INCOME TAXES:

The United States track maintenance credit is an income tax credit for Class II and Class III railroads, as defined by the STB, to reduce their federal income tax based on qualified railroad track maintenance expenditures (the Short Line Tax Credit). Qualified expenditures include amounts incurred for maintaining track, including roadbed, bridges and related track structures owned or leased by a Class II or Class III railroad. The credit is equal to 50% of the qualified expenditures, subject to an annual limitation of $3,500 multiplied by the number of miles of railroad track owned or leased by the Class II or Class III railroad as of the end of its tax year. The Short Line Tax Credit was in existence from 2005 through 2011 and was extended for fiscal years 2012 and 2013 on January 2, 2013, extended on December 19, 2014 for fiscal year 2014 and further extended on December 18, 2015 for fiscal years 2015 and 2016.

The Company's income tax provision for the year ended December 31, 2015 was $75.9 million, which represented 25.2% of income before income taxes.

The Company's income tax provision for the year ended December 31, 2014 was $107.1 million, which represented 29.1% of income before income taxes. The Company's provision for income taxes for the year ended December 31, 2014 included a $3.9 million tax benefit as a result of receiving consent from the United States Internal Revenue Service (IRS) to change a tax accounting method retroactively for companies acquired as a result of the RailAmerica acquisition.

Included in the Company's net income for the year ended December 31, 2013 was a $41.0 million benefit associated with the retroactive extension of the United States Short Line Tax Credit for fiscal year 2012. Since the extension became law in 2013, the 2012 impact was recorded in the first quarter of 2013. Excluding the $41.0 million retroactive benefit, the Company's provision for income taxes was $87.2 million for the year ended December 31, 2013, which represented 27.4% of income before income taxes.

The Company's effective income tax rates also included adjustments to reflect differences between book income tax expense and final tax returns filed each year related to the previous fiscal year, which the Company does not consider material.

The components of income before income taxes for the years ended December 31, 2015, 2014 and 2013 were as follows (dollars in thousands):



	2015		2014		2013
United States	$	236,613	$	276,343	$	211,094
Foreign	64,318		91,519		106,498
Total	$	300,931	$	367,862	$	317,592

No provision is made for the United States income taxes applicable to the undistributed earnings of controlled foreign subsidiaries as it is the intention of management to fully utilize those earnings in the operations of foreign subsidiaries. If the earnings were to be distributed in the future, those distributions may be subject to United States income taxes (appropriately reduced by available foreign tax credits) and withholding taxes payable to various foreign countries, however, the amount of the tax and credits is not practicable to determine. The amount of undistributed earnings of the Company's controlled foreign subsidiaries as of December 31, 2015 was $322.5 million.

The components of the provision for income taxes for the years ended December 31, 2015, 2014 and 2013 were as follows (dollars in thousands):



	2015			2014		2013
United States:
Current
Federal	$	12,003		$	15,647	$	6,571
State	8,181			7,134		6,031
Deferred
Federal	41,975			49,799		62
State	5,383			8,727		4,890
	67,542			81,307		17,554
Foreign:
Current	11,031			17,591		22,697
Deferred	(2,679		)	8,209		6,045
	8,352			25,800		28,742
Total	$	75,894		$	107,107	$	46,296

The provision for income taxes differs from that which would be computed by applying the statutory United States federal income tax rate to income before income taxes. The following is a summary of the effective tax rate reconciliation for the years ended December 31, 2015, 2014 and 2013:



	2015		2014		2013
Tax provision at statutory rate	35.0	%	35.0	%	35.0	%
Effect of foreign operations	(1.7	)%	(1.7	)%	(2.1	)%
Effect of foreign rate change	(3.3	)%	—	%	—	%
State income taxes, net of federal income tax benefit	3.0	%	2.8	%	2.2	%
Benefit of track maintenance credit	(9.1	)%	(7.3	)%	(21.0	)%
Other, net	1.3	%	0.3	%	0.4	%
Effective income tax rate	25.2	%	29.1	%	14.5	%

