Marathon Petroleum Corp | 2013 | FY | 3


Income Taxes
Income tax provisions (benefits) were:
 
2013
 
2012
 
2011
(In millions)
Current
 
Deferred
 
Total
 
Current
 
Deferred
 
Total
 
Current
 
Deferred
 
Total
Federal
$
954

 
$
20

 
$
974

 
$
1,185

 
$
432

 
$
1,617

 
$
1,040

 
$
139

 
$
1,179

State and local
131

 
8

 
139

 
169

 
57

 
226

 
152

 
(16
)
 
136

Foreign
5

 
(5
)
 

 
(1
)
 
3

 
2

 
15

 

 
15

Total
$
1,090

 
$
23

 
$
1,113

 
$
1,353

 
$
492

 
$
1,845

 
$
1,207

 
$
123

 
$
1,330


The provision for income taxes for periods prior to the Spinoff have been computed as if we were a stand-alone company.
A reconciliation of the federal statutory income tax rate (35 percent) applied to income before income taxes to the provision for income taxes follows:
 
2013
 
2012
 
2011
Statutory rate applied to income before income taxes
35
 %
 
35
 %
 
35
 %
State and local income taxes, net of federal income tax effects
3

 
2

 
2

Domestic manufacturing deduction
(2
)
 
(1
)
 
(1
)
Other
(2
)
 
(1
)
 

Provision for income taxes
34
 %
 
35
 %
 
36
 %


Deferred tax assets and liabilities resulted from the following:
 
December 31,         
(In millions)
2013
 
2012
Deferred tax assets:
 
 
 
Employee benefits
$
483

 
$
585

Environmental
37

 
35

Other
49

 
55

Total deferred tax assets
569

 
675

Deferred tax liabilities:
 
 
 
Property, plant and equipment
2,290

 
2,225

Inventories
614

 
610

Investments in subsidiaries and affiliates
267

 
307

Other
70

 
29

Total deferred tax liabilities
3,241

 
3,171

Net deferred tax liabilities
$
2,672

 
$
2,496


Net deferred tax liabilities were classified in the consolidated balance sheets as follows:
 
December 31,         
(In millions)
2013
 
2012
Assets:
 
 
 
Other noncurrent assets
$
2

 
$

Liabilities:
 
 
 
Accrued taxes
370

 
446

Deferred income taxes
2,304

 
2,050

Net deferred tax liabilities
$
2,672

 
$
2,496


The ability to realize the benefit of foreign tax credits is based on certain estimates concerning future financial conditions, income generated from foreign sources and our tax profile in the years that such credits may be claimed. A federal valuation allowance was established in 2013 for $2 million due to changes in the expected realizability of foreign tax credits.
MPC was a new taxpayer beginning in 2011. Prior to 2011, MPC was included in the Marathon Oil federal income tax returns for applicable years. MPC is continuously undergoing examination of its U.S. federal income tax returns by the Internal Revenue Service. Such audits have been completed through the 2009 tax year. We believe adequate provision has been made for federal income taxes and interest which may become payable for years not yet settled. Further, we are routinely involved in U.S. state income tax audits. We believe all other audits will be resolved with the amounts paid and/or provided for these liabilities. As of December 31, 2013, our income tax returns remain subject to examination in the following major tax jurisdictions for the tax years indicated:
United States Federal
2010
-
2012
States
2004
-
2012

As a result of the Spinoff and pursuant to the tax sharing agreement by Marathon Oil and MPC, the unrecognized tax benefits related to MPC operations for which Marathon Oil was the taxpayer remain the responsibility of Marathon Oil and MPC has indemnified Marathon Oil. Before the Spinoff, MPC made a prepayment of a portion of the unrecognized tax benefits to Marathon Oil, which is reflected in the table below as settlements. See Note 25. During 2013, we settled with Marathon Oil our U.S. federal and related state return liabilities for the 2008-2009 tax years, resulting in a reduction in unrecognized tax benefits of $21 million, which are also reflected in the table below as settlements.
During 2013, we settled with Marathon Oil for the 2011 period prior to the spinoff based on filed tax returns and in accordance with the tax sharing agreement, resulting in a $39 million increase to additional paid-in capital.
The following table summarizes the activity in unrecognized tax benefits:
(In millions)
2013
 
2012
 
2011
January 1 balance
$
40

 
$
20

 
$
14

Additions for tax positions of prior years
30

 
32

 
50

Reductions for tax positions of prior years
(25
)
 
(6
)
 

Settlements
(30
)
 
(6
)
 
(44
)
Statute of limitations
(2
)
 

 

December 31 balance
$
13

 
$
40

 
$
20


If the unrecognized tax benefits as of December 31, 2013 were recognized, $6 million would affect our effective income tax rate. There were $5 million of uncertain tax positions as of December 31, 2013 for which it is reasonably possible that the amount of unrecognized tax benefits would significantly increase or decrease during the next twelve months.
Interest and penalties related to income taxes are recorded as part of the provision for income taxes. Such interest and penalties were net receipts (expenses) of ($11 million), $1 million and ($5 million) in 2013, 2012 and 2011. As of December 31, 2013 and 2012, $15 million and $9 million of interest and penalties were accrued related to income taxes.

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