NOTE 18—INCOME TAXES

We recognize 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 are expected to apply to taxable income in which the differences are expected to be settled or realized. Valuation allowances are recorded to reduce deferred tax assets to an amount that is more likely than not to be realized.

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

Table 18.1: Significant Components of the Provision for Income Taxes Attributable to Continuing Operations



	Year Ended December 31,
(Dollars in millions)	2015			2014			2013
Current income tax provision:
Federal taxes	$	1,991		$	1,934		$	1,581
State taxes	207			197			194
International taxes	73			91			115
Total current provision	$	2,271		$	2,222		$	1,890
Deferred income tax (benefit) provision:
Federal taxes	$	(368	)	$	(125	)	$	284
State taxes	(39		)	22			46
International taxes	5			27			4
Total deferred (benefit) provision	$	(402	)	$	(76	)	$	334
Total income tax provision	$	1,869		$	2,146		$	2,224

The international income tax provision is related to pre-tax earnings from foreign operations of approximately $288 million in 2015, $466 million in 2014 and $459 million in 2013.

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

Table 18.2: Income Tax Provision (Benefit) Reported in Stockholders’ Equity



	Year Ended December 31,
(Dollars in millions)	2015			2014		2013
Income tax provision (benefit) recorded in AOCI ⁽¹⁾	$	19		$	374	$	(978	)
Income tax (benefit) provision recorded in additional paid in capital	(7		)	16		(10		)
Foreign currency translation losses	23			6		5
Total income tax provision (benefit) recorded in stockholders’ equity	$	35		$	396	$	(983	)

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⁽¹⁾	Includes the impact from hedging instruments designated as net investment hedges.

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, 2015, 2014 and 2013:

Table 18.3: Effective Income Tax Rate



	Year Ended December 31,
(Dollars in millions)	2015		2014		2013
Income tax at U.S. federal statutory tax rate	35.0%		35.0%		35.0%
State taxes, net of federal benefit	1.9		1.8		2.1
Low-income housing, new markets and other tax credits	(4.0	)	(3.0	)	(2.5	)
Other foreign tax differences, net	(0.2	)	(0.6	)	(0.6	)
Other, net	(0.9	)	(0.5	)	(0.2	)
Effective tax rate	31.8%		32.7%		33.8%

The following table presents significant components of the Company’s deferred tax assets and liabilities at December 31, 2015 and 2014:

Table 18.4: Significant Components of Deferred Tax Assets and Liabilities



(Dollars in millions)	December 31, 2015			December 31, 2014
Deferred tax assets:
Allowance for loan and lease losses	$	1,853		$	1,574
Rewards programs	1,192			993
Security and loan valuations	912			928
Compensation and employee benefits	303			305
Goodwill and intangibles	245			140
Representation and warranty reserve	226			271
Net operating loss and tax credit carryforwards	176			163
Unearned income	143			100
Net unrealized losses on derivatives	0			41
Other assets	329			323
Subtotal	5,379			4,838
Valuation allowance	(166		)	(148		)
Total deferred tax assets	5,213			4,690
Deferred tax liabilities:
Original issue discount	940			875
Fixed assets and leases	242			208
Net unrealized gains on derivatives	46			0
Other liabilities	323			275
Total deferred tax liabilities	1,551			1,358
Net deferred tax assets	$	3,662		$	3,332

As of the end of December 31, 2015, we have federal net operating loss carryforwards and losses of $20 million attributable to prior acquisitions that expire from 2018 to 2034. Under IRS rules, the Company’s ability to utilize these losses against future income is limited. We have state operating loss carryforwards with a net tax value of $169 million that expire from 2016 to 2034.

The valuation allowance increased by $18 million to $166 million as of December 31, 2015 in order 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. We recognize accrued interest and penalties related to income taxes as a component of income tax expense. We recognized a $3 million benefit for net interest and penalties for both 2015 and 2014, and a $13 million benefit for 2013.

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

Table 18.5: 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, 2014	$	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
Additions for tax positions related to prior years	38			8			46
Reductions for tax positions related to prior years due to IRS and other settlements	(15		)	(11		)	(26		)
Balance as of December 31, 2015	$	130		$	33		$	163
Portion of balance at December 31, 2015 that, if recognized, would impact the effective income tax rate	$	85		$	21		$	106

We are subject to examination by the IRS and other tax authorities in certain countries and states in which we operate. The tax years subject to examination vary by jurisdiction. During 2015, the IRS continued examining the Company’s federal income tax returns for the tax years 2012 and 2013. These examinations are expected to be completed in 2016.

The Company entered into the IRS Compliance Assurance Process (“CAP”) for the Company’s 2014 federal income tax return. The CAP examination process was substantially completed in 2015 prior to the filing of the Company’s 2014 federal income tax return. The Company has continued in the CAP examination process for the 2015 tax year, with a similar expectation that the IRS examination will be substantially completed prior to the filing of its 2015 federal income tax return in 2016. The Company has also been accepted into CAP for 2016. 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, 2015, U.S. income taxes and foreign withholding taxes have not been provided on approximately $1.5 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, 2015, 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 Bancorporation, Inc. (“North Fork”) and the acquisition of Chevy Chase Bank, F.S.B. (“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.