INCOME TAXES

Income tax expense (benefit) consists of the following:



(Thousands of Dollars)	2012		2011		2010

Current:
Federal	(8,244	)	4,604		8,673
State	(2,210	)	(55	)	833
Deferred	(466	)	(25,630	)	19,116
	(10,920	)	(21,081	)	28,622

Continuing operations	(9,371	)	(20,316	)	29,308
Discontinued operations	(1,549	)	(765	)	(686	)
	(10,920	)	(21,081	)	28,622

Income tax expense (benefit) related to continuing operations differs from the amounts computed by applying the U.S. federal income tax rate to income (loss) before income taxes. The reasons for these differences are as follows:



(Percent of Income (Loss) Before Income Taxes)	2012		2011		2010

Computed “expected” income tax expense (benefit)	(35.0	)	(35.0	)	35.0
State income taxes (benefit), net of federal tax expense (benefit)	(1.9	)	(2.3	)	4.3
Net income of associated companies taxed at dividend rates	(6.2	)	(0.5	)	(1.4	)
Domestic production deduction	2.1		(0.5	)	(0.8	)
Resolution of tax matters	(3.9	)	0.5		(3.5	)
Impairment of goodwill and other assets	—		23.9		—
Valuation allowance	1.8		1.0		(0.1	)
Tax law change	—		—		4.1
Non deductible costs of Chapter 11 Proceedings	9.3		—		—
Changes in tax basis	(5.6	)	—		—
Other	(1.1	)	0.6		0.6
	(40.5	)	(12.3	)	38.2

Net deferred income tax liabilities consist of the following components:



(Thousands of Dollars)	September 30 2012		September 25 2011

Deferred income tax liabilities:
Property and equipment	(40,684	)	(29,170	)
Investments	(11,651	)	(6,576	)
Identified intangible assets	(50,472	)	(45,472	)
Long-term debt and interest rate exchange agreements	—		(997	)
Other	(1,155	)	—
	(103,962	)	(82,215	)
Deferred income tax assets:
Long-term debt	33,682		—
Accrued compensation	5,540		7,067
Allowance for doubtful accounts and losses on loans	817		1,570
Pension and postretirement benefits	5,569		5,305
State operating loss carryforwards	24,613		23,515
Accrued expenses	2,508		5,024
Other	—		2,063
	72,729		44,544
Valuation allowance	(28,118	)	(27,566	)
Net deferred income tax liabilities	(59,351	)	(65,237	)

Net deferred income tax liabilities are classified as follows:



(Thousands of Dollars)	September 30 2012		September 25 2011

Current assets	789		967
Non-current liabilities	(60,140	)	(66,204	)
Net deferred income tax liabilities	(59,351	)	(65,237	)

A reconciliation of 2012 changes in gross unrecognized tax benefits is as follows:



(Thousands of Dollars)	2012

Balance, beginning of year	6,752
Decreases in tax positions for prior years	(163	)
Decreases in tax positions for the current year	(360	)
Lapse in statute of limitations	(1,312	)
Balance, end of year	4,917

The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $3,264,000 at September 30, 2012. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest related to unrecognized tax benefits was, net of tax, $710,000 at September 30, 2012 and $1,139,000 at September 25, 2011. There were no amounts provided for penalties at September 30, 2012 or September 25, 2011.

At September 30, 2012, we had approximately $796,814,000 of net operating loss carryforwards (“NOLs”) for state tax purposes that expire between 2014 and 2032. Such NOLs result in a deferred income tax asset of $24,613,000 at September 30, 2012, substantially all of which is offset by a valuation allowance. The valuation allowance not related to NOLs is $ 3,613,000 at September 30, 2012 and $4,068,000 at September 25, 2011.

In connection with the refinancing of debt under the Chapter 11 Proceedings, we realized substantial cancellation of debt income (“CODI”) for income tax purposes. However, this income was not immediately taxable for U.S. income tax purposes because the CODI resulted from our reorganization under the U.S. Bankruptcy Code. For U.S. income tax reporting purposes, we are required to reduce certain tax attributes, including any net operating loss carryforwards, capital losses, certain tax credit carryforwards, and the tax basis in certain assets and liabilities, including debt, in a total amount equal to the tax gain on the extinguishment of debt. As a result, in February 2012 we began recognizing additional interest expense deductions for income tax purposes. The reduction in the basis of certain assets will result in reduced depreciation and amortization expense for income tax purposes beginning in 2013.