(12) Income Taxes

We were included in the consolidated federal income tax returns and the combined state income tax returns of QCII until CenturyLink's April 1, 2011 acquisition of QCII and the consolidated federal income tax returns and certain combined state income tax returns of CenturyLink subsequent to the acquisition. Both CenturyLink and QCII treat our consolidated results as if we were a separate taxpayer. The policy requires us to settle our tax liabilities through a change in our general intercompany obligation based upon our separate return taxable income. Because we are included in the consolidated federal income tax returns and the combined state income tax returns of CenturyLink (and previously with QCII), any tax audits involving CenturyLink or QCII will also involve us. The IRS previously examined all of QCII's federal income tax returns prior to 2008 because they were included in its coordinated industry case program and now examines all of QCII's federal income tax returns as included in the consolidated federal return of the ultimate parent company, CenturyLink.

In years prior to 2011, QCII filed amended federal income tax returns for 2002-2007 to make protective claims with respect to items reserved in our audit settlements and to correct items not addressed in prior audits. The examination of those amended federal income tax returns by the IRS was completed in 2012. In 2012, QCII filed an amended 2008 federal income tax return primarily to report the carryforward impact of prior year settlements. Such amended filing is subject to adjustment by the IRS.

QCII also files combined income tax returns in many states, and these combined returns remain open for adjustments to its federal income tax returns. In addition, certain combined state income tax returns filed since 1996 are still open for state specific adjustments.

As of the successor dates of December 31, 2012 and December 31, 2011, we had no amounts accrued for unrecognized tax benefits for each aforementioned year.

Effective on April 1, 2011 in conjunction with CenturyLink's indirect acquisition of us, we changed our accounting policy to recognize interest expense and penalties related to income taxes as income tax expense. Prior to April 1, 2011, interest expense and penalties related to income taxes were included in the other income (expense) line of our consolidated statements of operations. As of the successor dates of December 31, 2012 and December 31, 2011, we had recorded liabilities for interest related to uncertain tax positions in the amounts of $5 million for each aforementioned year. We made no accrual for penalties related to income tax positions.

Income Tax Expense

The components of the income tax expense from continuing operations are as follows:

	Successor					Predecessor

	Year Ended December 31, 2012			Nine Months Ended December 31, 2011		Three Months Ended March 31, 2011		Year Ended December 31, 2010
	(Dollars in millions)
Income tax expense:
Current tax provision:
Federal	$	638			173		104		470
State and local		105			26		11		80

Total current tax provision		743			199		115		550
Deferred tax expense (benefit):
Federal		(175	)		128		61		208
State and local		(26	)		22		15		33

Total deferred tax expense (benefit)		(201	)		150		76		241

Income tax expense	$	542			349		191		791

The effective income tax rate for continuing operations differs from the statutory tax rate as follows:

	Successor				Predecessor

	Year Ended December 31, 2012		Nine Months Ended December 31, 2011		Three Months Ended March 31, 2011		Year Ended December 31, 2010
	(in percent)
Effective income tax rate:
Federal statutory income tax rate		35.0%		35.0%		35.0%		35.0%
State income taxes—net of federal effect		3.7		3.5		3.4		3.9
Medicare subsidiary		—		—		—		2.7
Excess compensation		—		—		—		1.0
Other		0.3		0.6		0.6		(0.4	)

Effective income tax rate		39.0%		39.1%		39.0%		42.2%

Deferred Tax Assets and Liabilities

The components of the deferred tax assets and liabilities are as follows:

	Successor

	December 31, 2012			December 31, 2011
	(Dollars in millions)
Deferred tax assets and liabilities:
Deferred tax liabilities:
Property, plant and equipment	$	(1,046	)		(1,279	)
Intangibles assets		(2,226	)		(2,274	)
Receivable from an affiliate due to pension plan participation		(398	)		(359	)
Other		(39	)		(148	)

Total deferred tax liabilities		(3,709	)		(4,060	)

Deferred tax assets:
Payable to affiliate due to post-retirement benefit plan participation		932			920
Debt premiums		70			164
Other		239			304

Total deferred tax assets		1,241			1,388

Valuation allowance on deferred tax assets		(12	)		(8	)

Net deferred tax assets		1,229			1,380

Net deferred tax liabilities	$	(2,480	)		(2,680	)

At December 31, 2012, we have established a valuation allowance of $12 million as it is not more likely than not that this amount of deferred tax assets will be realized.

Other Income Tax Information

We paid $607 million, $211 million and $677 million to QSC related to income taxes in the successor years ended 2012 and 2011 and the predecessor year ended 2010, respectively. As of the successor date of December 31, 2011, we had an approximate $19 million receivable from QSC relating to income taxes reflected in advances to affiliates on our consolidated balance sheets.

Income tax expense for the combined year ended December 31, 2011, as compared to the predecessor year ended December 31, 2010, decreased by $251 million as a result of the March 2010 enactments of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Income tax expense also decreased due to the 2010 tax treatments of the expenses allocated to us when QCII accelerated the vesting of certain stock-based compensation and certain expenses associated with CenturyLink's acquisition of us.

In the predecessor year ended December 31, 2010, we increased our state tax rate based on a review of our state apportionment factors and the current tax rate of the states where we conduct business. This change resulted in a $2 million state deferred tax expense, net of federal effect.

We had unamortized investment tax credits of $1 million, $2 million and $61 million as of the successor dates of December 31, 2012 and December 31, 2011 and the predecessor date of December 31, 2010, respectively, which are included in other long-term liabilities on our consolidated balance sheets. These investment credits are amortized over the lives of the related assets. Amortization of investment tax credits was immaterial in 2012 and 2011. Amortization of investment tax credits of $8 million is included in the provision for income taxes for the predecessor year ended December 31, 2010.