NOTE 17. INCOME TAXES

The tax effects of principal temporary differences between the carrying amounts of assets and liabilities and their tax bases are summarized in the following table. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income and foreign source income to realize deferred tax assets, net of valuation allowances. In arriving at this conclusion, we considered the profit before tax generated for the years 2010 through 2012, as well as future reversals of existing taxable temporary differences and projections of future profit before tax and foreign source income.

We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed quarterly. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard for all periods, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability and foreign source income, the duration of statutory carryforward periods, and our experience with operating loss and tax credit carryforward expirations. A history of cumulative losses is a significant piece of negative evidence used in our assessment. If a history of cumulative losses is incurred for a tax jurisdiction, forecasts of future profitability are not used as positive evidence related to the realization of the deferred tax assets in the assessment.

We have established a valuation allowance in the amount of $205.5 million consisting of $16.0 million for federal capital loss carryovers and statutorily limited operating loss carryovers, $16.2 million for state deferred tax assets, primarily operating loss carryovers, and $173.3 million for foreign deferred tax assets, primarily foreign operating loss carryovers.

We have $1,145.6 million of state net operating loss (“NOL”) carryforwards with expirations between 2013 and 2032. In addition, we have $587.6 million of foreign NOL carryforwards, of which $540.2 million are available for carryforward indefinitely and $47.4 million expire between 2013 and 2027. We also have U.S. foreign tax credit carryforwards of $119.1 million expiring between 2013 and 2022, and federal alternative minimum tax credit carryforwards of $13.8 million with no expiration date.

Our valuation allowances at December 31, 2012, increased from December 31, 2011 by a net amount of $10.6 million. This includes a net increase for certain foreign deferred tax assets of $23.9 million and net decreases of $10.8 million for federal deferred tax assets and $2.5 million for certain deferred state income tax assets. The increase in the valuation allowance for deferred foreign income tax assets was primarily due to additional foreign losses and other deferred tax assets, partially offset by the impact of current year income and carryforward expirations. The decrease in the valuation allowance for deferred federal income tax assets of $10.8 million was primarily due to the release of the valuation allowance against foreign tax credits of $15.7 million offset by an increase in a valuation allowance for certain statutorily limited federal losses of $4.9 million. The decrease in the valuation allowance for certain deferred state income tax assets of $2.5 million was primarily due to expirations and changes in deferred tax assets. We estimate we will need to generate future federal taxable income of $340.4 million, including foreign source income of $53.0 million, to fully realize the foreign tax credits before they expire in 2022. We estimate we will need to generate future taxable income of approximately $1,230.8 million for state income tax purposes during the respective realization periods in order to fully realize the net deferred income tax assets discussed above.

The Internal Revenue Code imposes limitations on a corporation’s ability to utilize federal tax attributes, including foreign tax credits, if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. There have been no ownership changes as defined in the Internal Revenue Code subsequent to our bankruptcy emergence. Future ownership changes could have an impact on our ability to utilize the deferred tax assets discussed above.


	December 31, 2012	December 31, 2011
Deferred income tax assets (liabilities)
Postretirement benefits	$ 105.9	$ 116.3
Pension benefit liabilities	30.7	17.8
Net operating losses	218.6	247.8
Foreign tax credit carryforwards	119.1	118.2
Other	104.2	95.5
Total deferred income tax assets	578.5	595.6
Valuation allowances	(205.5)	(194.9)
Net deferred income tax assets	373.0	400.7
Intangibles	(245.6)	(253.4)
Accumulated depreciation	(83.8)	(86.6)
Inventories	(20.8)	(21.9)
Other	(5.3)	(10.5)
Total deferred income tax liabilities	(355.5)	(372.4)
Net deferred income tax assets	$ 17.5	$ 28.3

Deferred income taxes have been classified in the Consolidated Balance Sheet as:
Deferred income tax assets - current	$ 49.9	$ 45.3
Deferred income tax assets - noncurrent	35.1	46.4
Deferred income tax liabilities - current	(1.3)	(2.4)
Deferred income tax liabilities - noncurrent	(66.2)	(61.0)
Net deferred income tax assets	$ 17.5	$ 28.3


	2012	2011	2010
Details of taxes
Earnings (loss) before income taxes:
Domestic	$ 188.6	$ 221.2	$ 236.3
Foreign	31.9	(3.9)	(17.1)
Eliminations of dividends from foreign subsidiaries	-	(23.5)	(146.1)
Total	$ 220.5	$ 193.8	$ 73.1

Income tax provision (benefit):
Current:
Federal	$ 24.1	$ 3.1	$ 24.0
Foreign	13.1	16.7	10.5
State	4.4	2.7	(0.1)
Total current	41.6	22.5	34.4

Deferred:
Federal	27.2	55.0	24.8
Foreign	1.8	(1.6)	(3.0)
State	5.5	5.1	1.8
Total deferred	34.5	58.5	23.6

Total income tax expense	$ 76.1	$ 81.0	$ 58.0

We are currently expanding international operations by constructing three new plants in China and one in Russia.

During 2011, we reevaluated our position with regards to foreign unremitted earnings and as part of this review it was determined that unremitted earnings would be permanently reinvested. We continue to permanently reinvest unremitted earnings. Accordingly we have not recorded U.S. income or foreign withholding taxes on approximately $234 million of undistributed earnings of foreign subsidiaries that could be subject to taxation if remitted to the U.S. because we currently plan to keep these amounts permanently invested overseas. It is not practical to calculate the residual income tax which would result if these basis differences reversed due to the complexities of the tax law and the hypothetical nature of the calculations.

