9. Income Taxes

The provision for income taxes from continuing operations for the years ended December 31, 2012, 2011 and 2010 consists of the following:

	2012

	(in thousands)
Currently payable:
Federal	$	104,922	93,677	85,394
State		9,335	9,033	6,730

		114,257	102,710	92,124
Deferred taxes		(5,782)	2,004	(5,191)

Provision for income taxes	$	108,475	104,714	86,933

The following table reconciles the statutory federal income tax rate with our effective income tax rate from continuing operations for the years ended December 31, 2012, 2011 and 2010:



Statutory federal income tax rate	35.0%	35.0%	35.0%
State income taxes, net of federal tax benefits	2.2	2.4	1.9
State tax incentives	(0.2)	(0.2)	(0.2)
Valuation allowance on losses capital in nature	(0.8)	(0.2)	(1.1)
Other items	(0.2)	0.8	0.6

Effective income tax rate	36.0%	37.8%	36.2%

The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at December 31, 2012 and 2011 are as follows:

	2012

	(in thousands)
Deferred tax liabilities:
Deferred sales commissions	$	(7,405)	(7,861)
Property and equipment		(8,010)	(13,017)
Benefit plans		(9,723)	(9,617)
Identifiable intangible assets		(8,583)	(8,523)
Unrealized gains on investment securities		(1,084)	-
Purchase of fund assets		(7,458)	(6,631)
Prepaid expenses		(2,138)	(2,430)

Total gross deferred liabilities		(44,401)	(48,079)

Deferred tax assets:
Acquisition lease liability		953	1,108
Additional pension and postretirement liability		28,935	26,403
Accrued expenses		12,705	13,285
Unrealized losses on investment securities		843	2,318
Unrealized losses on investment in partnerships		789	196
Capital loss carryforwards		169	3,022
Excess tax basis on investment in subsidiary		17,921	-
Nonvested stock		21,070	19,051
Unused state tax credits		972	1,123
State net operating loss carryforwards		6,284	5,893
Other		4,230	3,817

Total gross deferred assets		94,871	76,216
Valuation allowance		(24,695)	(11,191)

Net deferred tax asset	$	25,775	16,946

In 2009, the Company sold one of its subsidiaries, Austin Calvert & Flavin, Inc., which generated a capital loss available to offset potential future capital gains. Due to the character of the loss and the limited carryforward period permitted by law, the Company may not realize the full tax benefit of the capital loss. The capital loss carryforward, if not utilized, will expire in 2014. As of December 31, 2012, the Company had a deferred tax asset, net of federal tax effect, for a capital loss carryforward of $0.2 million, excess tax basis in Legend of $17.9 million, and other net deferred tax assets that were capital in nature of $0.5 million. As of December 31, 2011, the Company had a deferred tax asset, net of federal tax effect, for a capital loss carryforward of $3.0 million and other net deferred tax liabilities which were capital in nature of approximately $2.5 million. Management believes it is not more likely than not that the Company will generate sufficient future capital gains to realize the full benefit of these capital losses and accordingly, a valuation allowance in the amount of $18.6 million and $5.5 million has been recorded at December 31, 2012 and 2011, respectively. During 2012, a non-cash impairment charge to Legend resulted in an increase in the valuation allowance of $17.9 million. Losses from partnership investments also increased the valuation allowance by $0.6 million. These increases were partially offset by realized capital gains on securities classified as available for sale and appreciation in the fair value of the Company's investment portfolios, which reduced the valuation allowance by $3.4 million. The remaining $2.0 million decrease in the valuation allowance resulted from appreciation in the fair value of the Company's available for sale securities portfolio, which was recorded as an increase to accumulated other comprehensive income.

Certain subsidiaries of the Company have net operating loss carryforwards in certain states in which these companies file on a separate company basis. The deferred tax asset, net of federal tax effect, relating to the carryforwards as of December 31, 2012 and 2011 is approximately $6.3 million and $5.9 million, respectively. The carryforwards, if not utilized, will expire between 2013 and 2032. Management believes it is not more likely than not that these subsidiaries will generate sufficient future taxable income in these states to realize the benefit of the net operating loss carryforwards and, accordingly, a valuation allowance in the amount of $6.1 million and $5.7 million has been recorded at December 31, 2012 and 2011, respectively. The Company has state tax credit carryforwards of $1.0 million and $1.1 million as of December 31, 2012 and 2011, respectively. Of these state tax credit carryforwards, $0.7 million will expire between 2024 and 2028 if not utilized and $0.3 million will expire in 2026 if not utilized. The Company anticipates these credits will be fully utilized prior to their expiration date.

As of January 1, 2012, the Company had unrecognized tax benefits, including penalties and interest, of $9.8 million ($6.9 million net of federal benefit) that, if recognized, would impact the Company's effective tax rate. As of December 31, 2012, the Company had unrecognized tax benefits, including penalties and interest, of $10.8 million ($7.5 million net of federal benefit) that, if recognized, would impact the Company's effective tax rate. The unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities in the accompanying consolidated balance sheets; unrecognized tax benefits that are expected to be settled within the next 12 months are included in income taxes payable.

The Company's accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes. As of January 1, 2012, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $2.3 million ($1.8 million net of federal benefit). The total amount of penalties and interest, net of federal benefit, related to tax uncertainties recognized in the statement of income for the period ended December 31, 2012 was $0.2 million. The total amount of accrued penalties and interest related to uncertain tax positions at December 31, 2012 of $2.5 million ($2.0 million net of federal benefit) is included in the total unrecognized tax benefits described above.

The following table summarizes the Company's reconciliation of unrecognized tax benefits, excluding penalties and interest, for the years ended December 31, 2012, 2011 and 2010:

	2012

	(in thousands)
Balance at January 1	$	7,467	4,759	4,857
Increases during the year:
Gross increases - tax positions in prior period		275	1,684	189
Gross increases - current-period tax positions		2,215	1,844	981
Decreases during the year:
Gross decreases - tax positions in prior period		(429)	(183)	(490)
Decreases due to settlements with taxing authorities		-	-	(629)
Decreases due to lapse of statute of limitations		(1,206)	(637)	(149)

Balance at December 31	$	8,322	7,467	4,759

In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit our income tax returns. These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. During 2012, the Company settled three open tax years that were undergoing audit by a state jurisdiction in which the Company operates. No audits were settled in 2011. During 2010, the Company settled nine open tax years that were undergoing audits by state jurisdictions in which the Company operates. The Company also received notification of a favorable outcome on a tax position that the Company had previously considered partially uncertain, and therefore, had not previously recognized the full tax benefit. The 2009, 2010 and 2011 federal income tax returns are open tax years that remain subject to potential future audit. The 2006 and 2007 federal tax years also remain open to a limited extent due to capital loss carryback claims. State income tax returns for all years after 2008 and, in certain states, income tax returns prior to 2009, are subject to potential future audit by tax authorities in the Company's major state tax jurisdictions.

The Company is currently being audited in various state jurisdictions. It is reasonably possible that the Company will settle the audits in these jurisdictions within the next 12-month period. It is estimated that the Company's liability for unrecognized tax benefits, including penalties and interest, could decrease by approximately $0.4 million to $2.5 million ($0.3 million to $1.6 million net of federal benefit) upon settlement of these audits. Such settlements are not anticipated to have a significant impact on the results of operations.