Note 17 Income Taxes

The components of (loss) earnings from continuing operations before income tax provision were as follows:


	2012			2011			2010
Domestic	$	(1,422.2	)	$	(73.6	)	$	84.0
Foreign		(449.8	)		271.6			259.4

Total	$	(1,872.0	)	$	198.0		$	343.4

The components of the income tax (benefit) provision were as follows:


	2012			2011			2010
Current tax expense:
Federal	$	(6.8	)	$	37.0		$	22.1
State and local		(6.2	)		5.9			5.6
Foreign		69.5			77.5			63.1

Total current		56.5			120.4			90.8

Deferred tax (benefit) expense:
Federal		(231.2	)		(54.4	)		2.1
State and local		(24.8	)		(5.3	)		(2.1	)
Foreign		(62.4	)		(1.2	)		(3.3	)

Total deferred tax benefit		(318.4	)		(60.9	)		(3.3	)

Total (benefit) provision	$	(261.9	)	$	59.5		$	87.5

Deferred tax assets (liabilities) consist of the following:


	December 31,
	2012			2011
Settlement agreement and related accrued interest⁽¹⁾	$	442.3		$	383.8
Restructuring reserves		8.7			10.8
Accruals not yet deductible for tax purposes		74.1			67.5
Net operating loss carry forwards		132.6			124.5
Foreign, federal and state credits and investment tax allowances		53.2			130.2
Employee benefit items		129.7			125.9
Other		13.2			0.3

Gross deferred tax assets		853.8			843.0
Valuation allowance		(200.0	)		(219.1	)

Total deferred tax assets		653.8			623.9

Depreciation and amortization		(68.1	)		(72.3	)
Unremitted foreign earnings		(135.2	)		(149.8	)
Intangibles		(274.5	)		(573.3	)
Other		(10.0	)		(15.7	)

Total deferred tax liabilities		(487.8	)		(811.1	)

Net deferred tax assets (liabilities)	$	166.0		$	(187.2	)

⁽¹⁾

This deferred tax asset reflects the cash portion of the Settlement agreement and related accrued interest and the fair market value of 18 million shares of our common stock at a post-split price of $17.86 per share based on the price when the Settlement agreement was reached in 2002. However, the value of this deferred tax asset will depend on the price of our common stock at the time it is issued under the Settlement agreement. See Note 18, “Commitments and Contingencies,” for further discussion.

In assessing the need for a valuation allowance, we estimate future taxable earnings, with consideration for the feasibility of ongoing planning strategies and the realizability of tax benefit carry forwards and past operating results, to determine which deferred tax assets are more likely than not to be realized in the future. Changes to tax laws, statutory tax rates and future taxable earnings can have an impact on valuation allowances related to deferred tax assets.

The increase in net deferred tax assets (a change from a net deferred tax liability) is primarily attributable to the impairment of certain indefinite lived intangibles, primarily trademarks, related to the acquisition of Diversey. We also decreased our unrecognized benefits with respect to our deferred tax asset for the Settlement agreement (increasing our net asset) and this increase was largely offset by increases in our valuation allowance. We also used a significant amount of foreign tax credits in connection with our sale of Diversey Japan, which decrease was also largely offset by a decrease in our valuation allowance. We had losses in the U.S. and various other foreign jurisdictions and increased our valuation allowance with respect to our net operating loss carry forwards at various foreign subsidiaries.

Based upon anticipated future results, we have concluded that it is more likely than not that we will realize the $654 million balance of deferred tax assets at December 31, 2012, net of the valuation allowance of $200 million. The valuation allowance primarily relates to the uncertainty of utilizing the following deferred tax assets: $408 million of foreign net operating loss carryforwards, or $70 million on a tax-effected basis, $31 million of foreign and federal tax credits and investment allowances, $1.0 billion of state net operating loss carry forwards, or $43 million on a tax-effected basis, $14 million of state tax credits and $41 million of benefits with respect to the Settlement agreement. For the year ended December 31, 2012, the valuation allowance decreased by $19 million, due to the use of foreign tax credits in connection with the sale of Diversey Japan, offset by an increase with respect to foreign net operating losses and our allowance with respect to the Settlement agreement. For the year ended December 31, 2011, the valuation allowance increased by $176 million primarily due to $162 million related to the acquisition of Diversey, $3 million that was charged to the income tax provision and $11 million resulting from a net increase to deferred tax assets with a 100% valuation allowance. For the year ended December 31, 2010, the valuation allowance decreased by $4 million, which reduced the income tax provision.

