Income Taxes

We use an asset-and-liability approach to account for income taxes. Our objective is to recognize the amount of taxes payable or refundable for the current year through charges or credits to the current tax provision, and to recognize deferred tax assets and liabilities for future tax consequences of temporary differences between amounts reported in our consolidated financial statements and their respective tax bases. The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates. The effects of a tax position on our consolidated financial statements are recognized when we believe it is more likely than not that the position will be sustained. A valuation allowance is established if it is considered more likely than not that all or a portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities recorded in our consolidated statement of condition are netted within the same tax jurisdiction.

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



(In millions)	2015			2014		2013
Current:
Federal	$	52		$	59	$	193
State	92			39		47
Non-U.S.	342			257		248
Total current expense	486			355		488
Deferred:
Federal	(39		)	38		95
State	40			10		31
Non-U.S.	(169		)	12		2
Total deferred (benefit) expense	(168		)	60		128
Total income tax expense	$	318		$	415	$	616

In 2015 we recognized benefits associated with the reduction of an Italian deferred tax liability and the approval of a tax refund for prior years, partially offset by a change in New York tax law.

In 2014 we expanded our municipal securities portfolio, increased our investments in alternative energy projects and realized greater benefits from our non-U.S. operations.

The amount of income tax expense (benefit) related to net gains (losses) from sales of investment securities was $(3) million, $5 million and $6 million in 2015, 2014 and 2013, respectively. Pre-tax income attributable to our operations located outside the U.S. was approximately $1.30 billion, $1.33 billion and $1.25 billion for 2015, 2014 and 2013, respectively.

Pre-tax earnings of our non-U.S. subsidiaries are subject to U.S. income tax when effectively repatriated. As of December 31, 2015, we have chosen to indefinitely reinvest approximately $4.9 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, 2015, if such earnings had been repatriated to the U.S., we would have provided for approximately $1.1 billion 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:



(In millions)	2015			2014
Deferred tax assets:
Unrealized losses on investment securities, net	$	57		$	—
Deferred compensation	167			168
Defined benefit pension plan	143			193
Restructuring charges and other reserves	363			237
Foreign currency translation	155			56
Real estate	20			9
Other	32			68
Total deferred tax assets	937			731
Valuation allowance for deferred tax assets	(27		)	(54		)
Deferred tax assets, net of valuation allowance	$	910		$	677
Deferred tax liabilities:
Unrealized gains on securities, net	$	—		$	5
Leveraged lease financing	334			326
Fixed and intangible assets	804			1,006
Non-U.S. earnings	265			167
Other	121			83
Total deferred tax liabilities	$	1,524		$	1,587

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, 2015 and 2014, we had deferred tax assets associated with tax credit carryforwards of $2 million in each year. The tax credit carryforwards do not expire. As of December 31, 2015 and 2014, we had deferred tax assets associated with non-U.S. and state loss carryforwards of $26 million and $53 million, respectively, included in “other” in the table above. Of the total loss carryforwards of $26 million as of December 31, 2015, $19 million do not expire, and the remaining $7 million expire through 2034. The loss carryforwards have a valuation allowance of $22 million and $45 million for 2015 and 2014.

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:



	2015		2014		2013
U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
Changes from statutory rate:
State taxes, net of federal benefit	4.2		1.5		1.6
Tax-exempt income	(5.6	)	(5.1	)	(3.7	)
Tax credits	(9.4	)	(6.8	)	(3.6	)
Foreign tax differential	(9.6	)	(8.5	)	(5.9	)
Tax Refund	(2.8	)	—		—
Litigation Expense	2.7		1.3		—
Other, net	(0.7	)	(0.3	)	(0.3	)
Effective tax rate	13.8	%	17.1	%	23.1	%

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



(In millions)	2015			2014
Beginning balance	$	163		$	158
Decrease related to agreements with tax authorities	(122		)	(9		)
Increase related to tax positions taken during current year	8			8
Increase related to tax positions taken during prior year	14			6
Ending balance	$	63		$	163

The amount of unrecognized tax benefits that, if recognized, would reduce income tax expense and our effective tax rate was $55 million as of December 31, 2015. Unrecognized tax benefits do not include accrued interest of approximately $3 million and $9 million as of December 31, 2015 and 2014.

It is reasonably possible that the unrecognized tax benefits could decrease by up to $7 million within the next 12 months due to the resolution of an audit, which would not reduce our income tax expense and our effective tax rate. Management believes that we have sufficient accrued liabilities as of December 31, 2015 for tax exposures and related interest expense.

We recorded interest and penalties related to income taxes as a component of income tax expense. Income tax expense included related interest and penalties of approximately $5 million and $3 million for 2015 and 2014