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)	2013		2012		2013		2012
Statutory federal tax rate	35.0	%	35.0	%	35.0	%	35.0	%
Foreign rate differential	(0.1	)	(0.1	)	(0.1	)	(0.1	)
Domestic manufacturing/export tax incentive	(0.9	)	0.3		(1.0	)	(0.9	)
Dividends paid to CEOP	(0.4	)	(0.5	)	(0.4	)	(0.4	)
State income taxes, net	2.1		1.5		2.2		1.0
Return to provision	(0.1	)	0.7		—		0.3
Remeasurement of deferred taxes	0.2		0.5		0.1		0.8
Section 45O tax credit	—		(0.6	)	—		(3.7	)
Change in tax contingencies	(9.5	)	0.1		(4.1	)	0.7
Change in valuation allowance	1.2		0.7		(1.0	)	(0.3	)
Section 41 research credit	(2.1	)	—		(0.9	)	—
Australia dividend residual tax expense	—		1.6		—		0.4
Other, net	(0.3	)	(0.7	)	0.1		(0.2	)
Effective tax rate	25.1	%	38.5	%	29.9	%	32.6	%

The effective tax rates for the three months ended September 30, 2013 and 2012 included the cumulative effect of changes to our annual estimated effective tax rate from prior quarters.

The effective tax rates for both the three and nine months ended September 30, 2013 included a benefit of $8.8 million and $9.1 million, respectively, primarily associated with decreases in unrecognized tax benefits due to the expiration of federal and state statutes of limitation. The effective tax rates for both the three and nine months ended September 30, 2013 included a benefit of $1.9 million associated with the Research Credit under Section 41 of the Internal Revenue Code (Research Credit) that will be claimed on our 2011 and 2012 U.S. federal income tax returns. The effective tax rate for the nine months ended September 30, 2013 included a benefit of $3.4 million associated with the reduction of valuation allowance against certain capital loss carryforwards that we believe are more likely than not to be realized in future periods.

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 (Section 45O) that was 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 increases 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 earning 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.

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.

As of September 30, 2013, we had $34.9 million of gross unrecognized tax benefits, which would have a net $32.1 million impact on the effective tax rate, if recognized. As of September 30, 2012, we had $40.2 million of gross unrecognized tax benefits, of which $38.4 million would have impacted the effective tax rate, if recognized. The amount of unrecognized tax benefits was as follows:



	September 30,
	2013			2012
	($ in millions)
Balance at beginning of year	$	40.1		$	37.9
Increases for prior year tax positions	3.2			2.9
Decreases for prior year tax positions	(8.4		)	(0.4		)
Increases for current year tax positions	—			0.1
Settlement with taxing authorities	—			(0.3		)
Balance at end of period	$	34.9		$	40.2

As of September 30, 2013, we believe it is reasonably possible that our total amount of unrecognized tax benefits will decrease by approximately $2.0 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. Our U.S. federal income tax returns are under examination by the Internal Revenue Service (IRS) for tax years 2008 and 2010. 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 – 2008; 2010 – 2012
U.S. state income tax	2004 – 2012
Canadian federal income tax	2007 – 2012
Canadian provincial income tax	2007 – 2012