INCOME TAXES

The following table accounts for the difference between the actual tax provision and the amounts obtained by applying the statutory U.S. federal income tax rate of 35% to income before taxes.



	Three Months Ended September 30,				Nine Months Ended September 30,
Effective Tax Rate Reconciliation (Percent)	2012		2011		2012		2011
Statutory federal tax rate	35.0	%	35.0	%	35.0	%	35.0	%
Foreign rate differential	(0.1	)	(0.1	)	(0.1	)	—
Domestic manufacturing/export tax incentive	0.3		(1.6	)	(0.9	)	(0.8	)
Dividends paid to CEOP	(0.5	)	(0.4	)	(0.4	)	(0.2	)
State income taxes, net	1.5		2.4		1.0		1.2
Return to provision	0.7		2.0		0.3		0.6
Remeasurement of deferred taxes	0.5		—		0.8		(1.4	)
Section 45O tax credit	(0.6	)	—		(3.7	)	—
Incremental tax effect of SunBelt remeasurement	—		—		—		3.5
Change in tax contingencies	0.1		(5.2	)	0.7		(1.0	)
Change in valuation allowance	0.7		—		(0.3	)	—
Australia dividend residual tax expense	1.6		—		0.4		—
Other, net	(0.7	)	(0.1	)	(0.2	)	(0.1	)
Effective tax rate	38.5	%	32.0	%	32.6	%	36.8	%

The effective tax rates for the three months ended September 30, 2012 and 2011 included the cumulative effect of changes to our annual estimated effective tax rate from prior quarters.

The effective tax rate for the three and nine months ended September 30, 2012 included a benefit of $0.3 million and $6.3 million, respectively, associated with the Agricultural Chemicals Security Tax Credit under Section 45O of the Internal Revenue Code (IRC) (Section 45O), which is scheduled to sunset on December 31, 2012, that was or will be claimed on our 2008 to 2012 U.S. federal income tax returns. The effective tax rate for the three and nine months ended September 30, 2012 included expenses of $0.1 million and $1.3 million, respectively, associated primarily with changes in unrecognized tax benefits associated with prior years' tax positions. The effective tax rate for the three and nine months ended September 30, 2012 included a $0.7 million expense related to providing tax on previously undistributed earnings from our Winchester Australia Limited subsidiary. The effective tax rate for the three and nine months ended September 30, 2012 also included expenses of $0.2 million and $1.4 million, respectively, related to the remeasurement of deferred taxes due to an increase in state effective tax rates.

The effective tax rate for the three months ended September 30, 2011 included a $1.4 million expense associated with the finalization of our 2010 domestic income tax returns. The effective tax rate for the nine months ended September 30, 2011 included a benefit of $4.9 million related to remeasurement of deferred taxes due to an increase in state tax effective rates, a $2.1 million expense associated with the finalization of our 2010 domestic and Canadian income tax returns and a deferred tax expense of $76.0 million related to the tax effect of our gain on the remeasurement of our previously held 50% equity interest in SunBelt.

We completed the acquisition of KA Steel on August 22, 2012, with both parties agreeing to an election under Section 338(h)(10) of the U.S. IRC, which allows us to treat the transaction as an asset acquisition for U.S. federal income tax purposes. KA Steel does not carry forward any significant tax attributes and has an immaterial effect on our quarterly tax provision.

As of September 30, 2012, we had $40.2 million of gross unrecognized tax benefits, which would have a net $38.4 million impact on the effective tax rate, if recognized. As of September 30, 2011, we had $38.7 million of gross unrecognized tax benefits, of which $36.6 million would have impacted the effective tax rate, if recognized. The amount of unrecognized tax benefits was as follows:



	September 30,
	2012			2011
	($ in millions)
Balance at beginning of year	$	37.9		$	41.5
Increases for prior year tax positions	2.9			0.2
Decreases for prior year tax positions	(0.4		)	—
Increases for current year tax positions	0.1			—
Settlement with taxing authorities	(0.3		)	—
Reductions due to statute of limitations	—			(3.0		)
Balance at end of period	$	40.2		$	38.7

As of September 30, 2012, we believe it is reasonably possible that our total amount of unrecognized tax benefits will decrease by approximately $8.3 million over the next twelve months. The anticipated reduction primarily relates to settlements with taxing authorities and the expiration of federal, state and foreign statutes of limitation.

We operate primarily in North America and file income tax returns in numerous jurisdictions. Our tax returns are subject to examination by various federal, state and local tax authorities. We believe we have adequately provided for all tax positions; however, amounts asserted by taxing authorities could be greater than our accrued position. For our primary tax jurisdictions, the tax years that remain subject to examination are as follows:



	Tax Years
U.S. federal income tax	2007 – 2011
U.S. state income tax	2004 – 2011
Canadian federal income tax	2007 – 2011
Canadian provincial income tax	2007 – 2011