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Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

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INCOME TAXES
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract] Ìý
INCOME TAXES
NOTE 12 - INCOME TAXES
Income (loss) from continuing operations before income taxes includes the following components:
(In Millions)
2021 2020 2019
United States $ 3,827Ìý $ (201) $ 313Ìý
Foreign (24) 8Ìý —Ìý
$ 3,803Ìý $ (193) $ 313Ìý
The components of the income tax provision (benefit) on continuing operations consist of the following:
(In Millions)
2021 2020 2019
Current provision (benefit):
United States federal $ 14Ìý $ (2) $ (1)
United States stateÌý& local 55Ìý —Ìý —Ìý
Foreign —Ìý (1) —Ìý
69Ìý (3) (1)
Deferred provision (benefit):
United States federal 683Ìý (95) 19Ìý
United States stateÌý& local 31Ìý (11) —Ìý
ÌýÌýForeign (10) (2) —Ìý
Total income tax provision (benefit) from continuing operations $ 773Ìý $ (111) $ 18Ìý
Reconciliation of our income tax attributable to continuing operations computed at the U.S. federal statutory rate is as follows:
(In Millions)
2021 2020 2019
Tax at U.S. statutory rate $ 799Ìý 21Ìý % $ (41) 21Ìý % $ 66Ìý 21Ìý %
Increase (decrease) due to:
Percentage depletion in excess of cost depletion (99) (3) (42) 22Ìý (49) (16)
Non-taxable income related to noncontrolling interests (9) —Ìý (9) 4Ìý —Ìý —Ìý
Luxembourg legal entity reduction —Ìý —Ìý —Ìý —Ìý 846Ìý 271Ìý
Valuation allowance release:
Luxembourg legal entity reduction —Ìý —Ìý —Ìý —Ìý (846) (271)
State taxes, net 86Ìý 2Ìý (11) 6Ìý —Ìý —Ìý
Other items, net (4) —Ìý (8) 4Ìý 1Ìý 1Ìý
Provision for income tax expense (benefit) and effective income tax rate including discrete items $ 773Ìý 20Ìý % $ (111) 57Ìý % $ 18Ìý 6Ìý %
The increase in income tax expense in 2021 from income tax benefit in 2020 is directly correlated to the increase in pre-tax book income from the prior period for both federal and state income tax purposes.
The increase in income tax benefit from 2019 to 2020 is directly correlated to the decrease in pre-tax book income from the prior period for both federal and state income tax purposes. The Luxembourg legal entity reduction relates to initiatives resulting in the dissolution of certain entities and settlement of related financial instruments in 2019. The 2019 NOL deferred tax asset reduction resulted in tax expense of $846 million, which was fully offset by a decrease in the respective valuation allowance.
The components of income taxes for other than continuing operations consisted of the following:
(In Millions)
2021 2020 2019
Other comprehensive income (loss):
Pension and OPEB $ (206) $ (52) $ 11Ìý
Derivative financial instruments (21) (1) —Ìý
Total $ (227) $ (53) $ 11Ìý
Significant components of our deferred tax assets and liabilities are as follows:
(In Millions)
2021 2020
Deferred tax assets:
Operating loss and other carryforwards $ 379Ìý $ 1,236Ìý
Pension and OPEB liabilities 584Ìý 228Ìý
State and local 109Ìý 132Ìý
Other liabilities 287Ìý 190Ìý
Total deferred tax assets before valuation allowance 1,359Ìý 1,786Ìý
Deferred tax asset valuation allowance (409) (836)
Net deferred tax assets 950Ìý 950Ìý
Deferred tax liabilities:
Investment in partnerships (191) (144)
Property, plant and equipment and mineral rights (641) (246)
Other assets (216) (68)
Total deferred tax liabilities (1,048) (458)
Net deferred tax assets (liabilities) $ (98) $ 492Ìý
We had gross domestic (including states) and foreign NOLs of $2,081 million and $1,407 million, respectively, at DecemberÌý31, 2021. We had gross domestic and foreign NOLs of $7,444 million and $1,592 million, respectively, at DecemberÌý31, 2020. The U.S. federal NOLs will begin to expire in 2034 and state NOLs will begin to expire in 2022. The foreign NOLs can be carried forward indefinitely. We had gross interest expense limitation carryforwards of $18Ìýmillion and $80 million for the years ended December 31, 2021 and 2020, respectively. This interest expense can be carried forward indefinitely.
The changes in the valuation allowance are presented below:
(In Millions)
2021 2020 2019
Balance at beginning of year $ 836Ìý $ 441Ìý $ 1,287Ìý
Change in valuation allowance:
Included in income tax benefit (82) (3) (846)
Increase (decrease) from acquisitions (345) 398Ìý —Ìý
Balance at end of year $ 409Ìý $ 836Ìý $ 441Ìý
During 2021, we recorded a decrease to the valuation allowance of $345 million related to the election filed with our 2020 federal tax return to waive the pre-acquisition NOLs that are limited under Section 382 of the IRC. An offsetting decrease is recorded in the NOL deferred tax asset in the same period. These amounts relate to a portion of the $398 million valuation allowance recorded during 2020 through opening balance sheet adjustments to reflect the portion of federal and state NOLs that are limited under Section 382 of the IRC acquired through the AK Steel Merger.
During 2019, a legal entity reduction initiative was completed in Luxembourg resulting in the dissolution of certain entities and settlement of related financial instruments, triggering the utilization of $1.3 billion of NOL deferred tax asset and reversal of the intercompany notes deferred tax liability of $447 million. The total net deferred tax reduction resulted in an expense of $846 million, which was fully offset by a decrease in the valuation allowance. Our losses in Luxembourg in recent periods represent sufficient negative evidence to require a full valuation allowance against the remaining deferred tax assets in that jurisdiction. We intend to maintain a valuation allowance against the deferred tax assets related to these operating losses until sufficient positive evidence exists to support the realization of such assets.
We also have a valuation allowance recorded against certain state NOLs, which are expected to expire before utilization. At December 31, 2021 and 2020, we had a valuation allowance recorded against certain state NOLs of $70 million and $98 million, respectively.
At DecemberÌý31, 2021 and 2020, we had no cumulative undistributed earnings of foreign subsidiaries included in retained earnings. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(In Millions)
2021 2020 2019
Unrecognized tax benefits balance as of JanuaryÌý1 $ 107Ìý $ 29Ìý $ 29Ìý
Increase for tax positions in current year 4Ìý 7Ìý —Ìý
Decrease for tax positions of prior year (66) (4) —Ìý
Lapses in statutes of limitations (10) —Ìý —Ìý
Increases from acquisitions —Ìý 75Ìý —Ìý
Unrecognized tax benefits balance as of DecemberÌý31 $ 35Ìý $ 107Ìý $ 29Ìý
At DecemberÌý31, 2021 and 2020, we had $35 million and $107 million, respectively, of unrecognized tax benefits recorded. Of this amount, $1 million was recorded in Other current liabilities for the year ended December 31, 2021. Additionally, $34 million and $2 million, were recorded in Other non-current liabilities for the years ended DecemberÌý31, 2021 and 2020, respectively. An additional $96Ìýmillion was recorded in Other non-current assets for the year ended December 31, 2020. If the unrecognized tax benefits were recognized, $30 million would impact the effective tax rate. We do not expect that the amount of unrecognized benefits will change significantly within the next 12 months.
Tax years 2016 and forward remain subject to examination for the U.S., and tax years 2008 and forward remain subject to examination for Canada.