NOTE 17—INCOME TAXES

We account for income taxes in accordance with the accounting guidance prescribed by the FASB, recognizing the current and deferred tax consequences of all transactions that have been recognized in the consolidated financial statements using the provisions of enacted tax laws. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to an amount that is more likely than not to be realized. As of January 1, 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

The following table presents significant components of the provision for income taxes attributable to continuing operations:

Table 17.1: Significant Components of the Provision for Income Taxes Attributable to Continuing Operations



	Year Ended December 31,
(Dollars in millions)	2014			2013		2012
Current income tax provision:
Federal taxes	$	1,934		$	1,581	$	1,590
State taxes	197			194		154
International taxes	91			115		44
Total current provision	$	2,222		$	1,890	$	1,788
Deferred income tax (benefit) provision:
Federal taxes	$	(125	)	$	284	$	(246	)
State taxes	22			46		(85		)
International taxes	27			4		18
Total deferred (benefit) provision	$	(76	)	$	334	$	(313	)
Total income tax provision	$	2,146		$	2,224	$	1,475

The international income tax provision is related to pre-tax earnings from foreign operations of approximately $466 million in 2014, $459 million in 2013, and $296 million in 2012.

Income tax benefits of $1 million in both of 2014 and 2013, and $620 million in 2012, were allocated directly to reduce goodwill from acquisitions.

The following table presents the income tax provision (benefit) reported in stockholders’ equity:

Table 17.2: Income Tax Provision (Benefit) Reported in Stockholders’ Equity



	Year Ended December 31,
(Dollars in millions)	2014		2013			2012
Income tax provision (benefit) recorded in AOCI ⁽¹⁾	$	374	$	(978	)	$	303
Income tax provision (benefit) recorded in additional paid in capital	16		(10		)	15
Foreign currency translation gains	6		5			3
Total income tax provision (benefit) recorded in stockholders’ equity	$	396	$	(983	)	$	321

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⁽¹⁾	Includes the impact from hedging instruments designated as net investment hedges that were entered into during 2014.

The following table presents the reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate applicable to income from continuing operations for the years ended December 31, 2014, 2013 and 2012:

Table 17.3: Effective Income Tax Rate



	Year Ended December 31,
(Dollars in millions)	2014		2013		2012
Income tax at U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	1.8		2.1		1.9
Low-income housing, new markets tax credits, and other credits	(3.0	)	(2.5	)	(2.5	)
Other foreign tax differences, net	(0.6	)	(0.6	)	(0.7	)
Nontaxable bargain purchase gain	0.0		0.0		(4.0	)
Other, net	(0.5	)	(0.2	)	(1.2	)
Effective tax rate	32.7	%	33.8	%	28.5	%

The following table presents significant components of the Company’s deferred tax assets and liabilities at December 31, 2014 and 2013:

Table 17.4: Significant Components of Deferred Tax Assets and Liabilities



(Dollars in millions)	December 31, 2014			December 31, 2013
Deferred tax assets:
Allowance for loan and lease losses	$	1,574		$	1,583
Rewards programs	993			855
Security and loan valuations	928			1,296
Compensation and employee benefits	305			304
Representation and warranty reserve	271			444
Net operating loss and tax credit carryforwards	163			248
Goodwill and intangibles	140			0
Unearned income	100			87
Net unrealized losses on derivatives	41			167
Other foreign deferred taxes	9			7
Other assets	314			259
Subtotal	4,838			5,250
Valuation allowance	(148		)	(139		)
Total deferred tax assets	4,690			5,111
Deferred tax liabilities:
Original issue discount	875			893
Fixed assets and leases	208			173
Goodwill and intangibles	0			10
Other liabilities	275			303
Total deferred tax liabilities	1,358			1,379
Net deferred tax assets	$	3,332		$	3,732

As of the end of December 31, 2014, we had federal net operating loss carry-forwards and losses of $18 million attributable to ING Direct that expire from 2018 to 2032. Under IRS rules, the Company’s ability to utilize these losses against future income is limited to $2 million per year. We have state operating loss carryforwards with a net tax value of $157 million that expire from 2015 to 2033.

