Income Taxes

Income Tax Provision

The components of the provision for income taxes were as follows:



(Dollars in thousands)	Years ended December 31,
	2012			2011			2010
Current provision (benefit)
Federal	$	3,872		$	3,804		$	(52,792	)
State and local	34			4,156			179
Foreign	2,566			2,228			1,589
	6,472			10,188			(51,024		)
Deferred provision (benefit)
Federal	45,920			85,106			63,509
Federal net operating loss	11,166			(40,057		)	—
State and local	5,270			4,544			2,533
Foreign	(2,420		)	(152		)	(2,446		)
	59,936			49,441			63,596
	$	66,408		$	59,629		$	12,572

Income taxes have been provided for foreign operations based upon the various tax laws and rates of the countries in which operations are conducted. The components of income (loss) before income taxes were as follows:



(Dollars in thousands)	Years ended December 31,
	2012		2011		2010
U.S. sources	$	164,619	$	139,978	$	30,706
Non-U.S. sources	6,335		8,094		(14,149		)
	$	170,954	$	148,072	$	16,557

Con-way’s income tax provision varied from the amounts calculated by applying the U.S. statutory income tax rate to the pretax income as shown in the following reconciliation:



	Years ended December 31,
	2012		2011		2010
Federal statutory tax rate of 35%	35.0		35.0		35.0
State income tax, net of federal income tax benefit	3.1		5.0		15.7
Foreign taxes in excess of (less than) U.S. statutory rate	(1.2	)	(0.5	)	(9.7	)
Non-deductible operating expenses and tax-exempt income	—		0.1		5.3
Creditable foreign tax, net of foreign tax credits	0.5		0.6		3.8
Non-deductible goodwill impairment, write-down of an
acquisition-related receivable and purchase-price adjustment	—		(1.6	)	34.7
Fuel tax credit	(0.1	)	(2.5	)	(24.5	)
IRS audit settlement	—		4.0		—
Other, net	1.5		0.2		15.6
Effective income tax rate	38.8		40.3		75.9

Current and Deferred Income Tax Balances

The components of deferred tax assets and liabilities related to the following:



(Dollars in thousands)	December 31,
	2012			2011
Deferred tax assets
Employee benefits	$	231,386		$	248,481
Self-insurance accruals	32,336			37,426
Capital-loss carryforwards	—			695
Operating-loss carryforwards	49,125			57,635
Tax-credit carryforwards	9,138			6,877
Share-based compensation	15,558			13,724
Other	13,242			14,350
Valuation allowance	(19,120		)	(17,515		)
	331,665			361,673
Deferred tax liabilities
Property, plant and equipment	331,325			313,041
Prepaid expenses	27,626			25,056
Revenue	6,808			6,939
Other	8,798			8,269
	374,557			353,305
Net deferred tax asset (liability)	$	(42,892	)	$	8,368

Deferred tax assets and liabilities in the consolidated balance sheets are classified as current or non-current based on the related asset or liability creating the deferred tax. Deferred taxes not related to a specific asset or liability are classified based on the estimated period of reversal.

At December 31, 2012, Con-way had a federal tax loss carryforward of $82.5 million. This federal tax loss carryforward will expire in 2031. In addition to the federal tax loss carryforward, other carryforwards, including state tax credits, foreign taxes creditable against federal tax, and state and foreign tax losses, may create future benefits. The resulting benefit of the future use of all tax losses is $49.1 million while tax credit carryforwards provide a benefit of $9.1 million. Because Con-way does not anticipate that future state and foreign taxable income will allow realization of the full benefits, management concluded that these assets fail to meet the more-likely-than-not threshold for realization. These combined future tax benefits of $58.3 million, therefore, have been offset by a valuation allowance of $19.1 million.

For all other deferred tax assets, management believes it is more likely than not that the results of future operations will generate taxable income of a sufficient amount and type to realize these deferred tax assets.