As of December 31, 2012, we have foreign net operating loss carryforwards totaling $408 million that expire during the following calendar years (in millions): 2013 - $8; 2014 - $6; 2015 - $18; 2016 - $15; 2017 - $14; 2018 and beyond - $98; and no expiration - $249. The state net operating loss carryforwards totaling $1.0 billion expire in various amounts over one to 20 years.

As of December 31, 2012, we have foreign and federal foreign tax credit carryforwards and investment allowances totaling $39 million that expire during the following calendar years (in millions): 2013 - $1; 2017 - $1; 2018 and beyond - $22; and no expiration - $15. The state tax credit carryforwards, totaling $14 million, expire in various amounts over one to 20 years.

Net deferred income taxes (credited) charged to stockholders’ equity were $(25) million in 2012, $6 million in 2011 and $(5) million in 2010.

The U.S. federal statutory corporate tax rate reconciles to our effective income tax rate as follows:


	2012			2011			2010
Statutory U.S. federal tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax benefit		(0.7	)		0.4			0.6
Foreign earnings taxed at lower effective rates		(0.6	)		(7.5	)		(9.2	)
Nondeductible acquisition costs		—			2.7			—
U.S. domestic manufacturing deduction		—			(2.6	)		(1.1	)
Impairment		(20.2	)
Net change in unrecognized tax benefits		2.0			0.4			—
Other		(1.5	)		1.6			0.2

Effective income tax rate		14.0	%		30.0	%		25.5	%

Unrecognized Tax Benefits

We are providing the following disclosures related to our unrecognized tax benefits and the effect on our effective income tax rate if recognized:


	Gross			Net
Unrecognized tax benefits at January 1, 2012	$	254.5		$	246.7
Additions relating to the acquisition of Diversey		15.5			12.5
Additions for tax positions of current year		23.5			23.5
Additions for tax positions of prior years		2.9			2.5
Reductions for tax positions of prior years		(63.2	)		(55.7	)

Unrecognized tax benefits at December 31, 2012	$	233.2		$	229.5

In 2012, we reduced our unrecognized tax benefit by $56 million, primarily with respect to the Settlement agreement. The reduction with respect to our Settlement Agreement is a result of a reassessment of our unrecognized tax benefit position primarily due to our tax situation in the United States following the Diversey acquisition. Substantially all of this reduction was offset by required increases in our valuation allowances so that the net change did not have a material effect on our operating results or financial position.

If the unrecognized tax benefits at December 31, 2012 were recognized, our income tax provision would decrease by $187 million, resulting in a substantially lower effective tax rate. It is reasonably possible that within the next 12 months our unrecognized tax benefit position will decrease by approximately $46 million, including the recognition of a portion of the unrecognized tax benefits relating to the Settlement agreement. As described in Note 18, “Commitments and Contingencies,” in 2012 the courts have taken various actions with respect to the PI Settlement Plan and we do not know whether or when a final plan of reorganization will become effective.

We recognize interest and penalties related to unrecognized tax benefits in income tax provision on the consolidated statements of operations. We had a liability of approximately $32 million (of which $15 million represents penalties) at January 1, 2012 and a liability of $28 million (of which $14 million represents penalties) at December 31, 2012 for the payment of interest and penalties (before any tax benefit). In 2012, interest and penalties of $3 million (gross) ($3 million (net)) were recognized in connection with the related tax accruals for uncertainties in prior years. In addition, interest and penalties of $9 million (gross) ($7 million (net)) were reversed in connection with the related tax accruals for uncertainties in prior years.

Income Tax Returns

The Internal Revenue Service (the “Service”) has concluded its examination of the legacy Sealed Air U.S. federal income tax returns for all years through 2006. Examination of legacy Diversey U.S. federal income tax returns has also been substantially completed through 2006, but the Service could challenge the Diversey U.S. income tax losses carried forward to subsequent periods. The Service is currently auditing the 2007 and 2010 consolidated U.S. federal income tax returns of legacy Sealed Air and the 2009 and 2010 consolidated U.S. federal income tax returns of legacy Diversey.

State income tax returns are generally subject to examination for a period of three to five years after their filing date. We have various state income tax returns in the process of examination.

Income tax returns in foreign jurisdictions have statutes of limitations generally ranging from three to five years after their filing date and except where still under examination or where we are litigating, we have generally concluded all other income tax matters globally for years through 2005. Our foreign income tax returns are under examination in various jurisdictions in which we conduct business and we are litigating certain issues in several jurisdictions.