INCOME TAXES

Income Tax (Provision) Benefit

Our income tax (provision) benefit consisted of the following:



	Year Ended December 31,
(in millions)	2012			2011			2010
Current tax benefit (provision)	$	1		$	83		$	(7	)
Deferred tax provision	(449		)	(349		)	(265		)
Decrease in valuation allowance	432			351			257
Income tax (provision) benefit	$	(16	)	$	85		$	(15	)

The following table presents the principal reasons for the difference between the effective tax rate and the U.S. federal statutory income tax rate:



	Year Ended December 31,
	2012		2011		2010
U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State taxes	3.3		3.4		2.3
Decrease in valuation allowance	(40.8	)	(45.7	)	(42.3	)
Release of uncertain tax position reserve	—		(9.0	)	—
Other	4.0		5.3		7.6
Effective income tax rate	1.5	%	(11.0	)%	2.6	%

Deferred Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The following table shows significant components of our deferred tax assets and liabilities:



	December 31,
(in millions)	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	6,414		$	6,647
Pension, postretirement and other benefits	6,415			5,703
AMT credit carryforward	402			402
Deferred revenue	2,133			2,297
Rent expense	233			284
Reorganization items, net	209			395
Other	439			564
Valuation allowance	(10,963		)	(10,705		)
Total deferred tax assets	$	5,282		$	5,587
Deferred tax liabilities:
Depreciation	$	4,851		$	5,093
Debt valuation	162			206
Intangible assets	1,730			1,755
Fuel hedge derivatives	31			32
Other	92			68
Total deferred tax liabilities	$	6,866		$	7,154

The following table shows the current and noncurrent deferred tax assets (liabilities):



	December 31,
(in millions)	2012			2011
Current deferred tax assets, net	$	463		$	461
Noncurrent deferred tax liabilities, net	(2,047		)	(2,028		)
Total deferred tax liabilities, net	$	(1,584	)	$	(1,567	)

The current and noncurrent components of our deferred tax balances are generally based on the balance sheet classification of the asset or liability creating the temporary difference. If the deferred tax asset or liability is not based on a component of our balance sheet, such as our net operating loss (“NOL”) carryforwards, the classification is presented based on the expected reversal date of the temporary difference. Our valuation allowance has been allocated between current or noncurrent based on the percentages of current and noncurrent deferred tax assets to total deferred tax assets.

At December 31, 2012, we had (1) $402 million of federal alternative minimum tax (“AMT”) credit carryforwards, which do not expire and (2) $16.3 billion of federal pretax NOL carryforwards, which will not begin to expire until 2022.

Uncertain Tax Positions

The following table shows the amount of and changes to unrecognized tax benefits on our Consolidated Balance Sheets:



(in millions)	2012			2011			2010
Unrecognized tax benefits at beginning of period	$	22		$	89		$	66
Gross increases-tax positions in prior period	31			1			—
Gross increases-tax positions in current period	2			1			29
Settlements	(2		)	(65		)	(1		)
Other	(9		)	(4		)	(5		)
Unrecognized tax benefits at end of period⁽¹⁾	$	44		$	22		$	89


⁽¹⁾	Unrecognized tax benefits on our Consolidated Balance Sheets as of December 31, 2012, 2011 and 2010, include tax benefits of $12 million, $5 million and $72 million, respectively, which will affect the effective tax rate when recognized.

We accrue interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively. Interest and penalties are not material in any period presented.

We are currently under audit by the IRS for the 2011 and 2012 tax years.

Valuation Allowance

We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. We establish valuation allowances if it is not likely we will realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, our future projections of sustained profitability, deferred tax liabilities, the overall business environment, our historical financial results, our industry's historically cyclical financial results and potential current and future tax planning strategies.

We recorded a full valuation allowance in 2004 due to our cumulative three year loss position at that time, compounded by the negative industry-wide business trends and outlook. At December 31, 2012, we had an $11.0 billion valuation allowance established against our deferred income tax assets, which represents a full valuation allowance against our net deferred income tax asset.

During the March 2012 quarter, we moved from a cumulative loss position over the previous three years to a cumulative income position for the first time since we established a full valuation allowance. We have concluded as of December 31, 2012 that the valuation allowance was still needed on our net deferred tax assets based upon the weight of the factors described above, especially considering the history of losses. We continue to evaluate our cumulative income position and income trend as well as our future projections of sustained profitability and whether this profitability trend constitutes sufficient positive evidence to support a reversal of our valuation allowance (in full or in part).

The following table shows the balance of our valuation allowance and the associated activity:



(in millions)	2012			2011			2010
Valuation allowance at beginning of period	$	10,705		$	9,632		$	9,897
Income tax provision	(432		)	(351		)	(257		)
Other comprehensive income tax benefit	690			1,241			6
Other	—			183			(14		)
Valuation allowance at end of period⁽¹⁾	$	10,963		$	10,705		$	9,632


⁽¹⁾	At December 31, 2012, 2011 and 2010, $3.1 billion, $2.5 billion and $1.2 billion of these balances were recorded in AOCI on our Consolidated Balance Sheets, respectively.

Income Tax Allocation

We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations (the "Income Tax Allocation"). During 2009, as a result of the Income Tax Allocation, we recorded a non-cash deferred income tax expense of $321 million on other comprehensive income as a result of hedge gains on fuel derivatives and an offsetting non-cash income tax benefit of $321 million. This deferred income tax expense will remain in AOCI until all amounts in AOCI that relate to fuel derivatives which are designated as accounting hedges are recognized in the Consolidated Statement of Operations. We will reclassify to earnings all amounts relating to our fuel derivative contracts in AOCI on the original contract settlement dates. As a result, a non-cash income tax expense of $321 million will be recognized upon the settlement of the fuel derivative contracts designated as accounting hedges.