Income Taxes

Income taxes charged to income were:



	Millions of Dollars
	2016			2015		2014
Income Taxes
Federal
Current	$	(105	)	1,128		1,661
Deferred	645			444		(378	)
Foreign
Current	66			(74	)	22
Deferred	(84		)	42		80
State and local
Current	(24		)	227		274
Deferred	49			(3	)	(5	)
	$	547		1,764		1,654

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Major components of deferred tax liabilities and assets at December 31 were:



	Millions of Dollars
	2016		2015
Deferred Tax Liabilities
Properties, plants and equipment, and intangibles	$	4,525	4,361
Investment in joint ventures	2,442		2,292
Investment in subsidiaries	803		236
Inventory	154		176
Other	19		24
Total deferred tax liabilities	7,943		7,089
Deferred Tax Assets
Benefit plan accruals	669		751
Asset retirement obligations and accrued environmental costs	211		215
Other financial accruals and deferrals	188		175
Loss and credit carryforwards	261		227
Other	1		1
Total deferred tax assets	1,330		1,369
Less: valuation allowance	38		160
Net deferred tax assets	1,292		1,209
Net deferred tax liabilities	$	6,651	5,880

The loss and credit carryforwards deferred tax assets are primarily related to a German interest deduction carryforward of $295 million, an alternative minimum tax credit of $59 million and a foreign tax credit of $89 million. The German interest deduction carryforward and the alternative minimum tax credit may be carried forward indefinitely. The foreign tax credit expires in 2026.

Valuation allowances have been established to reduce deferred tax assets to an amount that will, more likely than not, be realized. During 2016, valuation allowances decreased by a total of $122 million. This decrease was primarily attributable to the reversal of valuation allowances related to interest deduction carryforwards in Germany and the sale of the Whitegate Refinery. During 2016, certain German intercompany loans were refinanced at lower interest rates. As a result of reduced interest rates, as well as increased earnings (current and forecasted), the likelihood of realizing approximately $68 million in tax benefits associated with interest deduction carryforwards is now considered more likely than not. The sale of the Whitegate Refinery resulted in the elimination of a net deferred tax asset and corresponding valuation allowance of approximately $45 million. Based on our historical taxable income, expectations for the future, and available tax-planning strategies, management expects the remaining net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and the tax consequences of future taxable income.

As of December 31, 2016, we had undistributed earnings related to foreign subsidiaries and foreign corporate joint ventures of approximately $3 billion for which deferred income taxes have not been provided. We plan to reinvest these earnings for the foreseeable future. If these amounts were distributed to the United States, we would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liability is not practicable due to the number of unknown variables inherent in the calculation.

As a result of the Separation and pursuant to the Tax Sharing Agreement with ConocoPhillips, the unrecognized tax benefits related to our operations for which ConocoPhillips was the taxpayer remain the responsibility of ConocoPhillips, and we have indemnified ConocoPhillips for such amounts. Those unrecognized tax benefits are included in the following table which shows a reconciliation of the beginning and ending unrecognized tax benefits.



	Millions of Dollars
	2016			2015		2014

Balance at January 1	$	82		142		202
Additions based on tax positions related to the current year	—			—		13
Additions for tax positions of prior years	5			6		14
Reductions for tax positions of prior years	(17		)	(17	)	(68	)
Settlements	—			(49	)	(19	)
Lapse of statute	—			—		—
Balance at December 31	$	70		82		142

Included in the balance of unrecognized tax benefits for 2016, 2015 and 2014 were $13 million, $34 million and $98 million, respectively, which, if recognized, would affect our effective tax rate. With respect to various unrecognized tax benefits and the related accrued liability, approximately $32 million may be recognized or paid within the next twelve months due to completion of audits.

At December 31, 2016, 2015 and 2014, accrued liabilities for interest and penalties totaled $12 million, $19 million and $16 million, respectively, net of accrued income taxes. As a result of reversing certain of these accruals, earnings increased by $7 million and $3 million in 2016 and 2015, respectively. Neither interest nor penalties had an impact on earnings in 2014.

We file tax returns in the U.S. federal jurisdiction and in many foreign and state jurisdictions. Audits in significant jurisdictions are generally complete as follows: United Kingdom (2011), Germany (2011) and United States (2008). Certain issues remain in dispute for audited years, and unrecognized tax benefits for years still subject to or currently undergoing an audit are subject to change. As a consequence, the balance in unrecognized tax benefits can be expected to fluctuate from period to period. Although it is reasonably possible such changes could be significant when compared with our total unrecognized tax benefits, the amount of change is not estimable.

The amounts of U.S. and foreign income (loss) before income taxes, with a reconciliation of tax at the federal statutory rate with the provision for income taxes, were:



	Millions of Dollars							Percent of Pre-tax Income
	2016			2015		2014		2016		2015		2014
Income from continuing operations before income taxes
United States	$	1,713		4,983		5,121		78.2	%	82.4		89.1
Foreign	478			1,061		624		21.8		17.6		10.9
	$	2,191		6,044		5,745		100.0	%	100.0		100.0

Federal statutory income tax	$	767		2,115		2,011		35.0	%	35.0		35.0
Goodwill allocated to assets sold	—			41		18		—		0.7		0.3
Sale of foreign subsidiaries	—			(125	)	(293	)	—		(2.1	)	(5.1	)
Foreign rate differential	(152		)	(239	)	(184	)	(6.9	)	(3.9	)	(3.2	)
German tax legislation	—			(103	)	—		—		(1.7	)	—
Change in valuation allowance	(81		)	(17	)	(14	)	(3.7	)	(0.2	)	(0.2	)
Federal manufacturing deduction	—			(77	)	(81	)	—		(1.3	)	(1.4	)
State income tax, net of federal benefit	12			150		180		0.6		2.5		3.1
Other	1			19		17		—		0.2		0.3
	$	547		1,764		1,654		25.0	%	29.2		28.8

Included in the line item “Sale of foreign subsidiaries” is a $224 million tax benefit attributable to the realization of excess tax basis during the fourth quarter of 2014 resulting from the sale of MRC and a $72 million benefit realized in 2015 attributable to the nontaxable gain from the sale of ICHP.

Income tax expenses of $150 million in 2016, and income tax benefits of $34 million and $37 million, for the years 2015 and 2014, respectively, are reflected in the “Capital in Excess of Par” column of the consolidated statement of equity.