In December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law. This law allowed for 100% bonus depreciation on certain capital expenditures made between September 9, 2010 and December 31, 2011 resulting in Con-way deducting a substantial portion of its 2011 capital expenditures in the 2011 tax year. The Act also allows for 50% bonus depreciation on certain capital expenditures made after December 31, 2011 and before January 1, 2013. As a result of this provision, Con-way deducted a substantial portion of its 2012 capital expenditures in the 2012 tax year. In January 2013, the American Taxpayer Relief Act of 2012 was enacted. Part of the act extended the alternative-fuel credit to the 2012 and 2013 tax years. As a result, Con-way will record a discrete benefit of $3.3 million in the first quarter of 2013 to recognize the effect of the credit associated with the 2012 tax year. The alternative-fuel credit for the 2013 tax year will be recognized over the course of 2013. The American Taxpayer Relief Act also extends the 50% bonus depreciation on certain capital expenditures into the 2013 tax year. Con-way may deduct a substantial amount of its 2013 capital expenditures in the 2013 tax year.

No deferred taxes have been provided for the cumulative undistributed earnings of Con-way’s foreign subsidiaries ($33.0 million at December 31, 2012), which if remitted, are subject to withholding and U.S. taxes. Such amounts have been indefinitely reinvested in the respective foreign subsidiaries’ operations until it becomes advantageous for tax or foreign exchange reasons to remit these earnings. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable.

Income tax receivables of $6.6 million and $4.8 million were included in other accounts receivable in Con-way’s consolidated balance sheets at December 31, 2012 and 2011, respectively.

Uncertain Tax Positions

Con-way recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained upon examination by a taxing authority. If the position meets the more-likely-than-not criteria, it is measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the first subsequent financial reporting period in which the threshold is no longer met.

During 2011, the estimate for uncertain tax positions increased to $17.4 million (including $6.7 million of accrued interest and penalties), primarily due to current year uncertain tax positions and the Internal Revenue Service ("IRS") audit settlement, more fully discussed below. During 2012, the estimate decreased to $15.0 million (including $5.3 million of accrued interest and penalties), primarily due to the lapse of statute of limitations and settlements with various taxing authorities, more fully discussed below.

At December 31, 2012 and 2011, Con-way estimated that $8.2 million and $8.7 million, respectively, of the unrecognized tax benefits, if recognized, would change the effective tax rate. In 2012, a $1.3 million reversal of interest and penalties was included in income tax expense, and in 2011, $0.8 million of interest and penalties were included in income tax expense.

The following summarizes the changes in the unrecognized tax benefits during the year, excluding interest and penalties:



(Dollars in thousands)
Balance at December 31, 2010	$	9,803
Gross increases — prior-period tax positions	2,770
Gross increases — current-period tax positions	1,014
Settlements	(1,758		)
Lapse of statute of limitations	(1,152		)
Balance at December 31, 2011	10,677
Gross increases — prior-period tax positions	2,676
Gross increases — current-period tax positions	1,039
Settlements	(1,102		)
Lapse of statute of limitations	(3,562		)
Balance at December 31, 2012	$	9,728

In the normal course of business, Con-way is subject to examination by taxing authorities throughout the world. As a result of these examinations, Con-way maintains ongoing discussions and negotiations relating to tax matters with the taxing authorities in these various jurisdictions.

Con-way is subject to examination for federal income taxes for tax years 2008 forward. In 2011, the IRS began its audit of the 2008 through 2010 periods with the objective of bringing Con-way into its Compliance Assurance Program (“CAP”) by 2013. CAP is designed to make audits more effective, efficient and current such that when the federal tax return is filed it has been approved by the IRS.

During 2012, the IRS finished its field audit of the 2008 through 2010 tax years and an issue emerged that resulted in an increase to the estimate for uncertain tax positions in 2012. Con-way is contesting the issue with the IRS and has taken the issue to the IRS Appeals Division.

In 2011, Con-way settled a disputed issue with the IRS that arose in the 2005 to 2007 audit cycle. This issue primarily related to the treatment and character of certain payments Con-way made to retirees and former employees of Menlo Worldwide Forwarding, Inc. and its subsidiaries (“MWF”) since the 2004 sale of MWF to United Parcel Service, Inc. Con-way and the IRS agreed in the settlement to re-characterize a portion of these payments as capital losses. The re-characterized portion may not be deducted, but may be used only to offset capital gains.

Con-way is also subject to examination by state, local, and foreign jurisdictions for 2003 to 2011. Con-way is currently under audit in many state and foreign tax jurisdictions, and management expects that, in the next 12 months, it is reasonably possible that the total of unrecognized tax benefits will decrease $4.3 million. This decrease is primarily due to settlement agreements Con-way expects to reach with various tax authorities and lapses of statutes of limitations.