10. Income Taxes

The (provision) benefit for income taxes on the income before income taxes and equity in net income of affiliates consists of the following (in thousands):

		September 30,			September 30,			September 30,
	Year Ended December 31,
	2011			2010			2009
Current:
U.S. Federal	$	(12,243	)	$	(4,575	)	$	(2,597	)
State and local		(7,679	)		(12,026	)		(3,166	)

Total current		(19,922	)		(16,601	)		(5,763	)

Deferred:
U.S. Federal		(61,248	)		277,916			669
State and local		(7,975	)		47,307			(477	)

Total deferred		(69,223	)		325,223			192

Total income tax (provision) benefit	$	(89,145	)	$	308,622		$	(5,571	)

Our current tax (provision) benefit includes an increase to our liability for UTPs for (in thousands):

		September 30,			September 30,			September 30,
	Year Ended December 31,
	2011			2010			2009
(Increase) decrease to unrecognized tax benefits	$	(10,593	)	$	(5,517	)	$	2,817
Interest expense		(4,809	)		(5,391	)		(4,426	)
Penalties		(1,659	)		(633	)		(701	)

Total	$	(17,061	)	$	(11,541	)	$	(2,310	)

For 2011, the deferred income tax provision of $69.2 million related primarily to our equity in net income of Telesat for the current year after having reversed our valuation allowance in the fourth quarter of 2010.

For 2010, the deferred income tax benefit of $325.2 million related primarily to (i) a benefit of $335.3 million from the reversal of a significant portion of our valuation allowance during the fourth quarter after having determined that based on all available evidence, it was more likely than not that we would realize the benefit from a significant portion of our deferred tax assets in the future offset by (ii) a provision of $10.1 million for the decrease to our deferred tax asset for federal AMT credits.

For 2009, the deferred income benefit of $0.2 million is detailed above.

In addition to the (provision) benefit for income taxes presented above, we recorded: (i) a deferred tax benefit of $39.4 million and $22.3 million for 2011 and 2010, respectively, related to tax adjustments in other comprehensive loss (see Note 3) and (ii) a current state tax benefit of $1.2 million and $0.4 million for 2011 and 2010, respectively, related to the excess tax benefits from stock option exercises recorded to paid-in-capital. The Company uses the with-and-without approach of determining when excess tax benefits from equity compensation have been realized. There were no additional items for 2009.

The (provision) benefit for income taxes differs from the amount computed by applying the statutory U.S. Federal income tax rate on income before income taxes and equity in net income of affiliates because of the effect of the following items (in thousands):

		September 30,			September 30,			September 30,
	Year Ended December 31,
	2011			2010			2009
Tax provision at U.S. Statutory Rate of 35%	$	(38,497	)	$	(32,583	)	$	(9,441	)
Permanent adjustments which change statutory amounts:
State and local income taxes, net of federal income tax		(9,703	)		(31,898	)		(16,703	)
Equity in net income of affiliates		(37,216	)		(29,969	)		(73,604	)
Losses in litigation		1,542			(583	)		(526	)
Provision for unrecognized tax benefits		1,457			2,542			(1,356	)
Nondeductible expenses		(2,500	)		(987	)		(2,076	)
Change in valuation allowance		375			402,809			96,617
Other, net		(4,603	)		(709	)		1,518

Total income tax (provision) benefit	$	(89,145	)	$	308,622		$	(5,571	)

The following table summarizes the activity related to our unrecognized tax benefits (in thousands):

		September 30,			September 30,			September 30,
	Year Ended December 31,
	2011			2010			2009
Balance at January 1	$	132,211		$	120,124		$	108,592
Increases related to prior year tax positions		1,220			339			8,855
Decreases related to prior year tax positions		(24,745	)		(1,933	)		(1,969	)
Decrease as a result of statute expirations		(1,629	)		(1,886	)		(3,178	)
Decrease as a result of tax settlements		(7,606	)		(5,207	)		(4,887	)
Increases related to current year tax positions		15,842			20,774			12,711

Balance at December 31	$	115,293		$	132,211		$	120,124

With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years prior to 2007. Earlier years related to certain foreign jurisdictions remain subject to examination. Various state and foreign income tax returns are currently under examination. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward. While we intend to contest any future tax assessments for uncertain tax positions, no assurance can be provided that we would ultimately prevail. During the next twelve months, the statute of limitations for assessment of additional tax will expire with regard to UTPs related to Old Loral, as well as several of our federal and state income tax returns filed for 2007 and 2008, potentially resulting in a $61.0 million reduction to our unrecognized tax benefits.

