8. Income Taxes

Income Tax Provision

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


(Dollars in thousands)	Years ended December 31,
	2011			2010			2009
Current provision (benefit)
Federal	$	3,804		$	(52,792	)	$	7,849
State and local		4,156			179			624
Foreign		2,228			1,589			2,237
		10,188			(51,024	)		10,710

Deferred provision (benefit)
Federal		85,106			63,509			5,541
Federal net operating loss		(40,057	)		--			--
State and local		4,544			2,533			(262	)
Foreign		(152	)		(2,446	)		1,489
		49,441			63,596			6,768
	$	59,629		$	12,572		$	17,478

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,
	2011		2010			2009

U.S. sources	$	139,978	$	30,706		$	(94,089	)
Non-U.S. sources		8,094		(14,149	)		3,820
	$	148,072	$	16,557		$	(90,269	)

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


(Dollars in thousands)	Years ended December 31,
	2011			2010			2009

Federal statutory tax rate of 35%	$	51,825		$	5,795		$	(31,594	)
State income tax, net of federal
income tax benefit		7,458			2,607			(676	)
Foreign taxes in excess of (less than) U.S. statutory rate		(757	)		(1,606	)		2,388
Non-deductible operating expenses and
tax-exempt income		113			878			2,231
Creditable foreign tax, net of
foreign tax credits		925			631			246
Non-deductible goodwill impairment,
write-down of an acquisition-related
receivable and purchase-price adjustment		(2,351	)		5,745			47,185
Fuel tax credit		(3,632	)		(4,054	)		(3,123	)
IRS audit settlement		5,888			--			--
Other, net		160			2,576			821
Income tax provision	$	59,629		$	12,572		$	17,478

Current and Deferred Income Tax Balances

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


(Dollars in thousands)	December 31,
	2011			2010
Deferred tax assets
Employee benefits	$	248,481		$	163,119
Self-insurance accruals		37,426			42,950
Capital-loss carryforwards		695			92
Operating-loss carryforwards		57,635			15,636
Tax-credit carryforwards		6,877			6,259
Share-based compensation		13,724			12,650
Other		14,350			14,161
Valuation allowance		(17,515	)		(12,749	)
		361,673			242,118

Deferred tax liabilities
Property, plant and equipment		313,041			245,083
Prepaid expenses		25,056			23,814
Revenue		6,939			7,562
Other		8,269			5,658
		353,305			282,117

Net deferred tax asset (liability)	$	8,368		$	(39,999	)

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, 2011, Con-way had a federal tax loss carryforward of $114.4 million. This federal tax loss carryforward will expire in 20 years. In addition to the federal tax loss carryforward, other carryforwards, including state tax credits, foreign taxes creditable against federal tax, state and foreign tax losses, and capital losses, may create future benefits. The resulting benefit of the future use of all tax losses is $57.6 million while tax credit carryforwards provide a benefit of $6.9 million and capital losses provide $0.7 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 $65.2 million, therefore, have been offset by a valuation allowance of $17.5 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 allows for 100% bonus depreciation on certain capital expenditures made between September 9, 2010 and December 31, 2011. As a result, Con-way deducted a substantial portion of its 2011 capital expenditures in the 2011 tax year. The new law 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 may deduct a substantial portion of its 2012 capital expenditures in the 2012 tax year.

No deferred taxes have been provided for the cumulative undistributed earnings of Con-way's foreign subsidiaries ($29.3 million at December 31, 2011), 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 $4.8 million and $41.2 million were included in other accounts receivable in Con-way's consolidated balance sheets at December 31, 2011 and 2010, 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 2010, the estimate for uncertain tax positions decreased to $15.9 million (including $6.1 million of accrued interest and penalties), primarily due to settlements with state taxing authorities. During 2011, the estimate 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.

At December 31, 2011 and 2010, Con-way estimated that $8.7 million and $8.0 million, respectively, of the unrecognized tax benefits, if recognized, would change the effective tax rate. In 2011, $0.8 million of interest and penalties were included in income tax expense, and in 2010, $0.6 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, 2009	$	14,818
Gross increases – prior-period tax positions		140
Gross decreases – prior-period tax positions		(1,684	)
Gross increases – current-period tax positions		358
Settlements		(2,234	)
Lapse of statute of limitations		(1,595	)
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

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.

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. As a result, Con-way paid taxes and interest of $1.8 million in 2011 for the additional 2005 to 2007 liability. Con-way recorded a remaining liability of $0.8 million for 2008 to 2010. Additionally, a valuation allowance of $3.3 million, representing the balance of the settlement, was recorded in 2011 against deferred tax assets.

As a separate but mitigating factor, Con-way realized capital gains on sales of property in 2011. These gains may be offset with capital loss carryovers, generating a $1.8 million tax refund.

Con-way is also subject to examination by state, local, and foreign jurisdictions for 2004 to 2010. 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 in the range of $5.4 million to $7.4 million. This decrease is primarily due to settlement agreements Con-way expects to reach with various tax authorities and lapses of statutes of limitations.