NOTE 12. Income Taxes:

For the years ended December 31, 2012, 2011 and 2010, domestic and foreign pretax income (loss) from continuing operations before noncontrolling interests was $449.6 million and $17.8 million, $128.2 million and $2.1 million, and $213.5 million and $(1.4) million, respectively.

Income taxes are summarized as follows:


	Year ended December 31,
	2012			2011			2010
	(in thousands)
Current:
Federal	$	82,269		$	(23,095	)	$	69,379
State		15,229			(1,267	)		14,962
Foreign		8,234			13,926			13,657

		105,732			(10,436	)		97,998

Deferred:
Federal		60,242			69,302			(680	)
State		111			4,585			(9,823	)
Foreign		(407	)		(11,737	)		(4,345	)

		59,946			62,150			(14,848	)

	$	165,678		$	51,714		$	83,150

Income taxes differ from the amounts computed by applying the federal income tax rate of 35.0%. A reconciliation of this difference is as follows:


	Year ended December 31,
	2012			2011			2010
	(in thousands)
Taxes calculated at federal rate	$	163,592		$	45,603		$	74,237
State taxes, net of federal benefit		9,525			2,499			3,340
Dividends received deduction		(995	)		(140	)		(250	)
Change in liability for tax positions		2,033			2,548			4,626
Exclusion of certain meals and entertainment expenses		2,414			2,245			2,889
Change in capital loss valuation allowance		(5,276	)		—			(14,683	)
Foreign taxes in excess of federal rate		1,434			1,740			9,802
Foreign tax credit		(2,921	)		—			—
Other items, net		(4,128	)		(2,781	)		3,189

	$	165,678		$	51,714		$	83,150

The Company’s effective income tax rate (income tax expense as a percentage of income before income taxes) was 35.4% for 2012, 39.7% for 2011and 39.2% for 2010. The differences in the effective tax rates were primarily due to changes in the ratio of permanent differences to income before income taxes, changes in state and foreign income taxes resulting from fluctuations in the Company’s noninsurance and foreign subsidiaries’ contribution to pretax profits, and changes in the liability related to tax positions reported on the Company’s tax returns. The effective tax rates for 2012 and 2010 included the release of valuation allowances recorded against capital losses. In addition, the effective tax rate for 2012 reflected the generation of foreign tax credits.

The primary components of temporary differences that give rise to the Company’s net deferred tax (liability) asset are as follows:


	December 31,
	2012			2011
	(in thousands)
Deferred tax assets:
Deferred revenue	$	8,110		$	6,008
Employee benefits		82,421			76,449
Bad debt reserves		13,423			13,484
Investment in affiliates		9,096			—
Loss reserves		3,044			4,469
Pension		121,605			112,558
Capital loss carryforward		30			32,887
Net operating loss carryforward		23,749			28,175
Securities		—			5,422
Other		8,844			6,134

		270,322			285,586
Valuation allowance		(14,172	)		(21,426	)

		256,150			264,160

Deferred tax liabilities:
Depreciable and amortizable assets		238,688			179,613
Claims and related salvage		36,307			29,533
Investment in affiliates		—			15,397
Securities		18,142			—

		293,137			224,543

Net deferred tax (liability) asset	$	(36,987	)	$	39,617

The exercise of stock options represents a tax benefit and has been reflected as a reduction of taxes payable and an increase to equity. The benefits recorded were $2.4 million for the year ended December 31, 2012 and $1.1 million for the years ended December 31, 2011 and 2010.

In connection with the Separation, the Company and TFAC entered into a Tax Sharing Agreement, dated June 1, 2010 (the “Tax Sharing Agreement”), which governs the Company’s and CoreLogic’s respective rights, responsibilities and obligations for certain tax related matters. At December 31, 2012 and 2011, the Company had a net payable to CoreLogic of $52.5 million and $35.4 million, respectively, related to tax matters prior to the Separation. This amount is included in the Company’s consolidated balance sheet in due to CoreLogic, net. The increase during the current year results from cash payments received from Corelogic related to tax matters prior to the Separation and an additional accrual for tax matters prior to the Separation. During 2011, the Company recorded a $5.2 million increase to stockholders’ equity related to the Separation to reflect the Company’s actual tax liability to be included in CoreLogic’s consolidated tax return for 2010.

