Income Taxes

Income from continuing operations before taxes consisted of the following:



	Years Ended December 31,
	2012		2011		2010
U.S.	$	458,456	$	463,814	$	407,060
International	146,157		22,727		149,129
Total	$	604,613	$	486,541	$	556,189

The provision for income taxes from continuing operations consisted of the following:



	Years Ended December 31,
	2012			2011			2010
U.S. Federal:
Current	$	174,705		$	(68,505	)	$	175,827
Deferred	16,136			135,305			(24,632		)
	190,841			66,800			151,195
U.S. State and Local:
Current	3,187			33,922			27,169
Deferred	(26,273		)	(15,546		)	(17,518		)
	(23,086		)	18,376			9,651
International:
Current	65,412			67,835			44,989
Deferred	(82,862		)	(85,401		)	7,763
	(17,450		)	(17,566		)	52,752

Total current	243,304			33,252			247,985
Total deferred	(92,999		)	34,358			(34,387		)
Total provision for income taxes	$	150,305		$	67,610		$	213,598

Effective tax rate	24.9		%	13.9		%	38.4		%

The effective tax rate for 2012 includes tax benefits of $32 million from the sale of non-U.S. leveraged lease assets, $47 million of tax benefits from the resolution of U.S. tax examinations and tax accruals of $43 million for the repatriation of additional non-U.S. earnings that arose as a result of one-time events including the sale of leveraged lease assets and Canadian tax law changes.

The effective tax rate for 2011 includes $90 million of tax benefits from the IRS tax settlements (see Other Matters below), a $34 million tax benefit from the sale of non-U.S. leveraged lease assets and a $4 million charge from the write-off of deferred tax assets associated with the expiration of out-of-the-money vested stock options and the vesting of restricted stock units previously granted to our employees. In addition, the effective tax rate for 2011 was increased due to a reduced tax benefit associated with the goodwill impairment charges.

The effective tax rate for 2010 includes $16 million of tax benefits associated with previously unrecognized deferred taxes on outside basis differences, a $15 million charge for the write-off of deferred tax assets associated with the expiration of out-of-the-money vested stock options and the vesting of restricted stock units previously granted to our employees and a $9 million charge for the write-off of deferred tax assets related to the U.S. health care reform legislation that eliminated the tax deduction for retiree health care costs to the extent of federal subsidies received by companies that provide retiree prescription drug benefits equivalent to Medicare Part D coverage.

The items described in the immediately preceding paragraphs that generated significant tax rate fluctuations are not expected to recur in future periods.

On January 2, 2013, the American Taxpayer Relief Act of 2012 (the Act) was signed into law. Among others provisions, the Act retroactively extends through 2013 certain expired provisions including the research credit and controlled foreign corporation look-thru rules. As a result, we expect an immaterial decrease to our 2013 tax rate.

The items accounting for the difference between income taxes computed at the federal statutory rate and our provision for income taxes consist of the following:



	Years Ended December 31,
	2012			2011			2010
Federal statutory provision	$	211,614		$	170,289		$	194,668
State and local income taxes	1,694			16,327			14,729
Impact of non-U.S. leveraged lease asset sales	(30,367		)	(31,423		)	—
Other impact of foreign operations	22,699			16,388			13,556
Tax exempt income/reimbursement	(1,992		)	(2,674		)	(2,352		)
Federal income tax credits/incentives	(8,918		)	(10,741		)	(7,580		)
Unrealized stock compensation benefits	3,456			3,538			15,149
Resolution of U.S. tax examinations	(47,380		)	(94,225		)	(8,230		)
U.S. health care reform tax change	—			—			9,070
Outside basis differences	—			—			(15,798		)
Other, net	(501		)	131			386
Provision for income taxes	$	150,305		$	67,610		$	213,598

Other impacts of foreign operations include income of foreign affiliates taxed at rates other than the 35% U.S. statutory rate, the accrual or release of tax uncertainty amounts related to foreign operations, the tax impacts of foreign earnings repatriation and the U.S. foreign tax credit impacts of other foreign income taxed in the U.S.