Deferred income taxes reflect the effect of temporary differences between the book and tax basis of assets and liabilities as well as available income tax credit and net operating loss carryforwards. The components of net deferred income taxes as of December 31, 2015 and 2014 were as follows (dollars in thousands):



	2015			2014
Deferred tax assets:
Track maintenance credit	$	237,411		$	227,102
Net operating loss carryforwards	20,810			16,008
Accruals and reserves not deducted for tax purposes until paid	14,896			11,027
Stock-based compensation	9,253			6,954
Deferred revenue	5,736			3,652
Deferred compensation	3,454			2,810
Foreign tax credit	—			1,964
Nonshareholder contributions	2,150			1,871
Interest rate swaps	4,223			1,664
Alternative minimum tax credit	1,592			1,592
Pension and postretirement benefits	15,411			425
Other	752			457
	315,688			275,526
Valuation allowance	(19,315		)	(14,793		)
Deferred tax liabilities:
Property and intangible basis difference	(1,270,901		)	(1,088,572		)
Other	(6,338		)	(1,519		)
Net deferred tax liabilities	$	(980,866	)	$	(829,358	)

In the accompanying consolidated balance sheets, these deferred benefits and deferred obligations are classified as current or non-current based on the classification of the related asset or liability for financial reporting. A deferred tax obligation or benefit that is not related to an asset or liability for financial reporting, including deferred tax assets related to tax credit and loss carryforwards, are classified according to the expected reversal date of the temporary difference as of the end of the year.

As of December 31, 2015, the Company had United States net operating loss carryforwards in various state jurisdictions that totaled approximately $354.3 million, United States track maintenance credit carryforwards of $237.4 million and foreign net operating loss carryforwards in the Netherlands that totaled approximately $25.6 million. Some of the Company's credit carryforwards are subject to Section 382 limitations of the Internal Revenue Code (Section 382). Section 382 imposes limitations on a corporation's ability to utilize its credits if it experiences an "ownership change." In general terms, an ownership change results from transactions increasing the ownership of certain existing stockholders or new stockholders in the stock of a corporation by more than 50% during a three-year testing period. Any unused annual limitation may be carried over to later years, and the amount of the limitation may, under certain circumstances, be increased to reflect both recognized and deemed recognized "built-in gains" that occur during the sixty-month period after the ownership change. The state net operating losses exist in different states and expire between 2016 and 2035. The United States track maintenance credits expire between 2026 and 2035. The Netherlands net operating losses expire between 2018 and 2024.

The Company maintains a valuation allowance on state and foreign net operating losses for which, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. It is management's belief that it is more likely than not that a portion of the deferred tax assets will not be realized.

A reconciliation of the beginning and ending amount of the Company's valuation allowance is as follows (dollars in thousands):



	2015
Balance at beginning of year	$	14,793
Increase for state net operating losses	89
Increase for foreign net operating losses	6,397
Decrease for expiration of foreign tax credit	(1,964		)
Balance at end of year	$	19,315

A reconciliation of the beginning and ending amount of the Company's liability for uncertain tax positions is as follows (dollars in thousands):



	2015			2014		2013
Balance at beginning of year	$	4,324		$	3,155	$	3,155
Increase for tax positions related to prior years	—			1,169		—
Decrease for effects of foreign exchange rates	(127		)	—		—
Balance at end of year	$	4,197		$	4,324	$	3,155

At December 31, 2015, 2014 and 2013, there was $4.2 million, $4.3 million and $3.2 million, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes.

As of December 31, 2015, the following tax years remain open to examination by the major taxing jurisdictions to which the Company is subject:



	Open Tax Years
Jurisdiction	From		To
United States	2002	-	2015
Australia	2010	-	2015
Belgium	2013	-	2015
Canada	2010	-	2015
Germany	2010	-	2015
Mexico	2008	-	2015
Netherlands	2010	-	2015
Poland	2010	-	2015
U.K.	2009	-	2015