Marathon Oil (MRO)

7.     Income Taxes

The provision for income taxes for interim periods is based on management's best estimate of the effective income tax rate expected to be applicable for the year plus any adjustments arising from a change in the estimated amount of taxes related to prior periods. The following is an analysis of the effective income tax rates for the periods presented:

As of January 1, 2007, total unrecognized tax benefits were $48 million. If these amounts were recognized, $30 million would affect Marathon's effective income tax rate. There are no uncertain income tax positions as of January 1, 2007 for which it is reasonably possible that the amount of unrecognized tax benefits would significantly increase or decrease during 2007.

Marathon is continuously undergoing examination of its U.S. federal income tax returns by the Internal Revenue Service. The audit of the 2004 and 2005 U.S. federal income tax returns commenced in May 2006 and is ongoing. Marathon believes it has made adequate provision for federal income taxes and interest which may become payable for years not yet settled. Further, Marathon is routinely involved in U.S. state and local income tax audits and foreign jurisdiction tax audits. Marathon's income tax returns remain subject to examination in the following major tax jurisdictions for the tax years indicated:

(a)

Includes federal, state and local jurisdictions.

In connection with the adoption of FIN No. 48, Marathon changed the presentation of interest and penalties related to income taxes in the consolidated statement of income. Effective January 1, 2007, such interest and penalties are prospectively recorded as part of the provision for income taxes. Prior to January 1, 2007, Marathon recorded such interest as part of net interest and other financing costs and such penalties as selling, general and administrative expenses. As of January 1, 2007, $17 million of interest and penalties was accrued related to income taxes.

8.     Income Taxes

The provision for income taxes for interim periods is based on management’s best estimate of the effective tax rate expected to be applicable for the current fiscal year plus any adjustments arising from a change in the estimated amount of taxes related to prior periods.

Effective January 1, 2005, the state of Kentucky enacted legislation which causes limited liability companies to be subject to Kentucky’s corporation income tax.  In the first quarter 2005, Marathon’s provision for income taxes includes $13 million related to the effects of this Kentucky income tax on deferred tax assets and liabilities as of January 1, 2005.  The effect on net income (after minority interest) was $6 million.

Also beginning in the first quarter of 2005, Marathon’s effective rate reflects the estimated impact of a special deduction for qualified domestic production expected to be taken related to the American Jobs Creation Act of 2004.  This deduction will be treated as a permanent difference.  Based on managements’ best estimates of taxable income for 2005, the effective rate will be reduced by approximately one-half percent.