Income Taxes

Income Tax Provision

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



(Dollars in thousands)	Years ended December 31,
	2013			2012			2011
Current provision (benefit)
Federal	$	(6,137	)	$	3,872		$	3,804
State and local	2,145			34			4,156
Foreign	873			2,566			2,228
Total current provision (benefit)	(3,119		)	6,472			10,188
Deferred provision (benefit)
Federal	41,832			45,920			85,106
Federal net operating loss	14,369			11,166			(40,057		)
State and local	5,608			5,270			4,544
Foreign	(3,478		)	(2,420		)	(152		)
Total deferred provision	58,331			59,936			49,441
Income tax provision	$	55,212		$	66,408		$	59,629

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 before income taxes were as follows:



(Dollars in thousands)	Years ended December 31,
	2013			2012		2011
U.S. sources	$	157,074		$	164,619	$	139,978
Non-U.S. sources	(2,709		)	6,335		8,094
Income before income tax provision	$	154,365		$	170,954	$	148,072

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,
	2013		2012		2011
Federal statutory tax rate of 35%	35.0	%	35.0	%	35.0	%
State income tax, net of federal income tax benefit	4.7		3.1		5.0
Foreign taxes less than U.S. statutory rate	(1.1	)	(1.2	)	(0.5	)
Non-deductible operating expenses and tax-exempt income	0.7		—		0.1
Foreign taxes eligible for US foreign tax credit	0.5		0.5		0.6
Write-down of an acquisition-related receivable and
purchase-price adjustment	—		—		(1.6	)
Fuel tax credit	(4.5	)	(0.1	)	(2.5	)
IRS audit	(0.4	)	1.5		4.0
Other, net	0.9		—		0.2
Effective income tax rate	35.8	%	38.8	%	40.3	%

Current and Deferred Income Tax Balances

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



(Dollars in thousands)	December 31,
	2013			2012
Deferred tax assets
Employee benefits	$	91,474		$	231,386
Self-insurance accruals	23,042			32,336
Domestic operating-loss carryforwards	22,461			37,818
Foreign operating-loss carryforwards	16,832			11,307
Tax-credit carryforwards	10,019			9,138
Share-based compensation	16,551			15,558
Other	11,471			13,242
Valuation allowance	(25,358		)	(19,120		)
Total deferred tax assets	166,492			331,665
Deferred tax liabilities
Property, plant and equipment	348,728			331,325
Prepaid expenses	24,401			27,626
Revenue	9,013			6,808
Other	6,967			8,798
Total deferred tax liabilities	389,109			374,557
Net deferred tax asset (liability)	$	(222,617	)	$	(42,892	)

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, 2013, Con-way had a federal tax loss carryforward of $41.5 million. This federal tax loss carryforward will fully 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, including domestic and foreign, is $39.3 million while tax credit carryforwards provide a benefit of $10.0 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 $49.3 million, therefore, have been offset by a valuation allowance of $25.4 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.

Certain capital expenditures made between September 9, 2010 and December 31, 2013 were eligible for bonus depreciation, and in accordance with this provision of U.S. tax law, Con-way deducted a substantial portion of its capital expenditures made during the 2010 through 2013 tax years. Also, in January 2013, the American Taxpayer Relief Act of 2012 was enacted which extended the alternative-fuel credit to 2012 and 2013 tax years. Con-way recorded 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 was recognized over the course of 2013.

No deferred taxes have been provided for the cumulative undistributed earnings of Con-way’s foreign subsidiaries ($29.9 million at December 31, 2013), 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 $10.6 million and $6.6 million were included in other accounts receivable in Con-way’s consolidated balance sheets at December 31, 2013 and 2012, 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 2012, the estimate for uncertain tax positions 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. During 2013, the estimate decreased to $11.9 million (including $3.5 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, 2013 and 2012, Con-way estimated that $6.5 million and $8.2 million, respectively, of the unrecognized tax benefits, if recognized, would change the effective tax rate. In 2013, a $1.8 million reversal of interest and penalties was included in income tax expense compared to $1.3 million in 2012.

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



(Dollars in thousands)
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
Gross increases — prior-period tax positions	14
Gross increases — current-period tax positions	1,376
Gross decreases — prior-period tax positions	(602		)
Lapse of statute of limitations	(2,128		)
Balance at December 31, 2013	$	8,388

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 2013, Con-way entered the Compliance Assurance Program (“CAP”). 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 Internal Revenue Service ("IRS").

In 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 settled this issue in 2013. Payment of the liability will occur in 2014.

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. 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 2012. 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 by $1.8 million. This decrease is primarily due to settlement agreements Con-way expects to reach with various tax authorities and by lapses of applicable statutes of limitations.