Note 5 – Income Taxes

We and our domestic subsidiaries file a consolidated Federal income tax return. Taxes based on income for the years ended June 30 have been provided as follows:


	2013		2012		2011

Currently payable:
Federal	$	47,789	$	41,214	$	43,140
State and local		3,487		4,116		4,542
Total current provision		51,276		45,330		47,682
Deferred Federal, state and local provision		1,458		4,893		7,460
Total taxes based on income	$	52,734	$	50,223	$	55,142

Certain tax benefits recorded directly to common stock for each of the years ending June 30 were as follows:


	2013		2012		2011

Tax benefits recorded directly to common stock	$	794	$	301	$	479

For the years ended June 30, our effective tax rate varied from the statutory Federal income tax rate as a result of the following factors:


	2013			2012			2011

Statutory rate		35.0	%		35.0	%		35.0	%
State and local income taxes		1.4			2.0			1.9
ESOP dividend deduction		(0.7)			(0.2)			(0.2)
Domestic manufacturing deduction		(2.9)			(2.5)			(2.5)
Other		(0.2)			0.1			(0.1)
Effective rate		32.6	%		34.4	%		34.1	%

The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30 were comprised of:


	2013		2012

Deferred tax assets:
Inventories	$	2,597	$	2,774
Employee medical and other benefits		11,161		13,201
Receivable and other allowances		4,375		4,699
Other accrued liabilities		3,133		2,869
Total deferred tax assets		21,266		23,543
Deferred tax liabilities:
Property, plant and equipment		(21,607)		(20,744)
Goodwill		(3,804)		(3,427)
Other		(425)		(274)
Total deferred tax liabilities		(25,836)		(24,445)
Net deferred tax liability	$	(4,570)	$	(902)

Net current deferred tax assets and prepaid Federal, state and local income taxes were included in Deferred Income Taxes and Other Current Assets on the Consolidated Balance Sheet. The related balances at June 30 were as follows:


	2013		2012

Net current deferred tax assets	$	13,704	$	13,168
Prepaid Federal, state and local income taxes	$	7,549	$	1,958

Cash payments for income taxes for each of the years ending June 30 were as follows:


	2013		2012		2011

Cash payments for income taxes	$	56,992	$	38,726	$	47,598

The gross tax contingency reserve at June 30, 2013 was approximately $0.9 million. The unrecognized tax benefits recorded as the gross tax contingency reserve noted in the following table for June 30, 2013 and 2012 would affect our effective tax rate, if recognized.

The following table sets forth changes in our total gross tax contingency reserve (including interest and penalties):


	2013		2012

Balance, beginning of year	$	1,939	$	1,795
Tax positions related to the current year:
Additions		66		17
Reductions		-		-
Tax positions related to prior years:
Additions		86		149
Reductions		(1,021)		(22)
Settlements		(158)		-
Balance, end of year	$	912	$	1,939

We have not classified any of the gross tax contingency reserve at June 30, 2013 as current liabilities as none of these amounts are expected to be resolved within the next 12 months. The entire liability of approximately $0.9 million was included in long-term liabilities. We expect that the amount of these liabilities will change within the next 12 months; however, we do not expect the change to have a significant effect on our financial position or results of operations.

We recognize interest and penalties related to these tax liabilities in income tax expense. For each of the years ended June 30, we recognized the change in the accrual for net tax-related interest and penalties as follows:


	2013		2012

(Benefit) expense recognized for net tax-related interest and penalties	$	(539)	$	120

We had accrued interest and penalties at June 30 as follows:


	2013		2012

Accrued interest and penalties included in the gross tax contingency reserve	$	383	$	922

We file income tax returns in the U.S. and various state and local jurisdictions. With limited exceptions, we are no longer subject to examination of U.S. Federal or state and local income taxes for years prior to 2010.

The American Jobs Creation Act provided a tax deduction calculated as a percentage of qualified income from manufacturing in the United States. The deduction percentage for 2013 was 9%. In accordance with FASB guidance, this deduction is treated as a special deduction, as opposed to a tax rate reduction.