Chapter 19 – Income Tax Disclosures
SOUTHWEST AIRLINES (December 31, 2012)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred tax assets and liabilities at December 31, 2012 and 2011, are as follows:
(in millions) 2011
DEFERRED TAX LIABILITIES:
Accelerated depreciation
Fuel derivative instruments
Other
Total deferred tax liabilities
DEFERRED TAX ASSETS:
Fuel derivative instruments
Deferred gains from sale and leaseback of aircraft
Capital and operating leases
Accrued engine maintenance
Accrued employee benefits
State taxes
Business partner income
Net operating losses and credit carrybacks
Other
Total deferred tax assets
Net deferred tax liability
2012
$ 3,812
33
70
3,915
40
24
179
84
281
77
339
83
170
1,277
$ 2,638
$ 3,537
—
84
3,621
155
267
44
141
43
78
207
212
171
1,318
$ 2,303
The provision for income taxes is composed of the following:
(in millions)
CURRENT:
Federal
State
Total current
DEFERRED:
Federal
State
Total deferred
2012
$ (45 )
12
(33 )
287
10
297
$ 264
2011
$ 4
13
17
122
6
128
$ 145
2010
$ 198
61
8
$ 286
69
19
217
The effective tax rate on income before income taxes differed from the federal income tax statutory rate for the following reasons:
(in millions)
Tax at statutory
U.S. tax rates
Nondeductible items
State income taxes, net of federal benefit
Other, net
Total income tax provision
2012
$ 240
10
14
—
$ 264
2010 2011
$ 114
13
13
5
$ 145
$ 261
8
18
(1 )
$ 286

During 2012, the Company continues to maintain and did not adjust, a $5 million liability for unrecognized tax benefits, the majority of which related to AirTran’s prior years’ tax positions.
As of December 31, 2012, the Company had net operating loss (“NOL”) carryforwards of approximately
$230 million from its federal tax return. These NOL’s are available to offset future taxable income. At a 35 percent federal statutory tax rate, these NOL’s result in a deferred tax asset of $81 million, as of December 31, 2012, which represents the expected future tax benefit of the NOL’s, and which is netted against the Company’s Deferred income tax liability in the Consolidated Balance Sheet. These NOL’s will expire from 2017 to 2031 if not utilized. No valuation allowance was necessary. See Note 2 for further information on the acquisition of AirTran. The only periods subject to examination for the Company’s federal tax return are the 2011 and 2012 tax years.
KELLOGG CO.
(December 29, 2012)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11
INCOME TAXES
The components of income before income taxes and the provision for income taxes were as follows:
(millions)
Income before income taxes
United States
Foreign
Income taxes
Currently payable
Federal
State
Foreign
Deferred
Federal
State
Foreign
Total income taxes
$
$
2012
1,008
317
1,325
383
34
105
522
(129
8
(38
(159
363
)
)
)
$
$
2011
935
249
1,184
285
26
108
419
(57
3
(45
(99
320
)
)
)
2010
$ 1,262
528
1,790
97
10
129
236
235
26
13
274
$ 510
The difference between the U.S. federal statutory tax rate and the Company’s effective income tax rate was:
U.S. statutory income tax rate
Foreign rates varying from 35%
State income taxes, net of federal benefit
Cost (benefit) of remitted and unremitted foreign earnings
Tax audit activity
Net change in valuation allowances
Statutory rate changes, deferred tax impact
U.S. deduction for qualified production activities
Other
Effective income tax rate
2012 2011 2010
35.0% 35.0% 35.0%
(4.4
) (4.9
) (4.4
)
2.1
1.6
1.4
(1.8
) (1.8
) 0.9
—
(0.5
) (1.6
)
0.8
0.9
0.5
(0.3
) (0.5
) —
(2.1
(1.9
27.4%
)
)
(1.8
(1.0
27.0%
)
)
(1.1
(2.2
28.5%
)
)
As presented in the preceding table, the Company’s 2012 consolidated effective tax rate was 27.4%, as compared to 27.0% in 2011 and 28.5% in 2010. The 2012 effective income tax rate benefited from the elimination of a tax liability related to certain international earnings now considered indefinitely reinvested.
As of December 29, 2012, the Company had recorded a deferred tax liability of $5 million related to $258 million of earnings. Accumulated foreign earnings of approximately $1.7 billion, primarily in Europe, were considered indefinitely reinvested. Accordingly, deferred income taxes have not been provided on these earnings and it is not practical to estimate the deferred tax impact of those earnings.

