INCOME TAXES

The Company files a consolidated U.S. income tax return that includes its more than 80%-owned U.S. subsidiaries. The amounts provided for income taxes are as follows:



	Year Ended December 31,
	2013			2012			2011
Current:
U.S. Federal	$	20,808		$	24,246		$	30,458
State	3,521			6,185			8,313
	$	24,329		$	30,431		$	38,771
Deferred:
U.S. Federal	$	596		$	(5,779	)	$	7,765
State	(130		)	(1,557		)	1,601
	466			(7,336		)	9,366
Total	$	24,795		$	23,095		$	48,137

The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and liabilities are as follows:



	December 31, 2013					December 31, 2012
	Deferred Tax Assets			Deferred Tax Liabilities		Deferred Tax Assets			Deferred Tax Liabilities
Excess of tax basis over book basis- non-consolidated entities	$	4,434		$	3,582	$	3,654		$	—
Employee benefit accruals	19,539			9,378		17,508			2,383
Book/tax differences on fixed and Intangible assets	—			48,086		—			45,439
Book/tax differences on inventory	—			19,213		—			18,165
Book/tax differences on long-term investments	—			30,898		1			—
Impact of accounting on convertible debt	9,202			44,823		16,306			56,346
Impact of timing of settlement payments	56,551			—		32,113			706
Various U.S. state tax loss carryforwards	10,010			—		10,854			—
Other	8,231			27,404		11,625			13,792
Valuation allowance	(6,014		)	—		(6,310		)	—
	$	101,953		$	183,384	$	85,751		$	136,831

Vector Tobacco had tax effected state and local net operating loss carryforwards of $10,010 and $10,854, respectively at December 31, 2013 and 2012, expiring through tax year 2027. The Company provides a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The valuation allowance of $6,014 and $6,310 at December 31, 2013 and 2012, respectively, consisted primarily of a reserve against Vector Tobacco's state and local net operating loss carryforwards. The valuation allowance was reduced in 2013 and 2012, respectively, as a result of changes in estimates in Vector Tobacco's ability to utilize state tax net operating losses in future years because of changes in state tax apportionment and projected taxable income.

The consolidated balance sheets of the Company include deferred income tax assets and liabilities, which represent temporary differences in the application of accounting rules established by generally accepted accounting principles and income tax laws.

Deferred federal income tax expense differs in 2013, 2012 and 2011 as a result of reclassifications between current and deferred tax liabilities. The deferred tax expense in 2013 results primarily from the utilitization of state tax net operating losses. The deferred tax benefit in 2012 results primarily from the non-cash interest charges associated with the Company's convertible debt partially offset by the recognition of temporary differences (related to depreciation and amortization) at the Liggett and Vector Tobacco segments. The deferred tax expense in 2011 results from temporary differences related primarily to bonus depreciation for federal tax purposes at the Liggett segment.

Differences between the amounts provided for income taxes and amounts computed at the federal statutory tax rate are summarized as follows:



	Year Ended December 31,
	2013			2012			2011
Income before income taxes	$	63,487		$	53,717		$	123,157
Federal income tax expense at statutory rate	22,221			18,801			43,105
Increases (decreases) resulting from:
State income taxes, net of federal income tax benefits	2,204			3,009			6,444
Impact of non-controlling interest	88			—			—
Non-deductible expenses	2,698			3,311			1,974
Impact of domestic production deduction	(1,889		)	(2,026		)	(4,256		)
Tax credits	(433		)	—			—
Changes in valuation allowance, net of equity and tax audit adjustments	(94		)	—			870
Income tax expense	$	24,795		$	23,095		$	48,137

The following table summarizes the activity related to the unrecognized tax benefits:



Balance at January 1, 2011	$	6,768
Additions based on tax positions related to prior years	250
Expirations of the statute of limitations	(421		)
Balance at December 31, 2011	6,597
Additions based on tax positions related to prior years	588
Expirations of the statute of limitations	(916		)
Balance at December 31, 2012	6,269
Additions based on tax positions related to prior years	179
Settlements	(250		)
Expirations of the statute of limitations	(3,076		)
Balance at December 31, 2013	$	3,122

In the event the unrecognized tax benefits of $3,122 and $6,269 at December 31, 2013 and 2012, respectively, were recognized, such recognition would impact the annual effective tax rates. During 2013, the accrual for potential penalties and interest related to these unrecognized tax benefits was decreased by $877, and in total, as of December 31, 2013, a liability for potential penalties and interest of $776 has been recorded. During 2012, the accrual for potential penalties and interest related to these unrecognized tax benefits was increased by $149, and in total, as of December 31, 2012, a liability for potential penalties and interest of $1,653 has been recorded.

It is reasonably possible the Company may recognize up to approximately $2,027 of currently unrecognized tax benefits over the next 12 months, pertaining primarily to expiration of statutes of limitations of positions reported on state and local income tax returns. The Company files U.S. and state and local income tax returns in jurisdictions with varying statutes of limitations.

In 2013, the Internal Revenue Service concluded an audit of the Company’s income tax return for the year ended December 31, 2009. There was no material impact on the Company’s consolidated financial statements as a result of the audit.