At December 31, 2012, the Company had available federal, state and foreign net operating loss carryforwards totaling, in aggregate, approximately $96.7 million for income tax purposes, of which $39.6 million has an indefinite expiration. The remaining $57.1 million expire at various times beginning in 2013. The Company carries a valuation allowance of $13.0 million against a portion of these net operating loss carryforwards.

The Company evaluates the realizability of its deferred tax assets by assessing the valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve the forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

During 2012, the Company released a valuation allowance of $5.3 million previously recorded against certain of its deferred tax assets. Specifically, management determined that it was more likely than not that all of its tax capital loss items will be realized prior to expiration as the result of realized gains from sales of securities and favorable market value activity in its securities portfolio. Application of the accounting guidance related to intraperiod tax allocations resulted in the valuation allowance being credited to tax expense in the amount of $5.3 million during the year ended December 31, 2012. As of December 31, 2012, no significant capital loss carryover remains in the Company’s deferred tax inventory.

As of December 31, 2012, United States taxes were not provided for on the earnings of the Company’s foreign subsidiaries of $116.4 million, as the Company has invested or expects to invest the undistributed earnings indefinitely. If in the future these earnings are repatriated to the United States, or if the Company determines that the earnings will be remitted in the foreseeable future, additional tax provisions may be required. It is not practicable to calculate the deferred taxes associated with these earnings because of the variability of multiple factors that would need to be assessed at the time of any assumed repatriation; however, foreign tax credits may be available to reduce federal income taxes in the event of distribution.

As of December 31, 2012 and 2011, the liability for income taxes associated with uncertain tax positions was $47.9 million and $17.3 million, respectively. The increase in the liability during 2012 was primarily attributable to the Company’s claim for a timing adjustment in a prior-year tax return. The liabilities could be reduced by $32.6 million and $2.9 million, as of December 31, 2012 and 2011, respectively, of offsetting tax benefits associated with the correlative effects of potential adjustments including timing adjustments and state income taxes. The net amount of $15.3 million and $14.4 million, as of December 31, 2012 and 2011, respectively, if recognized, would favorably affect the Company’s effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010 is as follows:


	December 31,
	2012			2011		2010
	(in thousands)
Unrecognized tax benefits—opening balance	$	17,300		$	11,100	$	10,400
Gross increases—tax positions in prior period		200			—		—
Gross increases—current period tax positions		30,500			6,200		700
Expiration of the statute of limitations for the assessment of taxes		(100	)		—		—

Unrecognized tax benefits—ending balance	$	47,900		$	17,300	$	11,100

The Company’s continuing practice is to recognize interest and penalties, if any, related to uncertain tax positions in tax expense. As of December 31, 2012 and 2011, the Company had accrued $4.2 million and $3.6 million, respectively, of interest and penalties (net of tax benefits of $1.7 million and $1.4 million, respectively) related to uncertain tax positions.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various non-U.S. jurisdictions. The primary non-federal jurisdictions are California, Canada, India, and the United Kingdom. The Company is no longer subject to U.S. federal, state, and non-U.S. income tax examinations by taxing authorities for years prior to 2005.

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s unrecognized tax positions may significantly increase or decrease within the next 12 months. These changes may be the result of items such as ongoing audits or the expiration of federal and state statute of limitations for the assessment of taxes. Based on the status of its current tax audits, the Company estimates that there will be no significant increase or decrease in unrecognized tax benefits within the next 12 months.

The Company records a liability for potential tax assessments based on its estimate of the potential exposure. New tax laws and new interpretations of laws and rulings by tax authorities may affect the liability for potential tax assessments. Due to the subjectivity and complex nature of the underlying issues, actual payments or assessments may differ from estimates. To the extent the Company’s estimates differ from actual payments or assessments, income tax expense is adjusted. The Company’s income tax returns in several jurisdictions are being examined by various tax authorities. The Company believes that adequate amounts of tax and related interest, if any, have been provided for any adjustments that may result from these examinations.