Bristol-Myers Squibb  Contingencies  $^{ }$Income Taxes  $^{ }$In the normal course of business, we are subject to contingencies, such as legal proceedings and claims arising out of our business,  that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and  environmental liability, contractual claims and tax matters. We recognize accruals for such contingencies when it is probable that a  liability will be incurred and the amount of the loss can be reasonably estimated. These estimates are subject to uncertainties that are  difficult to predict and, as such, actual results could vary from these estimates.  For discussions on contingencies, see Note 1 “Accounting Policies—Contingencies,” Note 7 “Income Taxes” and Note 21 “Legal  Proceedings and Contingencies.”  $^{ }$Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment of whether or not a valuation allowance is required often requires significant judgment including long-range forecasts  of future taxable income and evaluation of tax planning initiatives. Adjustments to the deferred tax valuation allowances are made to  earnings in the period when such assessments are made. Our deferred tax assets were $5.1 billion, net of valuation allowances of $4.4  billion at December 31, 2012 and $3.2 billion, net of valuation allowances of $3.9 billion at December 31, 2011.  $^{ }$Deferred tax assets related to a U.S. Federal net operating loss carryforward of $170 million and a U.S. Federal tax credit carryforward  of $31 million were recognized at December 31, 2012. The net operating loss carryforward expires in varying amounts beginning in  2022. The U.S. Federal tax credit carryforward expires in varying amounts beginning in 2017. The realization of these carryforwards  is dependent on generating sufficient domestic-sourced taxable income prior to their expiration. Although realization is not assured,  we believe it is more likely than not that these deferred tax assets will be realized.  $^{ }$In addition, a deferred tax asset related to a U.S. Federal and state capital loss of $794 million was recognized at December 31, 2012  that can be carried back three years and carried forward five years. The realization of this carryforward is dependent upon generating  sufficient capital gains prior to its expiration. A $411 million valuation allowance was established for this item at December 31, 2012.  $^{ }$Taxes are not provided on undistributed earnings of foreign subsidiaries expected to be reinvested indefinitely offshore. During 2010,  the Company completed an internal reorganization of certain legal entities which contributed to a $207 million tax charge recognized  in the fourth quarter of 2010. It is possible that U.S. tax authorities could assert additional material tax liabilities arising from the  reorganization. If such assertion were to occur, the Company would vigorously challenge any such assertion and believes it would  prevail; however there can be no assurance of such a result.  $^{ }$Prior to the Mead Johnson Nutrition Company (Mead Johnson) split-off in 2009, the following transactions occurred: (i) an internal  spin-off of Mead Johnson shares while still owned by us; (ii) conversion of Mead Johnson Class B shares to Class A shares; and; (iii)  conversion of Mead Johnson & Company to a limited liability company. These transactions as well as the split-off of Mead Johnson  through the exchange offer should qualify as tax-exempt transactions under the Internal Revenue Code based upon a private letter  ruling received from the Internal Revenue Service related to the conversion of Mead Johnson Class B shares to Class A shares, and  outside legal opinions. Certain assumptions, representations and covenants by Mead Johnson were relied upon regarding the future  conduct of its business and other matters which could affect the tax treatment of the exchange. For example, the current tax law  generally creates a presumption that the exchange would be taxable to us, if Mead Johnson or its shareholders were to engage in  transactions that result in a 50% or greater change in its stock ownership during a four year period beginning two years before the  exchange offer, unless it is established that the exchange offer were not part of a plan or series of related transactions to effect such a  change in ownership. If the internal spin-off or exchange offer were determined not to qualify as a tax exempt transaction, the  transaction could be subject to tax as if the exchange was a taxable sale by us at market value.  $^{ }$In addition, a negative basis or excess loss account (ELA) existed in our investment in stock of Mead Johnson prior to these  transactions. We received an opinion from outside legal counsel to the effect that it is more likely than not that we eliminated the  ELA as part of these transactions and do not have taxable income with respect to the ELA. The tax law in this area is complex and it  is possible that even if the internal spin-off and the exchange offer is tax exempt under the Internal Revenue Code, the IRS could  assert that we have additional taxable income for the period with respect to the ELA. We could be exposed to additional taxes if this  were to occur. Based upon our understanding of the Internal Revenue Code and opinion from outside legal counsel, a tax reserve of  $244 million was established reducing the gain on disposal of Mead Johnson included in discontinued operations in 2009.  $^{ }$We agreed to certain tax related indemnities with Mead Johnson as set forth in the tax sharing agreement. For example, Mead  Johnson has agreed to indemnify us for potential tax effects resulting from the breach of certain representations discussed above as  well as certain transactions related to the acquisition of Mead Johnson’s stock or assets. We have agreed to indemnify Mead Johnson  for certain taxes related to its business prior to the completion of the IPO and created as part of the restructuring to facilitate the IPO.  26