Our liability for UTPs increased from $122.8 million at December 31, 2010 to $139.9 million at December 31, 2011 and is included in long-term liabilities in the consolidated balance sheets. At December 31, 2011, we have accrued $29.0 million and $24.5 million for the potential payment of tax-related interest and penalties, respectively. If our positions are sustained by the taxing authorities, approximately $108.1 million of the tax benefits will reduce the Company's income tax provision. Other than as described above, there were no significant changes to our unrecognized tax benefits during the twelve months ended December 31, 2011, and we do not anticipate any other significant increases or decreases to our unrecognized tax benefits during the next twelve months.

In connection with the Telesat transaction, Loral retained the benefit of tax recoveries related to the transferred assets and indemnified Telesat for Loral Skynet tax liabilities relating to periods preceding 2007. The unrecognized tax benefits related to the Loral Skynet subsidiaries were transferred to Telesat subject to the contractual tax indemnification provided by Loral. Loral's net receivable at December 31, 2011 for the probable outcome of these matters is not material. (see Note 17)

At December 31, 2011, we had federal NOL carryforwards of $380.4 million, state NOL carryforwards, primarily California, of $244.0 million, and federal research credits of $5.8 million which expire from 2012 to 2031, as well as federal and state AMT credit carryforwards of approximately $14.4 million that may be carried forward indefinitely.

The reorganization of the Company on the Effective Date constituted an ownership change under section 382 of the Internal Revenue Code. Accordingly, use of our tax attributes, such as NOLs and tax credits generated prior to the ownership change, are subject to an annual limitation of approximately $32.6 million, subject to increase or decrease based on certain factors. Our annual limitation was increased significantly each year through 2010, the last year allowed for the recognition of additional benefits from our "net unrealized built-in gains" (i.e., the excess of fair market value over tax basis for our assets) as of the Effective Date.

We assess the recoverability of our NOLs and other deferred tax assets and based upon this analysis, record a valuation allowance to the extent recoverability does not satisfy the "more likely than not" recognition criteria. We continue to maintain our valuation allowance until sufficient positive evidence exists to support full or partial reversal. As of December 31, 2011, we had a valuation allowance totaling $10.9 million against our deferred tax assets for certain tax credit and loss carryovers due to the limited carryforward periods and character of such attributes. During 2011, the valuation allowance decreased by $0.3 million, primarily recorded as a benefit in our statement of operations.

During the fourth quarter of 2010, we determined, based on all available evidence, that it was more likely than not that we would realize the benefit from a significant portion of the deferred tax assets in the future and no longer required a full valuation allowance. We based this conclusion on cumulative profits generated in recent periods, as well as our current expectation that future operations would generate sufficient taxable income to realize the tax benefit from certain deferred tax assets. Accordingly, during 2010, our valuation allowance decreased from $414.0 million to $11.2 million. Of the $402.8 million change, which was recorded as a benefit in our statement of operations, $335.5 million was reversed as a deferred income tax benefit during the fourth quarter of 2010.

During 2009, our valuation allowance decreased by $73.7 million. The net change consisted primarily of (i) a decrease of $96.6 million recorded as a benefit in our statement of operations, (ii) an increase of $7.0 million charged to accumulated other comprehensive loss and (iii) an increase of $15.9 million offset by a corresponding increase to the deferred tax asset.

The significant components of the net deferred income tax assets are (in thousands):

		September 30,			September 30,
	December 31,
	2011			2010
Deferred tax assets:
Postretirement benefits other than pensions	$	26,685		$	25,504
Inventoried costs		20,165			24,666
Net operating loss and tax credit carryforwards		139,070			151,497
Compensation and benefits		24,984			26,996
Deferred research & development costs		3,269			6,575
Income recognition on long-term contracts		22,402			24,686
Investments in and advances to affiliates		6,175			34,227
Other, net		5,850			5,468
Federal benefit of uncertain tax positions		29,576			29,249
Pension costs		93,948			70,268

Total deferred tax assets before valuation allowance		372,124			399,136
Less valuation allowance		(10,887	)		(11,228	)

Net deferred tax assets		361,237			387,908

Deferred tax liabilities:
Property, plant and equipment		(27,515	)		(23,189	)
Intangible assets		(3,289	)		(4,480	)

Total deferred tax liabilities		(30,804	)		(27,669	)

Net deferred tax assets	$	330,433		$	360,239


Classification on consolidated balance sheets:
Current deferred tax assets	$	67,070		$	66,220
Long-term deferred tax assets		263,363			294,019

Total deferred tax assets	$	330,433		$	360,239