The 2011 effective income tax rate benefited from an international legal restructuring reflected in the cost
(benefit) of remitted and unremitted foreign earnings. During the third quarter of 2011, the Company recorded a benefit of $7 million from the decrease in the statutory rate in the United Kingdom.
The 2010 effective income tax rate was impacted primarily by the remeasurement of liabilities for uncertain tax positions. Authoritative guidance related to liabilities for uncertain tax positions requires the
Company to remeasure its liabilities for uncertain tax positions based on information obtained during the period, including interactions with tax authorities. Based on these interactions with tax authorities in various state and foreign jurisdictions, the Company reduced certain liabilities for uncertain tax positions by $42 million and increased others by $13 million in 2010. The other line item contains the benefit from an immaterial correction of an item related to prior years that was booked in the first quarter of 2010, as well as the U.S. research and development tax credit.
Changes in valuation allowances on deferred tax assets and the corresponding impacts on the effective income tax rate result from management’s assessment of the Company’s ability to utilize certain future tax deductions, operating losses and tax credit carryforwards prior to expiration. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future. The total tax benefit of carryforwards at year-end 2012 and 2011 were $61 million and $41 million, respectively, with related valuation allowances at year-end 2012 and 2011 of $50 and $38 million. Of the total carryforwards at year-end 2012, $3 million expire in 2014, $3 million in 2015 and the remainder expiring thereafter.
The following table provides an analysis of the Company’s deferred tax assets and liabilities as of yearend 2012 and 2011. Deferred tax assets on employee benefits increased in 2012 due to discount rate reduction s associated with the Company’s pension and postretirement plans. Additionally, the deferred tax liability for unremitted foreign earnings decreased by $20 million due to foreign earnings considered to be permanently reinvested.
(millions)
U.S. state income taxes
Advertising and promotion-related
Wages and payroll taxes
Inventory valuation
Employee benefits
Hedging transactions
Depreciation and asset disposals
Capitalized interest
Trademarks and other intangibles
Deferred compensation
Stock options
Unremitted foreign earnings
Other
Less valuation allowance
Total deferred taxes
Net deferred tax asset (liability)
Classified in balance sheet as:
Other current assets
Other current liabilities
Other assets
Other liabilities
Net deferred tax asset (liability)
Operating loss and credit carryforwards
—
39
51
—
90
747
(59 )
$ 688
$ (262 )
$ 159
(8 )
110
(523 )
$ (262 )
Deferred tax assets
2012
$ 7
23
26
22
426
61
2
—
—
2011
$ 8
22
29
26
306
41
3
—
—
—
39
48
—
53
575
(46 )
$ 529
$ (425 )
$ 149
(7 )
76
(643 )
$ (425 )
496
—
—
5
—
950
—
$ 950
Deferred tax liabilities
2012
$ 63
—
—
—
—
—
—
386
—
2011
$ 85
—
—
—
—
—
—
365
2
477
—
—
25
—
954
—
$ 954
The change in valuation allowance reducing deferred tax assets was:
(millions)
Balance at beginning of year
Additions charged to income tax expense
Reductions credited to income tax expense
Currency translation adjustments
Balance at end of year
2012
$
$
46
12
—
1
59
2011
$
$
36
12
(1
(1
46
)
)
2010
$
$
28
11
(2
(1
36
)
)

Cash paid for income taxes was (in millions): 2012 –$508; 2011–$271; 2010–$409. Income tax benefits realized from stock option exercises and deductibility of other equity-based awards are presented in
Note 7.
Uncertain tax positions
The Company is subject to federal income taxes in the U.S. as well as various state, local, and foreign jurisdictions. The Company’s annual provision for U.S. federal income taxes represents approximately
70% of the Company’s consolidated income tax provision. The Company was chosen to participate in the
Internal Revenue Service (IRS) Compliance Assurance Program (CAP) beginning with the 2008 tax year.
As a result, with limited exceptions, the Company is no longer subject to U.S. federal examinations by the
IRS for years prior to 2012. The Company is under examination for income and non-income tax filings in various state and foreign jurisdictions. Spanish tax authorities have issued assessments for the 2005 and
2006 tax years related to intercompany activity. The Company has appealed to the Spanish tax court and does not anticipate the resolution will have a material impact to its financial position.
As of December 29, 2012, the Company has classified $21 million of unrecognized tax benefits as a current liability. Management’s estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months is comprised of the current liability balance expected to be settled within one year, offset by approximately $9 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals, or other material deviation in this estimate.