Deferred tax liabilities and assets consisted of the following:



	December 31,
	2012			2011
Deferred tax liabilities:
Depreciation	$	(65,205	)	$	(69,092	)
Deferred profit (for tax purposes) on sale to finance subsidiary	(157,279		)	(157,397		)
Lease revenue and related depreciation	(306,612		)	(422,541		)
Amortizable intangibles	(104,156		)	(99,980		)
Other	(35,157		)	(49,044		)
Deferred tax liabilities	(668,409		)	(798,054		)

Deferred tax assets:
Nonpension postretirement benefits	119,002			198,379
Pension	117,509			40,956
Inventory and equipment capitalization	26,778			24,806
Restructuring charges	20,793			8,185
Long-term incentives	35,056			37,019
Net operating loss and tax credit carry forwards	194,134			180,281
Tax uncertainties gross-up	28,492			46,773
Other	89,406			99,996
Valuation allowance	(142,176		)	(111,438		)
Deferred tax assets	488,994			524,957

Total deferred taxes, net	$	(179,415	)	$	(273,097	)

The above amounts are classified as current or long-term in the Consolidated Balance Sheets in accordance with the asset or liability to which they related or based on the expected timing of the reversal. A valuation allowance was recognized to reduce the total deferred tax assets to an amount that will more-likely-than-not be realized. The valuation allowance relates primarily to certain foreign, state and local net operating loss and tax credit carryforwards that are more likely than not to expire unutilized.

We have net operating loss carry forwards of $339 million as of December 31, 2012. Most of these losses can be carried forward indefinitely.

As of December 31, 2012 we have not provided for income taxes on $750 million of cumulative undistributed earnings of subsidiaries outside the U.S. as these earnings will be either indefinitely reinvested or remitted substantially free of additional tax; however, we estimate that withholding taxes on such remittances would be approximately $10 million. Determination of the liability that would be incurred if these earnings were remitted to the U.S. is not practicable as there is a significant amount of uncertainty with respect to determining the amount of foreign tax credits and other indirect tax consequences that may arise from the distribution of these earnings.

Uncertain Tax Positions

A reconciliation of the amount of unrecognized tax benefits is as follows:



	2012			2011			2010
Balance at beginning of year	$	198,635		$	531,790		$	515,565
Increases from prior period positions	11,811			67,065			17,775
Decreases from prior period positions	(17,985		)	(140,107		)	(27,669		)
Increases from current period positions	28,255			28,686			43,804
Decreases from current period positions	—			—			(8,689		)
Decreases relating to settlements with tax authorities	(1,948		)	(18,204		)	(1,434		)
Reductions from lapse of applicable statute of limitations	(71,863		)	(270,595		)	(7,562		)
Balance at end of year	$	146,905		$	198,635		$	531,790

The amount of the unrecognized tax benefits at December 31, 2012, 2011 and 2010 that would affect the effective tax rate if recognized was $127 million, $160 million and $249 million, respectively.

On a regular basis, we conclude tax return examinations, statutes of limitations expire, and court decisions interpret tax law. We regularly assess tax uncertainties in light of these developments. As a result, it is reasonably possible that the amount of our unrecognized tax benefits will decrease in the next 12 months, and we expect this change could be up to 10% of our unrecognized tax benefits. We recognize interest and penalties related to uncertain tax positions in our provision for income taxes or discontinued operations as appropriate. During the years ended December 31, 2012, 2011 and 2010, we recorded interest and penalties of $(28) million, $(83) million and $15 million, respectively, primarily in discontinued operations. We had $11 million and $67 million accrued for the payment of interest and penalties at December 31, 2012 and 2011, respectively.

Other Tax Matters

As is the case with other large corporations, our tax returns are examined each year by tax authorities in the U.S., other countries and local jurisdictions in which we have operations. Except for issues arising out of certain partnership investments, the IRS examinations of tax years prior to 2009 are closed to audit. Other than the pending application of legal principles to specific issues arising in earlier years, only post-2007 Canadian tax years are subject to examination. Other significant tax filings subject to examination include various post-2004 U.S. state and local, post-2007 German, and post-2008 French and U.K. tax filings. We have other less significant tax filings currently under examination or subject to examination.

We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we have operations and account for the related financial statement implications. We believe we have established tax reserves that are appropriate given the possibility of tax adjustments. However, determining the appropriate level of tax reserves requires judgment regarding the uncertain application of tax law and the possibility of tax adjustments. Future changes in tax reserve requirements could have a material impact, positive or negative, on our results of operations, financial position and cash flows.

On August 27, 2012, the Third Circuit Court of Appeals overturned a prior Tax Court decision and ruled in favor of the IRS and adverse to the Historic Boardwalk Hall LLC, a partnership in which we had made an investment in the year 2000. The decision has been appealed and, therefore, the judgment is not yet final. Based on our partnership contractual relationship, we do not expect this matter to have a material effect on our results of operations.