Note 8 – Income Taxes
Our provision for federal and foreign income tax expense for continuing operations consisted of the following (in millions):
| 2013 | 2012 | 2011 | ||||||||||
|
Federal income tax expense: |
||||||||||||
|
Current |
$ | 1,204 | $ | 387 | $ | 912 | ||||||
|
Deferred |
3 | 925 | 9 | |||||||||
|
Total federal income tax expense |
1,207 | 1,312 | 921 | |||||||||
|
Foreign income tax expense (benefit): |
||||||||||||
|
Current |
6 | 14 | 38 | |||||||||
|
Deferred |
(8 | ) | 1 | 5 | ||||||||
|
Total foreign income tax (benefit) expense |
(2 | ) | 15 | 43 | ||||||||
|
Total income tax expense |
$ | 1,205 | $ | 1,327 | $ | 964 | ||||||
State income taxes are included in our operations as general and administrative costs and, under U.S. Government regulations, are allowable costs in establishing prices for the products and services we sell to the U.S. Government. Therefore, a substantial portion of state income taxes is included in our net sales and cost of sales. As a result, the impact of certain transactions on our operating profit and of other matters presented in these financial statements is disclosed net of state income taxes. Our total net state income tax expense was $121 million for 2013, $183 million for 2012, and $149 million for 2011.
Our reconciliation of the 35% U.S. federal statutory income tax rate to actual income tax expense for continuing operations is as follows (in millions):
| 2013 | 2012 | 2011 | ||||||||||
|
Income tax expense at the U.S. federal statutory tax rate |
$ | 1,454 | $ | 1,425 | $ | 1,271 | ||||||
|
U.S. manufacturing deduction benefit |
(100 | ) | (29 | ) | (106) | |||||||
|
Research and development tax credit |
(96 | ) | — | (35) | ||||||||
|
Tax deductible dividends |
(77 | ) | (73 | ) | (62) | |||||||
|
Goodwill impairment - non-deductible portion |
50 | — | — | |||||||||
|
IRS appeals and audit resolution |
— | — | (89) | |||||||||
|
Other, net |
(26 | ) | 4 | (15) | ||||||||
|
Income tax expense |
$ | 1,205 | $ | 1,327 | $ | 964 | ||||||
Our tax-deductible pension contributions were significantly higher in 2012 than in 2013 or 2011 and, accordingly, our U.S. manufacturing deduction for 2012 was significantly reduced.
We recognized tax benefits of $96 million in 2013 and $35 million in 2011 from U.S. research and development (R&D) tax credits. On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012, which retroactively reinstated the R&D tax credit for two years, from January 1, 2012 through December 31, 2013. As the effects of tax law changes are recognized in the period in which new legislation is enacted, $37 million ($.11 per share) of tax benefit attributable to 2012 was recorded during 2013, in addition to $39 million ($.12 per share) of tax benefit attributable to 2013.
We receive a tax deduction for dividends paid on shares of our common stock held by certain of our defined contribution plans with an employee stock ownership plan feature. The amount of the tax deduction has increased as we increased our dividend over the last three years, partially offset by a decline in the number of shares in these plans.
The non-cash goodwill impairment charge (Note 1) of $195 million, net of state tax benefits, increased our effective tax rate because only a portion of the charge will qualify for a tax deduction.
In April 2011, the U.S. Congressional Joint Committee on Taxation completed its review of the IRS Appeals Division’s resolution of certain adjustments related to our tax years 2003 through 2008. As a result, we recognized additional tax benefits and reduced our income tax expense for 2011 by $89 million ($.26 per share).
We participate in the IRS Compliance Assurance Process program. The IRS examinations of the years 2012, 2011, and 2010 were completed in the fourth quarter of 2013, 2012, and 2011. We also resolved certain issues in our 2009 tax return with the IRS Appeals Division in 2012. The resolution of these examinations and issues did not have a material impact on our effective tax rates.
The primary components of our federal and foreign deferred income tax assets and liabilities at December 31 were as follows (in millions):
| 2013 | 2012 | |||||||
|
Deferred tax assets related to: |
||||||||
|
Accrued compensation and benefits |
$ | 918 | $ | 909 | ||||
|
Pensions (a) |
3,198 | 5,117 | ||||||
|
Other postretirement benefit obligations |
316 | 433 | ||||||
|
Contract accounting methods |
721 | 853 | ||||||
|
Foreign company operating losses and credits |
52 | 34 | ||||||
|
Other |
223 | 284 | ||||||
|
Valuation allowance (b) |
(8 | ) | (8) | |||||
|
Deferred tax assets, net |
5,420 | 7,622 | ||||||
|
Deferred tax liabilities related to: |
||||||||
|
Goodwill and purchased intangibles |
410 | 402 | ||||||
|
Property, plant, and equipment |
575 | 604 | ||||||
|
Exchanged debt securities and other (c) |
502 | 544 | ||||||
|
Deferred tax liabilities |
1,487 | 1,550 | ||||||
|
Net deferred tax assets (d) |
$ | 3,933 | $ | 6,072 | ||||
| (a) |
The decrease in 2013 was primarily due to using a higher discount rate for the annual measurement adjustment related to our postretirement benefit plans (Note 10). |
| (b) |
A valuation allowance has been provided against certain foreign company deferred tax assets arising from carryforwards of unused tax benefits. |
| (c) |
Includes deferred taxes associated with the exchange of debt securities in 2012 (Note 9) and prior years. |
| (d) |
Includes net foreign current deferred tax liabilities, which are included on the Balance Sheets in other current liabilities. |
As of December 31, 2013 and 2012, our liabilities associated with unrecognized tax benefits are not material.
We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various foreign jurisdictions. With few exceptions, the statute of limitations is no longer open for U.S. federal or non-U.S. income tax examinations for the years before 2010, other than with respect to refunds.
U.S. income taxes and foreign withholding taxes have not been provided on earnings of $222 million, $211 million, and $193 million that have not been distributed by our non-U.S. companies as of December 31, 2013, 2012, and 2011. Our intention is to permanently reinvest these earnings, thereby indefinitely postponing their remittance to the U.S. If these earnings were remitted, we estimate that the additional income taxes after foreign tax credits would have been approximately $50 million in 2013, $45 million in 2012, and $41 million in 2011.
Our federal and foreign income tax payments, net of refunds received, were $787 million in 2013, $890 million in 2012, and $722 million in 2011. Our 2013 net payments reflect a $550 million refund from the IRS primarily attributable to our tax-deductible discretionary pension contributions during the fourth quarter of 2012; our 2012 net payments reflect a $153 million refund from the IRS related to a 2011 capital loss carryback claim; and our 2011 net payments reflect a $250 million refund from the IRS related to estimated taxes paid for 2010. As of December 31, 2013 and 2012, we had federal and foreign taxes receivable of $313 million and $662 million recorded within other current assets on our Balance Sheet, primarily attributable to our tax-deductible discretionary pension contributions in the fourth quarter of 2013 and 2012 and our debt exchange transaction in the fourth quarter of 2012.