Income Taxes

The following table presents the components of income tax expense for the years ended December 31:



(In millions)	2012			2011		2010
Current:
Federal	$	153		$	49	$	(885	)
State	65			54		15
Non-U.S.	262			295		156
Total current expense (benefit)	480			398		(714		)

Deferred:
Federal	262			134		745
State	26			8		141
Non-U.S.	(63		)	76		358
Total deferred expense	225			218		1,244
Total income tax expense	$	705		$	616	$	530

The amounts for 2012 and 2011 presented in the table included income tax expense of $40 million and $55 million, respectively, associated with indemnification benefits, recorded as offsets to acquisition costs, for the assumption of income tax liabilities related to the 2010 Intesa acquisition (refer to note 20).

Amounts of income tax expense (benefit) related to net gains (losses) from sales of investment securities were $22 million, $55 million and $(98) million for 2012, 2011 and 2010, respectively. Pre-tax income attributable to our operations located outside the U.S. was approximately $1.11 billion, $1.23 billion and $1.34 billion for 2012, 2011 and 2010, respectively.

Pre-tax earnings of our non-U.S. subsidiaries are subject to U.S. income tax when effectively repatriated. As of December 31, 2012, we have chosen to indefinitely reinvest approximately $2.7 billion of earnings of certain of our non-U.S. subsidiaries. No provision has been recorded for U.S. income taxes that could be incurred upon repatriation, and determination of the tax liability that could be incurred upon repatriation is not practicable.

The following table presents significant components of deferred tax assets and liabilities as of December 31:



(In millions)	2012			2011
Deferred tax assets:
Foreign currency translation	$	—		$	2
Unrealized losses on investment securities, net	131			651
Deferred compensation	175			162
Defined benefit pension plan	155			180
Restructuring charges and other reserves	172			141
Real estate	20			28
General business credits	76			34
Non-U.S. earnings	—			14
Other	63			56
Total deferred tax assets	792			1,268
Valuation allowance for deferred tax assets	(28		)	(19		)
Deferred tax assets, net of valuation allowance	$	764		$	1,249

Deferred tax liabilities:
Leveraged lease financing	$	370		$	397
Fixed and intangible assets	1,099			1,067
Non-U.S. earnings	118			—
Foreign currency translation	56			—
Other	81			21
Total deferred tax liabilities	$	1,724		$	1,485

Management considers the valuation allowance adequate to reduce the total deferred tax assets to an aggregate amount that will more likely than not be realized. Management has determined that a valuation allowance is not required for the remaining deferred tax assets because it is more likely than not that there is sufficient taxable income of the appropriate nature within the carryback and carryforward periods to realize these assets. As of December 31, 2012 and 2011, we had deferred tax assets associated with tax credit carryforwards of $76 million and $34 million, respectively, which are presented in the above table. The tax credit carryforwards expire in 2032. As of December 31, 2012 and 2011, we had deferred tax assets associated with non-U.S. and state loss carryforwards of $45 million and $34 million, respectively, included in “other” in the above table. The loss carryforwards expire in 2013 through 2031.

The following table presents a reconciliation of the U.S. statutory income tax rate to our effective tax rate based on income before income tax expense for the years ended December 31:



	2012		2011		2010
U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
Changes from statutory rate:
State taxes, net of federal benefit	1.8		2.0		1.2
Tax-exempt income	(2.6	)	(2.9	)	(3.6	)
Tax credits	(2.8	)	(1.5	)	(1.3	)
Foreign tax differential	(5.5	)	(4.3	)	(3.6	)
Transactions related to investment securities ⁽¹⁾	—		(4.1	)	(2.3	)
Other, net	(.4	)	.1		—
Effective tax rate	25.5	%	24.3	%	25.4	%

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⁽¹⁾	Amounts for 2011 and 2010 represented the effect of discrete tax benefits attributable to costs incurred in terminating former conduit asset structures; amount for 2010 also included the partial write-off of a deferred tax asset associated with certain investment securities sold in connection with our December 2010 investment portfolio repositioning.

The following table presents activity related to unrecognized tax benefits as of December 31:



(In millions)	2012			2011
Balance at beginning of year	$	125		$	446
Decrease related to agreements with tax authorities	(45		)	(322		)
Increase related to tax positions taken during current year	2			1
Increase related to tax positions taken during prior year	13			—
Balance at end of year	$	95		$	125

The amount of unrecognized tax benefits that, if recognized, would reduce income tax expense and our effective tax rate was $35 million as of December 31, 2012. Unrecognized tax benefits included accrued interest of approximately $2 million and $8 million as of December 31, 2012 and 2011, respectively.

We record interest and penalties related to income taxes as a component of income tax expense. Income tax expense for the year ended December 31, 2012 included a refund, net of related interest and penalties, of approximately $12 million. Income tax expense for the year ended December 31, 2011 included related interest and penalties of approximately $10 million. Income tax expense for the year ended December 31, 2010 included no interest and penalties.

We are presently under audit by a number of tax authorities. The earliest tax year open to examination in jurisdictions where we have material operations is 2007. Management believes that we have sufficient accrued liabilities as of December 31, 2012 for tax exposures and related interest expense.