Note 12. Income Taxes

Income taxes have been based on the following components of earnings (loss) from operations before income taxes for the years ended December 31, 2012, 2011 and 2010:


	2012			2011			2010
U.S.	$	(710.1	)	$	(274.5	)	$	171.0
Foreign		70.1			37.1			152.0

Total	$	(640.0	)	$	(237.4	)	$	323.0

The components of income tax expense (benefit) from operations for the years ended December 31, 2012, 2011 and 2010 were as follows:


	2012			2011			2010
Federal:
Current	$	8.6		$	(10.1	)	$	100.1
Deferred		(55.5	)		(82.1	)		(1.7	)
State:
Current		10.5			(19.5	)		(1.2	)
Deferred		(18.3	)		(21.5	)		(10.3	)
Foreign:
Current		46.5			36.3			41.6
Deferred		21.8			(19.4	)		(22.6	)

Total	$	13.6		$	(116.3	)	$	105.9

The following table outlines the reconciliation of differences between the Federal statutory tax rate and the Company’s effective income tax rate:


	2012			2011			2010
Federal statutory tax rate		35.0	%		35.0	%		35.0	%
Adjustment of uncertain tax positions		3.1			30.2			(4.0	)
Foreign tax rate differential		3.2			15.5			(6.1	)
Adjustment of interest on uncertain tax positions		0.6			10.1			0.6
Domestic manufacturing deduction		0.5			2.2			(2.6	)
Acquisition-related expenses		(0.1	)		(0.1	)		1.2
Change in valuation allowances		(4.4	)		(1.0	)		(4.4	)
State and local income taxes, net of U.S. federal income tax benefit		—			(1.6	)		(0.2	)
Restructuring and impairment charges		(40.1	)		(39.5	)		8.3
International reorganization		3.9			—			—
Foreign withholding tax		(1.7	)		—			2.2
Enactment of Health Care Reform Act		—			—			1.0
Other		(2.1	)		(1.8	)		1.8

Effective income tax rate		(2.1	%)		49.0	%		32.8	%

Included in 2012 is a benefit of $26.1 million reflecting the recognition of previously unrecognized tax benefits due to the resolution of certain U.S. federal uncertain tax positions and a $22.4 million benefit related to the decline in value and reorganization of certain entities within the International segment, partially offset by a valuation allowance provision of $32.7 million on certain deferred tax assets in Latin America and an $11.0 million provision related to certain foreign earnings no longer considered to be permanently reinvested.

Included in 2011 is a benefit of $74.8 million reflecting the expiration of U.S. federal statutes of limitations for certain years.

Included in 2010 is a benefit of $19.3 million reflecting the release of a valuation allowance on deferred tax assets due to the forecasted increase in net earnings for certain operations within the Latin America reporting unit.

Deferred income taxes

The significant deferred tax assets and liabilities at December 31, 2012 and 2011 were as follows:


	2012			2011
Deferred tax assets:
Pension and other postretirement benefit plan liabilities	$	524.1		$	489.3
Net operating losses and other tax carryforwards		331.6			339.3
Accrued liabilities		155.2			178.5
Other		99.4			81.8

Total deferred tax assets		1,110.3			1,088.9
Valuation allowances		(273.6	)		(273.2	)

Net deferred tax assets	$	836.7		$	815.7

Deferred tax liabilities:
Accelerated depreciation	$	(226.3	)	$	(257.7	)
Other intangible assets		(98.6	)		(212.5	)
Inventories		(30.7	)		(47.1	)
Other		(30.2	)		(22.5	)

Total deferred tax liabilities		(385.8	)		(539.8	)

Net deferred tax assets	$	450.9		$	275.9

The above amounts are classified as current or long-term in the Consolidated Balance Sheets in accordance with the asset or liability to which they relate on a jurisdiction by jurisdiction basis.

Transactions affecting the valuation allowances on deferred tax assets during the years ended December 31, 2012, 2011 and 2010 were as follows:


	2012			2011			2010
Balance, beginning of year	$	273.2		$	259.5		$	277.5
Current year expense (benefit)—net		28.2			2.4			(9.6	)
Write-offs		(37.9	)		(1.8	)		(9.4	)
Foreign exchange and other		10.1			13.1			1.0

Balance, end of year	$	273.6		$	273.2		$	259.5

As of December 31, 2012, the Company had domestic and foreign net operating loss and other tax carryforwards of approximately $87.6 million and $244.0 million, respectively ($75.1 million and $264.2 million, respectively, at December 31, 2011), of which $175.9 million expires between 2013 and 2022. Limitations on the utilization of these tax assets may apply. The Company has provided valuation allowances to reduce the carrying value of certain deferred tax assets, as management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized.