26
	2012	2011	2010
Reconciliation to U.S. statutory tax rate
Continuing operations tax at statutory rate	$ 77.2	$ 67.8	$ 25.6
State income tax expense, net of federal benefit	6.2	7.7	1.6
(Decrease) in valuation allowances on deferred domestic income tax assets	(0.7)	(0.8)	(2.2)
Increase in valuation allowances on deferred foreign income tax assets	14.9	14.7	14.9
Tax on foreign and foreign-source income	(8.2)	(2.8)	(4.4)
Permanent book/tax differences	(0.9)	0.6	1.1
Impact of health care reform legislation on Medicare Part D subsidy	-	-	22.0
IRS audit settlement	2.2	-	-
Net benefit due to increase in foreign tax credits	(15.7)	(6.6)	-
Other	1.1	0.4	-
Tax on unremitted earnings	-	-	(0.6)
Tax expense at effective rate	$ 76.1	$ 81.0	$ 58.0

During 2010 and 2011, we recorded $169.6 million of dividends from our foreign subsidiaries related to unremitted foreign earnings for which we previously recorded a net deferred tax liability as the earnings were not considered permanently reinvested. The receipt of the foreign dividends in 2011 provided an opportunity to elect to credit foreign taxes that were previously deducted. In 2011, we increased the deferred tax assets by $21.1 million offset by a valuation allowance of $15.7 million, for a net tax benefit of $5.4 million to reflect the net impact of the foreign tax credit over the tax deduction for the foreign taxes. When establishing the valuation allowance, we considered the levels of historical and forecasted taxable and foreign source income, the duration of statutory carryforward periods, and our experience with net operating losses and tax credit carryforwards. Based on that analysis and the expiration period of the foreign tax credit carryforward, we recorded the valuation allowance discussed above.

In 2012, we released the valuation allowance with respect to the foreign tax credits of $15.7 million. The release was a result of increased foreign source income due to changes to certain supply contracts resulting in additional foreign source income and positive recent trending of other foreign source income, primarily from our export sales and reduced expense allocations. These items changed the mix of income by recharacterizing domestic source income to foreign source income; thus increasing our ability to utilize the foreign tax credits.

During March 2010, President Obama signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the “Act”). The federal government currently provides a partial subsidy, on a tax-free basis, to companies that provide certain retiree prescription drug benefits (the “Medicare Part D subsidy”). The Act reduces the tax deductibility of retiree health care costs to the extent of any Medicare Part D subsidy received beginning in 2013. As a result of this change in tax treatment, a non-cash income tax charge of approximately $22 million was recorded in the first quarter of 2010.

We recognize the tax benefits of an uncertain tax position only if those benefits are more likely than not to be sustained based on existing tax law. Additionally, we establish a reserve for tax positions that are more likely than not to be sustained based on existing tax law, but uncertain in the ultimate benefit to be sustained upon examination by the relevant taxing authorities. Unrecognized tax benefits are subsequently recognized at the time the more likely than not recognition threshold is met, the tax matter is effectively settled or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, whichever is earlier.

We have $138.4 million of Unrecognized Tax Benefits (“UTB”) as of December 31, 2012, $90.6 million ($88.1 million, net of federal benefit) of this amount, if recognized in future periods, would impact the reported effective tax rate.

It is reasonably possible that certain UTB’s may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities. Over the next twelve months, we estimate that UTB’s may decrease by $0.7 million due to statutes expiring and increase by $6.9 million due to uncertain tax positions expected to be taken on tax returns.

We account for all interest and penalties on uncertain income tax positions as income tax expense. We reported $1.9 million of interest and penalty exposure as accrued income tax in the Consolidated Balance Sheet as of December 31, 2012.

We conduct business globally, and as a result, we file income tax returns in the U.S., various states and international jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world in such major jurisdictions as Australia, Canada, Germany, India, the Netherlands, the United Kingdom and the United States. Generally, we have open tax years subject to tax audit on average of between three years and six years. Our U.S. income tax returns from 2007 to 2009 are currently under review by the IRS. With respect to these years, we have extended the statute of limitations to June 30, 2014. All tax years prior to 2007 have been settled with the IRS. With few exceptions, the statute of limitations is no longer open for state or non-U.S. income tax examinations for the years before 2007. Other than the U.S., we have not significantly extended any open statutes of limitation for any major jurisdiction and have reviewed and accrued for, where necessary, tax liabilities for open periods. The tax years 2007 through 2011 are subject to future potential tax adjustments.

We had the following activity for UTB’s for the years ended December 31, 2012, 2011 and 2010:


	2012	2011	2010
Unrecognized tax benefits balance at January 1,	$ 127.2	$ 126.3	$ 57.5
Gross change for current year positions	10.2	4.1	71.5
Increases for prior period positions	7.8	1.4	2.5
Decrease for prior period positions	(6.1)	(3.9)	(2.4)
Decrease due to settlements and payments	-	-	(1.8)
Decrease due to statute expirations	(0.7)	(0.7)	(1.0)
Unrecognized tax benefits balance at December 31,	$ 138.4	$ 127.2	$ 126.3


	2012	2011	2010
Other taxes
Payroll taxes	$ 55.4	$ 58.3	$ 61.0
Property, franchise and capital stock taxes	11.4	12.1	13.5