NOTE 13 INCOME TAXES

The components of the provision for income taxes were as follows:

(In millions)
Year Ended June 30,	2009	2008	2007
Current taxes:
U.S. Federal	$3,159	$4,357	$4,593
U.S. State and Local	192	256	154
International	1,139	1,007	957
Current taxes	4,490	5,620	5,704
Deferred taxes	762	513	332
Provision for income taxes	$5,252	$6,133	$6,036
U.S. and international components of income before income taxes were as follows:
(In millions)
Year Ended June 30,	2009	2008	2007
U.S.	$ (5,529	$12,682	$12,902
International	14,292	11,132	7,199
Income before income taxes	$19,821	$23,814	$20,101
The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes were as follows:

Year Ended June 30,	2009	2008	2007
Federal statutory rate	35.0%	35.0%	35.0%
Effect of:
Foreign earnings taxed at lower rates	(9.3)%	(7.0)%	(5.1)%
Internal Revenue Service settlement	–%	(5.8)%	–
European Commission fine	–%	2.1%	–
Other reconciling items, net	0.8%	1.5%	0.1%
Effective rate	26.5%	25.8%	30.0%

In general, other reconciling items consist of interest, U.S. state income taxes, domestic production deductions, and research credits. In fiscal years 2009 and 2008, there were no individually significant other reconciling items. Other reconciling items in fiscal year 2007 included the impact of a $195 million reduction resulting from various changes in tax positions taken in prior periods, related primarily to favorable developments in an IRS position and multiple foreign audit assessments.

The components of the deferred income tax assets and liabilities were as follows:

(In millions)
June 30,	2009	2008
Deferred income tax assets:
Stock-based compensation expense	$)2,004	,$)2,225
Other expense items	1,595	1,933
Unearned revenue	743	928
Impaired investments	236	331
Other revenue items	120	91
Deferred income tax assets	$)4,698	$)5,508

Deferred income tax liabilities:
International earnings	$(1,191)	$(1,300)
Unrealized gain on investments	(516)	(513)
Other	(449)	(729)
Deferred income tax liabilities	(2,206)	(2,542)
Net deferred income tax assets	$)2,492	$,2,966

Reported as:
Current deferred income tax assets	$)2,213	$)2,017
Long-term deferred income tax assets	279	949
Net deferred income tax assets	$)2,492	$)2,966

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are actually paid or recovered.

We have not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences of approximately $18.0 billion resulting from earnings for certain non-U.S. subsidiaries which are permanently reinvested outside the United States. The unrecognized deferred tax liability associated with these temporary differences is approximately $5.4 billion.

Income taxes paid were $6.6 billion in fiscal year 2009, $5.4 billion in fiscal year 2008, and $5.2 billion in fiscal year 2007.

UNCERTAIN TAX POSITIONS

As of June 30, 2009, we had $5.4 billion of unrecognized tax benefits of which $4.4 billion, if recognized, would affect our effective tax rate. As of June 30, 2008, we had $3.2 billion of unrecognized tax benefits of which $2.3 billion, if recognized, would affect our effective tax rate.

Interest and penalties related to unrecognized tax benefits are included in income tax expense. Such interest totaled $230 million in fiscal year 2009 and $121 million in fiscal year 2008. As of June 30, 2009 and 2008, we had accrued interest related to uncertain tax positions of $554 million and $324 million, respectively, net of federal income tax benefits, on our balance sheets.

The aggregate changes in the balance of unrecognized tax benefits were as follows:

(In millions)
Year Ended June 30,	2009	2008
Balance, beginning of year	$3,195	$7,076
Decreases related to settlements	(82)	(4,787)
Increases for tax positions related to the current year	2,203	934
Increases for tax positions related to prior years	239	66
Decreases for tax positions related to prior years	(132)	(80)
Reductions due to lapsed statute of limitations	(20)	(14)
Balance, end of year	$5,403	$3,195

During fiscal year 2008, we reached a settlement with the Internal Revenue Service (“IRS”) on its 2000-2003 examination. As a result, we reduced our unrecognized tax benefits by $4.8 billion and recognized a tax provision reduction of $1.2 billion. As a result of the 2000-2003 settlement and the related impact on subsequent years, we paid the IRS approximately $4.1 billion during fiscal year 2009.

We are under audit by the IRS for the tax years 2004-2006. We do not believe it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months as we do not believe the examination will be concluded within the next 12 months.

We are subject to income tax in many jurisdictions outside the United States, none of which are individually material to our financial position, cash flows, or results of operations.