Following is a reconciliation of the Company’s total gross unrecognized tax benefits as of the years ended
December 29, 2012, December 31, 2011 and January 1, 2011. For the 2012 year, approximately
$59 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.
(millions)
Balance at beginning of year
Tax positions related to current year:
Additions
Tax positions related to prior years:
Additions
Reductions
Settlements
Lapses in statutes of limitation
Balance at end of year
2012
$
$
66
8
14
(4
(1
(3
80
)
)
)
2011
$
$
104
7
8
(19
(27
(7
66
)
)
)
2010
$
$
130
12
13
(42
(6
(3
104
)
)
)
For the year ended December 29, 2012, the Company recognized an increase of $4 million of tax-related interest and penalties and had $19 million accrued at year end. For the year ended December 31, 2011, the Company recognized a decrease of $3 million of tax-related interest and penalties and had approximately $16 million accrued at December 31, 2011. For the year ended January 1, 2011, the
Company recognized an increase of $2 million of tax-related interest and penalties and had approximately $26 million accrued at January 1, 2011.
WAL MART STORES INC. (January 31, 2013)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Summary of Significant Accounting Policies
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company records interest and penalties related to unrecognized tax benefits in interest expense and operating, selling, general and administrative expenses, respectively, in the Company’s
Consolidated Statements of Income. Refer to Note 9 for additional income tax disclosures.
Note 9. Taxes
Income from Continuing Operations
The components of income from continuing operations before income taxes are as follows:
(Amounts in millions)
U.S.
Non-U.S.
Total income from continuing operations before income taxes
A summary of the provision for income taxes is as follows:
$
$
2013
Fiscal Years Ended January 31,
2012 2011
19,352 $
6,385
25,737 $
18,685 $
5,713
24,398 $
18,398
5,140
23,538
(Amounts in millions)
Current:
2013
Fiscal Years Ended January 31,
2012 2011
U.S. federal
U.S. state and local
International
Total current tax provision
Deferred:
$ 5,611 $
622
1,766
7,999
38
4,596 $
743
1,403
6,742
1,444
57
4,600
637
1,466
6,703
U.S. federal
U.S. state and local
International
Total deferred tax expense (benefit)
Total provision for income taxes $
(8 )
(48 )
(18 )
7,981 $
(299 )
1,202
7,944 $
818
39
19
876
7,579
Effective Income Tax Rate Reconciliation
The Company's effective income tax rate is typically lower than the U.S. statutory tax rate primarily because of benefits from lower-taxed global operations, including the use of global funding structures and certain U.S. tax credits. The Company's non-U.S. income is generally subject to local country tax rates that are below the 35% U.S. statutory tax rate. Certain non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax. A reconciliation of the significant differences between the U.S. statutory tax rate and the effective income tax rate on pretax income from continuing operations is as follows:
U.S. statutory tax rate
U.S. state income taxes, net of federal income tax benefit
Income taxed outside the U.S.
Net impact of repatriated international earnings
Other, net
Effective income tax rate
2013
Fiscal Years Ended January 31,
2012 2011
35.0 %
1.7 %
35.0 %
2.0 %
35.0 %
1.9 %
(2.6 )%
(2.5 )%
(0.6 )%
31.0 %
(2.8 )%
(0.3 )%
(1.3 )%
32.6 %
(2.2 )%
(1.5 )%
(1.0 )%
32.2 %

Deferred Taxes
The significant components of the Company's deferred tax account balances are as follows:
(Amounts in millions)
Deferred tax assets:
Loss and tax credit carryforwards
Accrued liabilities
Share-based compensation
Other
Total deferred tax assets
Valuation allowance
$
2013
January 31,
2012
3,525 $
2,683
204
1,500
7,912
(2,225 )
2,996
2,949
376
1,029
7,350
(2,528 )
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Property and equipment
Inventories
Other
Total deferred tax liabilities
Net deferred tax liabilities $
The deferred taxes are classified as follows in the Company's Consolidated Balance Sheets:
5,687
5,830
1,912
1,157
8,899
3,212 $
4,822
5,891
1,627
409
7,927
3,105
(Amounts in millions)
Balance Sheet classification:
Assets:
2013
January 31,
2012
Prepaid expenses and other
Other assets and deferred charges
Asset subtotals
Liabilities:
Accrued liabilities
Deferred income taxes and other
Liability subtotals
Net deferred tax liabilities
$
$
520 $
757
1,277
116
4,373
4,489
3,212 $
815
738
1,553
41
4,617
4,658
3,105
Unremitted Earnings
United States income taxes have not been provided on accumulated but undistributed earnings of the Company's international subsidiaries of approximately $19.2 billion and $19.7 billion as of January 31, 2013 and 2012, respectively, as the Company intends to permanently reinvest these amounts outside of the United States. However, if any portion were to be distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable because of the complexities with its hypothetical calculation. The Company provides deferred or current income taxes on earnings of international subsidiaries in the period that the Company determines it will remit those earnings.
