Income Taxes

The provision (benefit) for income taxes for the years ended December 31, 2013, 2012 and 2011 was as follows:



	Year Ended December 31,
	2013			2012			2011
	(In millions)
Provision (benefit) for income taxes:
Current
Federal	$	48.5		$	77.4		$	13.2
State	2.1			1.9			1.0
Foreign	2.4			1.8			1.8
	53.0			81.1			16.0
Deferred
Federal	(13.5		)	(12.2		)	11.4
State	(0.9		)	(1.7		)	2.4
	(14.4		)	(13.9		)	13.8
Provision for income taxes	$	38.6		$	67.2		$	29.8

The provision for income taxes differs from the expected federal income tax rates as follows:



	Year Ended December 31,
	2013		2012		2011
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State and other taxes, net of federal tax benefit	2.9		2.8		3.7
Change in unrecognized tax benefits	1.4		(0.2	)	(4.0	)
Change in valuation allowance	(2.7	)	0.7		1.7
State adjustments including audits and settlements	(1.1	)	0.2		0.2
Compensation related tax credits, net of deduction offsets	(0.6	)	(0.9	)	(4.9	)
Changes in tax rates and state tax laws	—		(3.2	)	(3.9	)
Kansas High Performance Incentive Program credits	—		—		0.5
Other	—		0.1		0.1
Effective tax rate	34.9	%	34.5	%	28.4	%

Net deferred tax assets (liabilities) consisted of the following components:



	2013			2012
	(In millions)
Differences in capitalization and depreciation and amortization of reacquired franchises and equipment	$	4.8		$	4.9
Differences in acquisition financing costs	1.8			1.8
Employee compensation	15.0			15.2
Deferred gain on sale of assets	6.3			5.9
Book/tax difference in revenue recognition	29.8			22.2
Other	35.0			35.4
Deferred tax assets	92.7			85.4
Valuation allowance	(1.1		)	(4.1		)
Total deferred tax assets after valuation allowance	91.6			81.3
Differences between financial and tax accounting in the recognition of franchise and equipment sales	(51.2		)	(55.1		)
Differences in capitalization and depreciation ⁽¹⁾	(301.1		)	(310.2		)
Differences in acquisition financing costs	(7.1		)	(7.7		)
Book/tax difference in revenue recognition	(19.5		)	(19.5		)
Differences between book and tax basis of property and equipment	(10.1		)	(9.8		)
Other	(20.3		)	(19.4		)
Deferred tax liabilities	(409.3		)	(421.7		)
Net deferred tax liabilities	$	(317.7	)	$	(340.4	)
Net deferred tax asset—current	$	24.2		$	22.3
Valuation allowance—current	(0.3		)	(0.5		)
Net deferred tax asset—current	23.9			21.8
Deferred tax liability—non-current	(340.8		)	(358.6		)
Valuation allowance—non-current	(0.8		)	(3.6		)
Net deferred tax liability—non-current	(341.6		)	(362.2		)
Net deferred tax liabilities	$	(317.7	)	$	(340.4	)

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⁽¹⁾	Primarily related to the Applebee's acquisition.

The Company files federal income tax returns and the Company or one of its subsidiaries file income tax returns in various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to federal, state or non-United States tax examinations by tax authorities for years before 2008. In the second quarter of 2013, the Internal Revenue Service (“IRS”) issued a Revenue Agent’s Report (“RAR”) related to its examination of the Company’s U.S federal income tax return for the tax years 2008 to 2010. The Company disagrees with a portion of the proposed assessments and has contested them through the IRS administrative appeals procedures. We anticipate the appeals process to continue into 2014. The Company continues to believe that adequate reserves have been provided relating to all matters contained in the tax periods open to examination.

The total gross unrecognized tax benefit as of December 31, 2013 and 2012 was $2.7 million and $6.7 million, respectively, excluding interest, penalties and related income tax benefits. The decrease of $4.0 million is primarily related to recent settlements with taxing authorities. The entire $2.7 million will be included in the Company's effective income tax rate if recognized.

The Company estimates the unrecognized tax benefits may decrease over the upcoming 12 months by an amount up to $0.2 million related to settlements with taxing authorities and the lapse of the statute of limitations. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	(In millions)
Unrecognized tax benefit as of December 31, 2011	$	8.2
Change as a result of prior year tax positions	0.8
Change as a result of current year tax positions	0.2
Decreases relating to settlements with taxing authorities	(0.9		)
Decreases as a result of a lapse of the statute of limitations	(1.6		)
Unrecognized tax benefit as of December 31, 2012	6.7
Change as a result of prior year tax positions	0.8
Decreases relating to settlements with taxing authorities	(4.7		)
Decreases as a result of a lapse of the statute of limitations	(0.1		)
Unrecognized tax benefit as of December 31, 2013	$	2.7

As of December 31, 2013, the accrued interest and penalties were $2.9 million and $0.1 million, respectively, excluding any related income tax benefits. As of December 31, 2012, the accrued interest and penalties were $1.4 million and $0.2 million, respectively, excluding any related income tax benefits. The increase of $1.5 million of accrued interest is primarily related to an increase in unrecognized tax benefits as a result of recent audits by taxing authorities. The Company recognizes interest accrued related to unrecognized tax benefits and penalties as a component of the income tax provision recognized in the Consolidated Statements of Comprehensive Income.

For the years ended December 31, 2013 and 2012, the Company had a total valuation allowance in the amounts of $1.1 million and $4.1 million, respectively. The entire $1.1 million in 2013 is related to the Massachusetts enacted legislation requiring unitary businesses to file combined reports. The decrease of $3.0 million in the valuation allowance was as a result of releasing valuation allowance that was previously set up for various state net operating losses at DineEquity, Inc. and International House of Pancakes, LLC and Subsidiaries. The Company implemented a tax planning strategy that enables the Company to utilize the state net operating loss carryovers from prior years before they expire.

As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regards to future realization of deferred tax assets. As of December 31, 2013, because the Company implemented a tax planning strategy that was prudent and feasible in the current year, management determined that sufficient positive evidence existed as of December 31, 2013, to conclude that was more likely than not that additional deferred taxes of $3.0 million are realizable, and therefore, reduced the valuation allowance.