Note 22.

Income Taxes

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


(In millions)	2011		2010			2009
Current:
Federal	$	49	$	(885	)	$	75
State		54		15			39
Non-U.S.		295		156			157


Total current expense (benefit)		398		(714	)		271

Deferred:
Federal		134		745			383
State		8		141			28
Non-U.S.		76		358			40

Total deferred expense		218		1,244			451

Total income tax expense	$	616	$	530		$	722

The amounts for 2011 presented in the table included income tax expense of $55 million associated with an indemnification benefit for an income tax claim related to the 2010 acquisition of the Intesa securities services business (refer to note 2). The amounts for 2009 presented in the table excluded an income tax benefit of $2.41 billion associated with the extraordinary loss recorded in connection with the conduit consolidation.

Amounts of income tax expense (benefit) related to net gains (losses) from sales of investment securities were $55 million, $(98) million and $147 million for 2011, 2010 and 2009, respectively. Pre-tax income attributable to our operations located outside the U.S. was $1.70 billion, $1.34 billion and $801 million for 2011, 2010 and 2009, respectively.

Pre-tax earnings of our non-U.S. subsidiaries are subject to U.S. income tax when effectively repatriated. As of December 31, 2011, we have chosen to indefinitely reinvest $2.2 billion of the retained 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 determining the tax liability that could be incurred upon repatriation is not practicable.

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


(In millions)	2011			2010
Deferred tax liabilities:
Lease financing transactions	$	397		$	463
Fixed and intangible assets		1,067			1,029
Other		21			122

Total deferred tax liabilities	$	1,485		$	1,614


Deferred tax assets:
Foreign currency translation	$	2		$	70
Unrealized losses on securities, net		651			1,083
Deferred compensation		162			183
Defined benefit pension plan		180			121
Expenses		141			177
Real estate		28			33
Other		104			137

Total deferred tax assets		1,268			1,804

Valuation allowance for deferred tax assets		(19	)		(18	)

Deferred tax assets net of valuation allowance	$	1,249		$	1,786

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, 2011 and 2010, we had deferred tax assets associated with non-U.S. and state loss carryforwards of $34 million and $26 million, respectively, included in "other" in the above table. Loss carryforwards expire in 2012 through 2031.

The following table presents a reconciliation of the U.S. statutory income tax rate to the effective tax rate based on income before income tax expense, excluding the aforementioned extraordinary loss for 2009, for the years ended December 31:


	2011			2010			2009
U.S. federal income tax rate		35.0	%		35.0	%		35.0	%
Changes from statutory rate:
State taxes, net of federal benefit		2.0			1.2			1.7
Tax-exempt income		(2.9	)		(3.6	)		(3.1	)
Tax credits		(1.5	)		(1.3	)		(1.6	)
Foreign tax differential		(4.3	)		(3.6	)		(5.0	)
Transactions related to investment securities ⁽¹⁾		(4.1	)		(2.3	)		—
Non-deductible penalty		—			—			1.0
Other, net		.1			—			.6


Effective tax rate		24.3	%		25.4	%		28.6	%

⁽¹⁾

Amounts for both years represented the effect of discrete tax benefits related to the cost to terminate funding obligations that supported former conduit asset structures; the amount for 2010 also included the partial write-off of a deferred tax asset associated with certain of the 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)	2011			2010
Balance at beginning of year	$	446		$	386
Increase (Decrease) related to agreements with tax authorities		(322	)		27
Increase related to tax positions taken during current year		1			33


Balance at end of year	$	125		$	446

The balance as of December 31, 2011 presented in the table included $112 million of tax positions considered highly certain to ultimately result in tax deductions or credits, but for which the timing of such deductions or credits is uncertain. It is reasonably possible that unrecognized tax benefits will decrease by up to $44 million over the next 12 months as a result of amendments of state tax filings consistent with our agreement with the IRS to close their review of the tax years 2000—2006. Refer to note 10 for additional information about the agreement.

We record interest and penalties related to income taxes as a component of income tax expense. Income tax expense for 2011 and 2009 included related interest and penalties of approximately $10 million and $3 million, respectively. Income tax expense for 2010 included no interest and penalties. We had recorded accrued interest of approximately $8 million and $65 million as of December 31, 2011 and 2010, respectively.

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, 2011 for tax exposures and related interest expense.