The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the Act) was signed into law in March 2010. The federal government currently provides a subsidy, on a tax-free basis, to companies that provide certain retiree prescription drug benefits (the Medicare Part D subsidy). The Act reduces the tax deductibility of retiree health cost to the extent of any Medicare Part D subsidy received beginning in 2013. As a result of this change in tax treatment, we recorded a noncash income tax charge and a decrease to our deferred tax assets of $35.0 million in fiscal 2010 as of the enactment date of the Act. The following table reconciles the United States statutory income tax rate with our effective income tax rate: The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows: We have established a valuation allowance against certain of the categories of deferred tax assets described above as current evidence does not suggest we will realize sufficient taxable income of the appropriate character (e.g., ordinary income versus capital gain income) within the carry forward period to allow us to realize these deferred tax benefits. Of the total valuation allowance of $392.0 million, $168.8 million relates to a deferred tax asset for losses recorded as part of the Pillsbury acquisition. Of the remaining valuation allowance, $93.1 million relates to capital loss carryforwards and $119.8 million relates to state and foreign operating loss carryforwards. As of May 30, 2010, we believe it is more likely than not that the remainder of our deferred tax asset is realizable. The carryforward periods on our foreign loss carryforwards are as follows: $81.2 million do not expire; $9.8 million expire between fiscal 2011 and fiscal 2012; and $19.7 million expire between fiscal 2013 and fiscal 2019. We have not recognized a deferred tax liability for unremitted earnings of $2.1 billion from our foreign operations because our General Mills 78 2010 2009 2008 Fiscal Year .................................................. ......................................................................................................................................................................................... United States statutory rate 35.0% 35.0% 35.0% State and local income taxes, net of federal tax benefits 2.5 2.9 3.5 Foreign rate differences (1.8) (2.3) (1.2) Enactment date effect of health care reform 1.3 — — Federal court decisions, including interest — 2.7 (1.7) Domestic manufacturing deduction (1.8) (1.1) (1.0) Other, net (0.2) (0.1) (0.6) ......................................................................................................................................................................................... Effective income tax rate 35.0% 37.1% 34.0% In Millions May 30, 2010 May 31, 2009 ......................................................................................................................................................................................... Accrued liabilities $ 190.4 $ 160.0 Restructuring, impairment, and other exit charges — 0.4 Compensation and employee benefits 680.6 559.9 Pension liability 76.5 — Unrealized hedge losses 15.6 18.4 Unrealized losses 248.6 221.7 Capital losses 93.1 165.7 Net operating losses 119.8 94.6 Other 134.5 95.4 ......................................................................................................................................................................................... Gross deferred tax assets 1,559.1 1,316.1 Valuation allowance 392.0 440.4 ......................................................................................................................................................................................... Net deferred tax assets 1,167.1 875.7 ......................................................................................................................................................................................... Brands 1,279.5 1,286.6 Depreciation 307.6 308.1 Prepaid pension asset — 81.3 Intangible assets 107.4 102.2 Tax lease transactions 68.7 72.6 Other 235.8 174.6 ......................................................................................................................................................................................... Gross deferred tax liabilities 1,999.0 2,025.4 ......................................................................................................................................................................................... Net deferred tax liability $ 831.9 $1,149.7