Deferred income taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in those foreign subsidiaries for which such excess is considered to be permanently reinvested in those operations. The Company has recognized deferred tax liabilities of $9.1 million and $3.0 million as of December 31, 2012 and December 31, 2011, respectively, related to local withholding taxes on certain foreign earnings which are not considered to be permanently reinvested. Determination of the amount of unrecognized U.S. income tax liabilities with respect to certain foreign earnings which have been reinvested abroad is not practical.

Cash payments for income taxes were $100.0 million, $106.5 million and $181.1 million in 2012, 2011 and 2010, respectively. Cash refunds for income taxes were $18.5 million, $11.2 million and $52.0 million in 2012, 2011 and 2010, respectively.

The Company’s income taxes payable for federal and state purposes has been reduced by the tax benefits associated with the exercise of employee stock options and the vesting of restricted stock units. A component of the income tax benefit, calculated as the tax effect of the difference between the fair market value at the time stock options are exercised or restricted stock units vest and the grant date fair market value, directly increases or reduces RR Donnelley shareholders’ equity. For the year ended December 31, 2012, the tax expense recognized as a reduction of RR Donnelley shareholders’ equity was $1.2 million. For the years ended December 31, 2011 and 2010, tax benefits of $3.6 million and $1.1 million, respectively, were recognized in RR Donnelley shareholders’ equity.

See Note 16 for details of the income tax expense or benefit allocated to each component of other comprehensive income.

Uncertain tax positions

Changes in the Company’s unrecognized tax benefits at December 31, 2012, 2011 and 2010 were as follows:


	2012			2011			2010
Balance at beginning of year	$	76.4		$	157.1		$	176.4
Additions for tax positions of the current year		6.3			6.1			10.2
Additions for tax positions of prior years		3.9			6.0			9.5
Reductions for tax positions of prior years		(29.6	)		(26.9	)		(18.1	)
Settlements during the year		(5.6	)		(3.3	)		(9.6	)
Lapses of applicable statutes of limitations		(3.5	)		(62.3	)		(13.6	)
Foreign exchange and other		—			(0.3	)		2.3

Balance at end of year	$	47.9		$	76.4		$	157.1

As of December 31, 2012, 2011 and 2010, the Company had $47.9 million, $76.4 million and $157.1 million, respectively, of unrecognized tax benefits. Unrecognized tax benefits of $29.3 million as of December 31, 2012, if recognized, would have decreased income taxes and the corresponding effective income tax rate and increased net earnings. This potential impact on net earnings (loss) reflects the reduction of these unrecognized tax benefits, net of certain deferred tax assets and the federal tax benefit of state income tax items.

As of December 31, 2012, it is reasonably possible that the total amount of unrecognized tax benefits will decrease within twelve months by as much as $16.9 million due to the resolution of audits or expirations of statutes of limitations related to U.S. federal, state and international tax positions.

The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. The total interest expense, net of tax benefits, related to tax uncertainties recognized in the Consolidated Statements of Operations for the years ended December 31, 2012 and 2011, was a benefit of $4.1 million and $24.0 million, respectively, due to the reversal of interest accrued on previously unrecognized tax benefits that were recognized during the year. For the year ended December 31, 2010, the Company recognized total interest expense, net of tax benefits, related to tax uncertainties of $1.9 million. Benefits of $1.1 million and $2.5 million were recognized for the years ended December 31, 2012 and 2011, respectively, from the reversal of accrued penalties. A provision for penalties of $0.9 million was recognized for the year ended December 31, 2010. Accrued interest of $8.5 million and $13.4 million related to income tax uncertainties were reported as a component of other noncurrent liabilities in the Consolidated Balance Sheets at December 31, 2012 and 2011, respectively. Accrued penalties of $2.7 million and $3.9 million related to income tax uncertainties were reported in other noncurrent liabilities in the Consolidated Balance Sheets at December 31, 2012 and 2011, respectively.

The Company has tax years from 2003 that remain open and subject to examination by the IRS, certain state taxing authorities and certain foreign tax jurisdictions.

Tax Holidays

The Company has been granted “tax holidays” in certain foreign countries as an incentive to attract international investment. Generally, a tax holiday is an agreement between the Company and a foreign government under which the Company receives certain tax benefits in that country. The Company’s most significant tax holiday agreements expired in 2011. The aggregate effect on income tax expense in 2012, 2011 and 2010, as a result of these agreements, was approximately $0.2 million, $7.9 million and $8.1 million, respectively.