Income Taxes

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



(In millions)	2013		2012			2011
Current:
Federal	$	151	$	153		$	49
State	39		65			54
Non-U.S.	248		262			295
Total current expense	438		480			398
Deferred:
Federal	70		262			134
State	25		26			8
Non-U.S.	17		(63		)	76
Total deferred expense	112		225			218
Total income tax expense	$	550	$	705		$	616

In the fourth quarter of 2013, we completed a multi-year tax data enhancement process, the final stages of which identified a reconciliation difference in our deferred tax accounts, and we determined that our deferred tax liabilities were overstated by $50 million and our deferred tax assets were understated by $21 million. We evaluated the qualitative and quantitative effects of the resulting overstatement of income tax expense, and concluded that such overstatement did not have a material effect on any prior annual or quarterly consolidated financial statements. Accordingly, in the fourth quarter of 2013, we recorded an adjustment in our consolidated statement of income to correct this difference, which resulted in an out-of-period income tax benefit of $71 million. This income tax benefit is reflected in the table above as a reduction of total deferred expense for 2013.

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.

Amounts of income tax expense (benefit) related to net gains (losses) from sales of investment securities were $6 million, $22 million and $55 million for 2013, 2012 and 2011, respectively. Pre-tax income attributable to our operations located outside the U.S. was approximately $1.25 billion, $1.11 billion and $1.23 billion for 2013, 2012 and 2011, respectively.

Pre-tax earnings of our non-U.S. subsidiaries are subject to U.S. income tax when effectively repatriated. As of December 31, 2013, we have chosen to indefinitely reinvest approximately $3.5 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. As of December 31, 2013, if such earnings had been repatriated to the U.S., we would have provided for approximately $690 million of additional income tax expense.

The following table presents significant components of our gross deferred tax assets and gross deferred tax liabilities as of December 31. Deferred tax assets and deferred tax liabilities recorded in our consolidated statement of condition are netted within the same tax jurisdiction.



(In millions)	2013			2012
Deferred tax assets:
Unrealized losses on investment securities, net	$	421		$	131
Deferred compensation⁽¹⁾	209			175
Defined benefit pension plan	97			155
Restructuring charges and other reserves	126			172
Real estate	18			20
General business credits	3			76
Other	54			63
Total deferred tax assets	928			792
Valuation allowance for deferred tax assets	(33		)	(28		)
Deferred tax assets, net of valuation allowance	$	895		$	764
Deferred tax liabilities:
Leveraged lease financing	$	359		$	370
Fixed and intangible assets	1,073			1,099
Non-U.S. earnings	105			118
Foreign currency translation	35			56
Other⁽²⁾	44			81
Total deferred tax liabilities	$	1,616		$	1,724

⁽¹⁾ Amount as of December 31, 2013 reflected an increase of $21 million associated with an out-of-period income tax benefit recorded in 2013.

⁽²⁾ Amount as of December 31, 2013 reflected a decrease of $50 million associated with an out-of-period income tax benefit recorded in 2013.

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, 2013 and 2012, we had deferred tax assets associated with tax credit carryforwards of $3 million and $76 million, respectively, which are presented in the table above. The tax credit carryforwards expire in 2033. As of December 31, 2013 and 2012, we had deferred tax assets associated with non-U.S. and state loss carryforwards of $50 million and $45 million, respectively, included in “other” in the table above. Of the total loss carryforwards of $50 million as of December 31, 2013, $33 million do not expire, and the remaining $17 million expire 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:



	2013		2012		2011
U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
Changes from statutory rate:
State taxes, net of federal benefit	1.6		1.8		2.0
Tax-exempt income	(3.7	)	(2.6	)	(2.9	)
Tax credits	(3.6	)	(2.8	)	(1.5	)
Foreign tax differential	(5.9	)	(5.5	)	(4.3	)
Transactions related to investment securities⁽¹⁾	—		—		(4.1	)
Out-of-period income tax benefit⁽²⁾	(2.7	)	—		—
Other, net	(.2	)	(.4	)	.1
Effective tax rate	20.5	%	25.5	%	24.3	%


⁽¹⁾	Amounts for 2011 represented the effect of discrete tax benefits attributable to costs incurred in terminating former conduit asset structures.

⁽²⁾Excluding the impact of the out-of-period income tax benefit of $71 million described earlier in this note, our effective tax rate would have been 23.2%.

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



(In millions)	2013			2012
Beginning balance	$	95		$	125
Decrease related to agreements with tax authorities	(4		)	(45		)
Increase related to tax positions taken during current year	10			2
Increase related to tax positions taken during prior year	57			13
Ending balance	$	158		$	95

The amount of unrecognized tax benefits that, if recognized, would reduce income tax expense and our effective tax rate was $98 million as of December 31, 2013. Unrecognized tax benefits do not include accrued interest of approximately $7 million and $2 million as of December 31, 2013 and 2012, respectively. It is reasonably possible that the unrecognized tax benefits will decrease by $5 million to $6 million within the next 12 months due to potential agreements covering outstanding refund claims.

We recorded interest and penalties related to income taxes as a component of income tax expense. Income tax expense for the year ended December 31, 2013 included related interest and penalties of approximately $3 million. 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.

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 2009. Management believes that we have sufficient accrued liabilities as of December 31, 2013 for tax exposures and related interest expense.