Note E — Income Taxes

The components of income tax expense (benefit) are as follows:

	Year Ended December 31,
In thousands	2012			2011			2010
Current
Federal	$	14,505		$	12,507		$	20,296
State and local	3,950			5,843			4,009
Foreign	1,878			2,054			1,618
Total current	$	20,333		$	20,404		$	25,923

Deferred
Federal	$	(34,916	)	$	10,267		$	7,830
State and local	(7,721		)	237			(146		)
Foreign	(878		)	(117		)	(315		)
Total deferred	$	(43,515	)	$	10,387		$	7,369

Total income tax expense (benefit)	$	(23,182	)	$	30,791		$	33,292

The United States and foreign components of income (loss) from continuing operations before income taxes were as follows:

	Year Ended December 31,
In thousands	2012			2011		2010
United States	$	(100,191	)	$	69,941	$	83,388
Foreign	3,905			6,727		5,098
Total income (loss) from continuing operations before income taxes	$	(96,286	)	$	76,668	$	88,486

The differences between total income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate to income before income taxes were as follows:

	Year Ended December 31,
In thousands	2012			Rate		2011			Rate		2010			Rate
Computed expected income tax expense (benefit)	$	(33,700	)	-35	%	$	26,834		35	%	$	30,970		35	%
Net effect of state income taxes	2,907			3	%	3,952			5	%	2,290			3	%
Production activities deduction	0			0	%	0			0	%	(469		)	-1	%
Goodwill impairment	8,765			9	%	0			0	%	0			0	%
Change in beginning of year valuation allowance	(1,225		)	-1	%	(117		)	0	%	40			0	%
Other, net	71			0	%	122			0	%	461			1	%
Income tax expense (benefit) for the period	$	(23,182	)	-24	%	$	30,791		40	%	$	33,292		38	%

Total income tax expense (benefit) was allocated as follows:

	Year Ended December 31,
In thousands	2012			2011			2010
Continuing operations	$	(23,182	)	$	30,791		$	33,292
Discontinued operations	(4,981		)	(1,016		)	(569		)
Loss on sale	(2,147		)	0			0
Stockholders’ equity	(736		)	(5,910		)	(463		)
Total	$	(31,046	)	$	23,865		$	32,260

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:

	December 31,
In thousands	2012			2011
Deferred tax assets
Deferred compensation and retirement plan	$	31,515		$	27,039
Accrued expenses not deductible until paid	5,459			6,570
Employee stock-based compensation	4,000			6,426
Accrued payroll not deductible until paid	2,363			3,573
Accounts receivable, net	1,963			1,221
Other, net	158			185
State income tax	69			494
Federal net operating loss carryforwards	151			151
Foreign net operating loss carryforwards	2,439			2,590
State net operating loss carryforwards	2,214			1,206
Total gross deferred tax assets	50,331			49,455
Less valuation allowance	(2,439		)	(3,638		)
Net deferred tax assets	$	47,892		$	45,817

Deferred tax liabilities
Property, plant and equipment	$	(11,787	)	$	(16,298	)
Goodwill and other intangibles	(81,859		)	(112,377		)
Total gross deferred tax liabilities	(93,646		)	(128,675		)
Net deferred tax liabilities	$	(45,754	)	$	(82,858	)

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on the expectation of future taxable income and that the deductible temporary differences will offset existing taxable temporary differences, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances, at December 31, 2012 and 2011.

Net deferred taxes are recorded both as a current deferred income tax asset and as other long-term liabilities based upon the classification of the related assets and liabilities that give rise to the temporary difference. There are approximately $39.7 million and $36.2 million of deferred tax assets related to non-current items that are netted with long-term deferred tax liabilities at December 31, 2012 and 2011, respectively.

Harte-Hanks or one of our subsidiaries files income tax returns in the U.S. federal, U.S. state and foreign jurisdictions. For U.S. federal, U.S. state and foreign returns, we are no longer subject to tax examinations for years prior to 2008.

A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:

Balance at January 1, 2011	$	371
Additions for current year tax positions	$	0
Additions for prior year tax positions	27
Reductions for prior year tax positions	0
Lapse of statute	(230		)
Settlements	(77		)
Balance at December 31, 2011	$	91

Additions for current year tax positions	$	0
Additions for prior year tax positions	0
Reductions for prior year tax positions	0
Lapse of statute	(40		)
Settlements	0
Balance at December 31, 2012	$	51

Included in the balance as of December 31, 2012 are $0.1 million of federally effected unrecognized tax benefits that, if recognized, would impact the effective tax rate. We anticipate that it is reasonably possible that we will have a reduction in the liability of up to $0.1 million during 2013 as a result of lapsing statutes.

We have elected to classify any interest and penalties related to income taxes within income tax expense in our Consolidated Statements of Comprehensive Income (Loss). We recognized $0.1 million in tax benefits for the reduction of accrued interest and penalties associated with the reduction of the liability for unrecognized tax benefits during each of the years ended December 31, 2012 and 2011. We did not have any interest and penalties accrued at December 31, 2012 or 2011.

As of December 31, 2012, we had net operating loss carryforwards that are available to reduce future taxable income and that will begin to expire in 2026.

The valuation allowance for deferred tax assets as of January 1, 2011, was $3.7 million. The valuation allowance at December 31, 2012 and 2011 relates to foreign and state net operating loss carryforwards, which are not expected to be realized. As part of our assessment of the realizability of our deferred tax assets, and based on the expectations of future taxable income and that the deductible temporary differences will offset existing taxable temporary differences, we reduced our January 1, 2012 valuation allowance associated with the Florida Shoppers net operating loss by $1.0 million.

Deferred income taxes have not been provided on the undistributed earnings of our foreign subsidiaries as these earnings have been, and under current plans will continue to be, permanently reinvested in these subsidiaries. As of December 31, 2012, the cumulative undistributed earnings of these subsidiaries were approximately $4.4 million. If those earnings were not considered permanently reinvested, U.S. federal deferred income taxes would have been recorded, after consideration of U.S. foreign tax credits. However, it is not practicable to estimate the amount of additional taxes which may be payable upon distributions.

Cash payments for income taxes were $13.6 million, $15.5 million and $28.2 million in 2012, 2011 and 2010, respectively.