Income Taxes

The reconciliation of income taxes for the three and nine month periods ended September 30, 2014 and 2013, computed at the U.S. federal statutory income tax rate, compared to our effective income tax rate for continuing operations, was as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions of dollars)	2014			2013			2014			2013
Income tax expense computed at U.S. statutory income tax rate (35%)	$	18.8		$	14.4		$	27.3		$	11.8
Decrease of valuation allowances, net	—			—			—			(7.0		)
Miscellaneous	0.6			0.2			2.8			1.8
Income tax expense as reported	$	19.4		$	14.6		$	30.1		$	6.6
Effective tax rate	36.2		%	35.6		%	38.7		%	19.6		%

For the nine months ended September 30, 2014, we recorded an income tax expense from continuing operations of $30.1 million on income before taxes of $77.8 million. For the nine months ended September 30, 2013, we reported an income tax expense from continuing operations of $6.6 million on income before taxes of $33.6 million. The low effective tax rate in 2013 was primarily due to the release of valuation allowances for certain foreign jurisdictions in the amount of $7.0 million.

The U.S. federal statute of limitations remains open for the year 2011 and forward. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 3 to 5 years. Years still open to examination by foreign tax authorities in major jurisdictions include Australia (2010 forward), Brazil (2009 forward), Canada (2006 forward) and the U.K. (2011 forward). We are currently under examination in various foreign jurisdictions.

Income Tax Assessment

In connection with our May 1, 2012 acquisition of Mead Consumer and Office Products Business ("Mead C&OP") we assumed all of the tax liabilities for the acquired foreign operations. In December of 2012, the Federal Revenue Department of the Ministry of Finance of Brazil ("FRD") issued a tax assessment against our acquired indirect subsidiary, Tilibra Produtos de Papelaria Ltda. ("Tilibra"), which challenged the deduction of goodwill from Tilibra's taxable income for the year 2007. A second assessment challenging the deduction of goodwill from Tilibra's taxable income for the years 2008, 2009 and 2010 was issued by FRD in October 2013. The assessments seek payment of approximately R100.7 million ($41.0 million based on current exchange rates) of tax, penalties and interest.

Tilibra is disputing both of the tax assessments through established administrative procedures. We believe we have meritorious defenses and intend to vigorously contest these matters; however, there can be no assurances that we will ultimately prevail. We are in the early stages of the process to challenge the FRD's tax assessments, and the ultimate outcome will not be determined until the Brazilian tax appeal process is complete, which is expected to take a number of years. In addition, Tilibra's 2011-2012 tax years remain open and subject to audit, and there can be no assurances that we will not receive additional tax assessments regarding the goodwill deducted for the Tilibra acquisition for one or more of those years. If the FRD's initial position is ultimately sustained, the amount assessed would adversely affect our cash flow in the year of settlement.

Because there is no settled legal precedent on which to base a definitive opinion as to whether we will ultimately prevail, the Company considers the outcome of this dispute to be uncertain. Since it is not more likely than not that we will prevail, in the fourth quarter of 2012, we recorded a reserve in the amount of $44.5 million in consideration of this contingency, of which $43.3 million was recorded as an adjustment to the purchase price and included the 2008-2012 tax years plus interest and penalties through December 2012. In addition, the Company will continue to accrue interest related to this contingency until such time as the outcome is known or until evidence is presented that we are more likely than not to prevail. During the three and nine months ended September 30, 2014, the Company accrued additional interest as a charge to current tax expense of $0.8 million and $2.4 million respectively, and $0.3 million and $1.0 million for the same periods in 2013.