Net Operating Losses, Tax Credit Carryforwards and Valuation Allowances
At January 31, 2013, the Company had net operating loss and capital loss carryforwards totaling approximately

$5.5 billion. Of these carryforwards, approximately $3.2 billion will expire, if not utilized, in various years through
2023. The remaining carryforwards have no expiration. At January 31, 2013, the Company had foreign tax credit carryforwards of $1.7 billion, which will expire in various years through 2023, if not utilized.
As of January 31, 2013 and 2012, the Company had a valuation allowance recorded of approximately $2.2 billion and $2.5 billion, respectively, on deferred tax assets associated primarily with net operating loss carryforwards for which management has determined it is more likely than not that the deferred tax asset will not be realized. The
$0.3 billion net decrease in the valuation allowance during fiscal 2013 related to releases arising from the use of net operating loss and capital loss carryforwards, increases from certain net operating losses arising in fiscal 2013, decreases due to operating and capital loss expirations and fluctuations in currency exchange rates. Management believes that it is more likely than not that the remaining net deferred tax assets will be fully realized.
The recoverability of these future tax deductions and credits is evaluated by assessing the adequacy of future expected taxable income from all sources, including taxable income in prior carryback years, reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent management does not consider it more likely than not that a deferred tax asset will be realized, a valuation allowance is established. To the extent that a valuation allowance has been established and management subsequently determines that it is more likely than not that the deferred tax assets will be realized, the valuation allowance is released.
Uncertain Tax Positions
The benefits of uncertain tax positions are recorded in the Company's Consolidated Financial Statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities.
As of January 31, 2013 and 2012, the amount of unrecognized tax benefits related to continuing operations was
$818 million and $611 million, respectively. The amount of unrecognized tax benefits that would affect the
Company's effective income tax rate is $741 million and $520 million for January 31, 2013 and 2012, respectively.
A reconciliation of unrecognized tax benefits from continuing operations is as follows:
(Amounts in millions)
Unrecognized tax benefits, beginning of year
Increases related to prior year tax positions
Decreases related to prior year tax positions
Increases related to current year tax positions
$
2013
Fiscal Years Ended January 31,
2012 2011
611
88
(232 )
$ 795 $
87
(162 )
1,019
101
(61 )
431 56 199
Settlements during the period
Lapse in statutes of limitations
Unrecognized tax benefits, end of year $
(80 )
—
818 $
(161 )
(4 )
611 $
(453 )
(10 )
795
The Company classifies interest and penalties related to uncertain tax benefits as interest expense and as operating, selling, general and administrative expenses, respectively. During fiscal 2013, 2012 and 2011, the Company recognized interest and penalty expense (benefit) related to uncertain tax positions of $2 million, $(19) million and
$45 million, respectively. As of January 31, 2013 and 2012, accrued interest related to uncertain tax positions of
$139 million and $166 million, respectively, were recorded in the Company's Consolidated Balance Sheets. The
Company did not have any accrued penalties recorded as of January 31, 2013 or 2012.
During the next twelve months, it is reasonably possible that tax audit resolutions could reduce unrecognized tax benefits by between $165 million and $210 million, either because the tax positions are sustained on audit or because the Company agrees to their disallowance. The Company is focused on resolving tax audits as expeditiously as possible. As a result of these efforts, unrecognized tax benefits could potentially be reduced

beyond the provided range during the next twelve months. The Company does not expect any change to have a significant impact to its Consolidated Financial Statements.
The Company remains subject to income tax examinations for its U.S. federal income taxes generally for fiscal
2011 through 2013. The Company also remains subject to income tax examinations for international income taxes for fiscal 2005 through 2013, and for U.S. state and local income taxes generally for fiscal 2006 through 2013.
Other Taxes
The Company is subject to tax examinations for payroll, value added, sales-based and other non-income taxes. A number of these examinations are ongoing and, in certain cases, have resulted in assessments from the taxing authorities. Where appropriate, the Company has made accruals for these matters, which are reflected in the
Company's Consolidated Financial Statements. While these matters are individually immaterial, a group of related matters, if decided adversely to the Company, may result in a liability material to the Company's Consolidated
Financial Statements.