The valuation allowance increased by $9 million to adjust the tax benefit of certain state deferred tax assets and net operating loss carryforwards to the amount we have determined is more likely than not to be realized.

The accounting guidance for income taxes clarifies the accounting for uncertainty in income taxes, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also provides rules on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. We recognize accrued interest and penalties related to income taxes as a component of income tax expense. We recognized a $3 million benefit, $13 million benefit and $3 million expense for net interest and penalties for 2014, 2013 and 2012, respectively.

The following table presents the accrued balance of tax, interest and penalties related to unrecognized tax benefits:

Table 17.5: Reconciliation of the Change in Unrecognized Tax Benefits



(Dollars in millions)	Gross Unrecognized Tax Benefits			Accrued Interest and Penalties			Gross Tax, Interest and Penalties
Balance as of January 1, 2013	$	208		$	54		$	262
Additions for tax positions related to prior years	15			7			22
Reductions for tax positions related to prior years due to IRS and other settlements	(109		)	(22		)	(131		)
Balance as of December 31, 2013	$	114		$	39		$	153
Additions for tax positions related to prior years	9			2			11
Reductions for tax positions related to prior years due to IRS and other settlements	(16		)	(5		)	(21		)
Balance as of December 31, 2014	$	107		$	36		$	143
Portion of balance at December 31, 2014 that, if recognized, would impact the effective income tax rate	$	70		$	23		$	93

We are subject to examination by the IRS and other tax authorities in certain countries and states in which we have significant business operations. The tax years subject to examination vary by jurisdiction. During 2014, the IRS paid to the Company tax refunds in the aggregate amount of $155 million with respect to the taxable years 2000 to 2008, for which examinations were completed in 2013. The IRS also completed the examination of the Company’s federal income tax returns for the taxable years 2009, 2010, and 2011 during 2014 and paid tax refunds to the Company in the aggregate amount of $123 million. Because receivables had been recorded in prior years for these refunds, they did not have a significant effect on the income tax provisions in 2012, 2013 and 2014.

The IRS initiated the examinations of the Company’s federal income tax returns for the tax years 2012 and 2013 during 2014, which are expected to be completed in 2015. During 2014, the Company entered into the IRS Compliance Assurance Process (“CAP”) for the Company’s 2014 federal income tax return. Under the CAP examination process, the IRS exam team contemporaneously reviewed the Company’s intended tax return reporting of certain 2014 transactions disclosed to the IRS on a quarterly basis during 2014. The CAP examination process is expected to be completed in 2015 prior to the filing of the Company’s 2014 federal income tax return.

It is reasonably possible that further adjustments to the Company’s unrecognized tax benefits may be made within twelve months of the reporting date as a result of the above-referenced pending matters. At this time, an estimate of the potential change to the amount of unrecognized tax benefits cannot be made.

As of December 31, 2014, U.S. income taxes and foreign withholding taxes have not been provided on approximately $1.4 billion of unremitted earnings of subsidiaries operating outside the U.S., in accordance with the guidance for accounting for income taxes in special areas. These earnings are considered by management to be invested indefinitely. Upon repatriation of these earnings, we could be subject to both U.S. income taxes (subject to possible adjustment for foreign tax credits) and withholding taxes payable to various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability and foreign withholding tax on these unremitted earnings is not practicable at this time because such liability is dependent upon circumstances existing if and when remittance occurs.

As of December 31, 2014, U.S. income taxes of approximately $107 million have not been provided for approximately $287 million of previously acquired thrift bad debt reserves created for tax purposes as of December 31, 1987. These amounts, acquired as a result of the merger with North Fork, and the acquisition of CCB, are subject to recapture in the unlikely event that CONA, as successor to North Fork and CCB, makes distributions in excess of earnings and profits, redeems its stock, or liquidates.