9
Federal research and experimentation credits	(25		)	(8		)	(20		)
Domestic production activities deduction	(25		)	(14		)	(11		)
Share-based compensation	6			4			4
Tax exempt interest	(1		)	(2		)	(5		)
Effects of non-U.S. operations	(4		)	(20		)	—
Non-deductible goodwill impairment charge	8			—			—
Other, net	2			4			—
Total provision for income taxes from continuing operations	$	332		$	276		$	206

In December 2010 the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010 was signed into law. The Act includes a reinstatement of the federal research and experimentation credit through December 31, 2011 that was retroactive to January 1, 2010. We recorded a discrete tax benefit of approximately $9 million for the retroactive amount related to fiscal 2010 and the first quarter of fiscal 2011 during the twelve months ended July 31, 2011.

During the twelve months ended July 31, 2010 we recorded discrete tax benefits of approximately $20 million that were related to foreign tax credits associated with the distribution of profits from certain of our non-U.S. subsidiaries and our plans to indefinitely reinvest substantially all remaining non-U.S. earnings in support of our international expansion plans. This tax benefit is shown in the table above on the effects of non-U.S. operations line.

In January 2009 we entered into a favorable agreement with a state tax authority with respect to certain tax years including years ended prior to fiscal 2009. As a result of this agreement, we recorded a discrete tax benefit of approximately $18 million during the twelve months ended July 31, 2009.

In October 2008 changes in federal tax law resulted in the reinstatement of the federal research and experimentation credit through December 31, 2009 that was retroactive to January 1, 2008. We recorded a discrete tax benefit of approximately $7 million for the retroactive amount related to fiscal year 2008 during the twelve months ended July 31, 2009.

Significant deferred tax assets and liabilities were as follows at the dates indicated:



	July 31,
(In millions)	2011			2010
Deferred tax assets:
Accruals and reserves not currently deductible	$	28		$	30
Deferred rent	9			10
Accrued and deferred compensation	33			18
Loss and tax credit carryforwards	39			63
Property and equipment	11			8
Share-based compensation	88			89
Other, net	1			4
Total deferred tax assets	209			222
Deferred tax liabilities:
Intangible assets	51			55
Other, net	1			1
Total deferred tax liabilities	52			56
Total net deferred tax assets	157			166
Valuation allowance	(8		)	(8		)
Total net deferred tax assets, net of valuation allowance	$	149		$	158

We have provided a valuation allowance related to the benefits of certain state and foreign net operating loss carryforwards that we believe are unlikely to be realized. Changes in the valuation allowance during the twelve months ended July 31, 2011 and 2010 were not significant.

We provide U.S. federal income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are intended to be indefinitely reinvested in our international operations. To the extent that foreign earnings previously treated as indefinitely reinvested are repatriated, the related U.S. tax liability may, subject to certain limitations, be reduced by any foreign income taxes paid on these earnings. At July 31, 2011, the cumulative amount of earnings upon which U.S. income taxes had not been provided was approximately $30 million. The unrecognized deferred tax liability for these earnings was approximately $8 million.

The components of total net deferred tax assets, net of valuation allowances, as shown on our balance sheets were as follows at the dates indicated:



	July 31,
(In millions)	2011		2010
Current deferred income taxes	$	94	$	117
Long-term deferred income taxes	55		41
Total net deferred tax assets, net of valuation allowance	$	149	$	158

At July 31, 2011, we had total federal net operating loss carryforwards of approximately $35 million that will start to expire in fiscal 2021. Utilization of the net operating losses is subject to annual limitation. The annual limitation may result in the expiration of net operating losses before utilization.

At July 31, 2011, we had excess federal foreign tax credits of approximately $15 million, of which $2 million can be carried back and $13 million can be carried forward. The foreign tax credit carryforwards will start to expire in fiscal 2020. Our ability to utilize foreign tax credits is dependent upon having sufficient foreign source income during the carryforward period. The foreign source income limitation may result in the expiration of foreign tax credits before utilization.

At July 31, 2011, we had total state net operating loss carryforwards of approximately $168 million for which we have recorded a deferred tax asset of $9 million and a valuation allowance of $8 million. The state net operating losses will start to expire in fiscal 2014. Utilization of the net operating losses is subject to annual limitation. The annual limitation may result in the expiration of net operating losses before utilization.

Unrecognized Tax Benefits

The aggregate changes in the balance of our gross unrecognized tax benefits were as follows for the periods indicated:



	Twelve Months Ended July 31,
(In millions)	2011		2010			2009
Gross unrecognized tax benefits, beginning balance	$	35	$	40		$	45
Increases related to tax positions from prior fiscal years, including acquisitions	2		3			10
Decreases related to tax positions from prior fiscal years	—		(5		)	(10		)
Increases related to tax positions taken during current fiscal year	4		3			4
Settlements with tax authorities	—		—			(8		)
Lapses of statutes of limitations	—		(6		)	(1		)
Gross unrecognized tax benefits, ending balance	$	41	$	35		$	40

The total amount of our unrecognized tax benefits at July 31, 2011 was $41 million. Net of related deferred tax assets, unrecognized tax benefits were $35 million at that date. If we were to recognize these net benefits, our income tax expense would reflect a favorable net impact of $35 million. We do not believe that it is reasonably possible that there will be a significant increase or decrease in unrecognized tax benefits over the next 12 months.

We file U.S. federal, U.S. state, and foreign tax returns. Our major tax jurisdictions are U.S. federal and the State of California. For U.S. federal tax returns we are no longer subject to tax examinations for fiscal 2006 and for years prior to fiscal 2005. For California tax returns we are no longer subject to tax examinations for years prior to fiscal 2005.

We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes. Amounts accrued at July 31, 2011 and July 31, 2010 for the payment of interest and penalties were not significant. The amounts of interest and penalties that we recognized during the twelve months ended July 31, 2011, 2010 and 2009 were also not significant.