12. Income Taxes

The provision for income taxes is based on income recognized for consolidated financial statement purposes and includes the effects of permanent and temporary differences between such income and income recognized for income tax return purposes. As a result of the reverse spin-off from Ceridian, deferred tax assets consisting of net operating loss (“NOL”) and credit carryforwards were transferred from Ceridian to the Company, along with temporary differences related to the Company’s business. The NOL carryforwards will expire in various amounts from 2013 to 2029. Arbitron Mobile also incurred losses in 2011 available for U.S. carryforward subject to the separate return limitation year rules.

The components of income before income tax expense and a reconciliation of the statutory federal income tax rate to the income tax rate on income before income tax expense for the years ended December 31, 2012, 2011, and 2010 are as follows (dollars in thousands):


	2012			2011			2010
Income (loss) before income tax expense:
U.S.	$	99,652		$	89,188		$	70,657
International		(4,705	)		(841	)		1,115

Total	$	94,947		$	88,347		$	71,772

Income tax expense (benefit):
Current:
U.S.	$	35,768		$	32,871		$	18,706
State, local and foreign		5,039			3,892			2,441

Total		40,807			36,763			21,147

Deferred:
U.S.		(3,925	)		(3,783	)		3,700
State, local and foreign		1,134			2,076			2,447

Total		(2,791	)		(1,707	)		6,147

	$	38,016		$	35,056		$	27,294

U.S. statutory rate		35.0	%		35.0	%		35.0	%

Income tax expense at U.S. statutory rate	$	33,231		$	30,921		$	25,120
State income taxes, net of federal benefit		4,101			3,452			2,834
Meals and entertainment		234			198			187
Change in valuation allowance for foreign tax credit and capital loss		(340	)		1,099			(169	)
Nondeductible capitalized acquisition costs		1,491			—			—
Domestic production activities deduction		(568	)		(525	)		(508	)
Other		(133	)		(89	)		(170	)

Income tax expense	$	38,016		$	35,056		$	27,294

Effective tax rate		40.0	%		39.7	%		38.0	%

Income tax expense. The effective tax rate was 40.0% in 2012, which was impacted by $5.2 million of 2012 Merger costs associated with the Nielsen transaction, of which $4.3 million was non-deductible for tax purposes. The effective tax rate was 39.7% in 2011, which was impacted primarily by a $0.8 million U.S. deferred tax asset valuation allowance arising from the net operating loss incurred by Arbitron Mobile during 2011.

The Company’s Indian operations are conducted in a Special Economic Zone (SEZ) providing for a reduction of tax rates on certain classes of income when certain conditions are met. The Company was in compliance with these conditions as of December 31, 2012. Beginning April of 2011, the Company became subject to a Minimum Alternate Tax in India due to a change in legislation affecting all SEZ operating companies. The earnings from our foreign operations in India are subject to a tax holiday which partially expires in fiscal year 2013. A deferred tax liability was recognized for the cumulative undistributed earnings which the Company does not expect to permanently reinvest outside of the U.S. Therefore, the Company’s reduction of tax expense due to the tax holiday in India was immaterial during fiscal years 2012, 2011 and 2010.

The following table summarizes the activity related to the Company’s unrecognized tax benefits as of December 31, 2012, and 2011 (in thousands):


	2012			2011
Balance at January 1	$	1,300		$	1,896
Increases related to current year tax positions		64			107
Increases (decreases) related to prior years’ tax positions		373			(537	)
Decreases related to settlements with taxing authorities		(135	)		—
Expiration of the statute of limitations for the assessment of taxes		(264	)		(166	)

Balance at December 31	$	1,338		$	1,300

During 2012, certain liabilities for tax contingencies related to prior periods were recognized. Certain other liabilities were reversed due to the settlement and completion of income tax audits and returns and the expiration of audit statutes during the year. The Company’s net unrecognized tax benefits for these changes and other items was less than $0.1 million with the balance remaining at $1.3 million as of December 31, 2012. If recognized, the $1.3 million of unrecognized tax benefits would reduce the Company’s effective tax rate in future periods.

The Company accrues potential interest and penalties and recognizes as income tax expense where, under relevant tax law, interest and penalties would be assessed if the uncertain tax position ultimately were not sustained. The Company has recorded a liability for potential interest and penalties of $0.2 million as of December 31, 2012.

Management determined it is reasonably possible that certain unrecognized tax benefits as of December 31, 2012, will decrease during the subsequent 12 months due to the expiration of statutes of federal and state limitations and due to the settlement of certain state audit examinations. The estimated decrease in these unrecognized federal tax benefits and the estimated decrease in unrecognized tax benefits from various states are both immaterial.

The Company files numerous income tax returns, primarily in the United States, including federal, state, and local jurisdictions, and certain foreign jurisdictions. Tax years ended December 31, 2010 through December 31, 2011, remain open for assessment by the Internal Revenue Service. Generally, the Company is not subject to state, local, or foreign examination for years prior to 2007. However, tax years 1992 through 2006 remain open for assessment for certain state taxing jurisdictions where NOL carryforwards were utilized on income tax returns for such states since 2007.

Temporary differences and the resulting net deferred income tax assets as of December 31, 2012, and 2011, were as follows (in thousands):


	2012			2011
Deferred tax assets
Current deferred tax assets
Accruals	$	5,513		$	5,084
Net operating loss carryforwards		—			1,314

		5,513			6,398
Noncurrent deferred tax assets
Benefit plans	$	10,862		$	11,237
Accruals		3,258			2,372
Net operating loss carryforwards		760			760
Share-based compensation		8,814			7,573
Partnership interest		1,785			1,851
Investment impairment		1,361			1,355
Other		1,590			1,316

		28,430			26,464
Less valuation allowance		(922	)		(1,262	)

Total deferred tax assets		33,021			31,600
Deferred tax liabilities
Noncurrent deferred tax liabilities
Basis differences in intangible assets and property and equipment	$	(21,435	)	$	(22,860	)
Benefit plans		(1,467	)		(2,476	)
Other		(2,222	)		(1,168	)

Total deferred tax liabilities		(25,124	)		(26,504	)

Net deferred tax assets	$	7,897		$	5,096

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during periods in which the temporary differences become deductible and before tax credits or NOL carryforwards expire. Management considered the historical results of the Company during the previous three years and projected future U.S. and foreign taxable income and determined that a valuation allowance of $0.9 million and $1.3 million was required as of December 31, 2012 and 2011, respectively, for NOLs, specific capital losses and foreign tax credit carryforwards.

Income taxes paid in 2012, 2011, and 2010 were $38.3 million, $31.7 million, and $24.9 million, respectively.