12. Income Taxes

Income taxes included in the income statement are summarized below. We file a consolidated federal income tax return.


Year ended December 31, in millions	2014			2013			2012
Currently payable:
Federal	$	288		$	216		$	178
State		33			26			18
Total currently payable		321			242			196
Deferred:
Federal		16			39			41
State		(11	)		(10	)		(6	)
Total deferred		5			29			35
Total income tax (benefit) expense ^(a)	$	326		$	271		$	231

(a)

There was no income tax (benefit) expense recorded on securities transactions in 2014 and 2012. The income tax (benefit) expense on securities transactions totaled $1 million in 2013. Income tax expense excludes equity- and gross receipts-based taxes, which are assessed in lieu of an income tax in certain states in which we operate. These taxes, which are recorded in “noninterest expense” on the income statement, totaled $17 million in 2014, $23 million in 2013, and $29 million in 2012.

Significant components of our deferred tax assets and liabilities included in “accrued income and other assets” and “accrued expense and other liabilities,” respectively, on the balance sheet, are as follows:


December 31, in millions	2014		2013
Allowance for loan and lease losses	$	316	$	334
Employee benefits		251		187
Net unrealized securities losses		17		45
Federal credit carryforwards		96		226
State net operating losses and credits		9		11
Other		312		302
Gross deferred tax assets		1,001		1,105
Less: valuation allowance		—		1
Total deferred tax assets		1,001		1,104

Leasing transactions		682		753
Other		125		141
Total deferred tax liabilities		807		894
Net deferred tax assets (liabilities) ^(a)	$	194	$	210

(a)	From continuing operations

We conduct quarterly assessments of all available evidence to determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded. The available evidence used in connection with these assessments includes taxable income in prior periods, projected future taxable income, potential tax-planning strategies, and projected future reversals of deferred tax items. These assessments involve a degree of subjectivity and may undergo significant change. Based on these criteria, we have recorded a valuation allowance of less than $1 million dollars against the gross deferred tax assets associated with certain state net operating loss carryforwards and state credit carryforwards.

At December 31, 2014, we had a federal credit carryforward of $96 million. Additionally, we had state net operating loss carryforwards of $62 million and state credit carryforwards of $6 million, resulting in a net state deferred tax asset of $9 million. These carryforwards are subject to limitations imposed by tax laws and, if not utilized, will gradually expire through 2031.

The following table shows how our total income tax expense (benefit) and the resulting effective tax rate were derived:


Year ended December 31, dollars in millions	2014					2013					2012
Year ended December 31, dollars in millions	Amount		Rate			Amount		Rate			Amount		Rate
Income (loss) before income taxes times 35% statutory federal tax rate	$	445		35.0	%	$	399		35.0	%	$	376		35.0	%
Amortization of tax-advantaged investments		69		5.4			63		5.5			64		6.0
Foreign tax adjustments		10		.8			(4)		(.3)			1		.1
Reduced tax rate on lease financing income		(3)		(.2)			(13)		(1.2)			(50)		(4.7)
Tax-exempt interest income		(16)		(1.3)			(15)		(1.3)			(16)		(1.5)
Corporate-owned life insurance income		(41)		(3.2)			(42)		(3.7)			(43)		(4.0)
Interest refund (net of federal tax benefit)		(1)		(.1)			(1)		(.1)			—		—
State income tax, net of federal tax benefit		15		1.1			10		.9			8		.7
Tax credits		(134)		(10.5)			(130)		(11.4)			(119)		(11.1)
Other		(18)		(1.4)			4		.3			10		.9
Total income tax expense (benefit)	$	326		25.6	%	$	271		23.7	%	$	231		21.4	%

Liability for Unrecognized Tax Benefits

The change in our liability for unrecognized tax benefits is as follows:


Year ended December 31, in millions	2014		2013
Balance at beginning of year	$	6	$	7
Decrease related to other settlements with taxing authorities		—		(1)
Balance at end of year	$	6	$	6

Each quarter, we review the amount of unrecognized tax benefits recorded in accordance with the applicable accounting guidance. Any adjustment to unrecognized tax benefits is recorded in income tax expense. The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $6 million at both December 31, 2014, and December 31, 2013. We do not currently anticipate that the amount of unrecognized tax benefits will significantly change over the next 12 months.

As permitted under the applicable accounting guidance, it is our policy to record interest and penalties related to unrecognized tax benefits in income tax expense. We recorded net interest credits of $10.6 million in 2014, $1.4 million in 2013, and interest expense of $.2 million in 2012. We did not recover state tax penalties in 2014 and 2012, and recovered $.2 million in 2013. At December 31, 2014, we had an accrued interest payable of $1.2 million, compared to $1.1 million at December 31, 2013. Our liability for accrued state tax penalties was $.3 million at both December 31, 2014, and December 31, 2013.

The FASB issued new accounting guidance, effective January 1, 2014, for us, that requires unrecognized tax benefits to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if certain criteria are met. As a result, at December 31, 2014, our federal tax credit carryforward included in our federal deferred tax asset was reduced by $1 million.

We file federal income tax returns, as well as returns in various state and foreign jurisdictions. We are subject to income tax examination by the IRS for the tax years 2009 and forward. Currently, we are under audit for the tax years 2009-2012. As of December 31, 2014, the IRS has not proposed any significant adjustments. We are not subject to income tax examinations by other tax authorities for years prior to 2003.