INCOME TAXES

Income tax expense consisted of the following (in thousands):



	Years Ended December 31,
	2012			2011		2010
Current:
Federal	$	69,590		$	6,275	$	56,030
State	10,088			6,664		11,195
Foreign	(478		)	1,347		894
	79,200			14,286		68,119
Deferred:
Federal	(8,630		)	50,297		(8,523		)
State	(438		)	7,566		(3,398		)
	(9,068		)	57,863		(11,921		)
Total income tax expense	$	70,132		$	72,149	$	56,198

The effective income tax rate differs from the federal corporate tax rate of 35% in 2012, 2011 and 2010 as follows (in thousands):



	Years Ended December 31,
	2012			2011			2010
Tax at statutory rate	$	60,608		$	61,217		$	47,683
State income taxes, net of federal tax benefits	6,273			9,250			5,068
Non-deductible meals and entertainment	2,686			2,571			2,943
Income tax credits	(758		)	(1,517		)	(525		)
Other, net	1,323			628			1,029
Total income tax expense	$	70,132		$	72,149		$	56,198

At December 31, deferred tax assets and liabilities consisted of the following (in thousands):



	December 31,
	2012		2011
Deferred tax assets:
Insurance and claims accruals	$	73,211	$	72,613
Allowance for uncollectible accounts	7,813		6,913
Other	9,416		8,382
Gross deferred tax assets	90,440		87,908
Deferred tax liabilities:
Property and equipment	288,032		295,429
Prepaid expenses	6,774		6,710
Other	3,026		2,964
Gross deferred tax liabilities	297,832		305,103
Net deferred tax liability	$	207,392	$	217,195

These amounts are presented in the accompanying Consolidated Balance Sheets as of December 31 as follows (in thousands):



	December 31,
	2012		2011
Current deferred tax asset	$	25,139	$	25,805
Non-current deferred tax liability	232,531		243,000
Net deferred tax liability	$	207,392	$	217,195

We have not recorded a valuation allowance because we believe that all deferred tax assets are more likely than not to be realized as a result of our historical profitability, future taxable income and reversal of deferred tax liabilities.

We recognized a $0.5 million increase in the net liability for unrecognized tax benefits for the year ended December 31, 2012 and a $2.2 million increase for the year ended December 31, 2011. We accrued interest expense of $0.2 million during 2012 and $0.4 million during 2011. If recognized, $7.4 million of unrecognized tax benefits as of December 31, 2012 and $6.9 million as of December 31, 2011 would impact our effective tax rate. Interest of $3.6 million as of December 31, 2012 and $3.4 million as of December 31, 2011 has been reflected as a component of the total liability. We expect no other significant increases or decreases for uncertain tax positions during the next twelve months.

The reconciliations of beginning and ending gross balances of unrecognized tax benefits for 2012 and 2011 are shown below (in thousands).



	December 31,
	2012			2011
Unrecognized tax benefits, beginning balance	$	10,827		$	7,482
Gross increases – tax positions in prior period	279			2,184
Gross increases – current-period tax positions	788			1,219
Settlements	(331		)	(58		)
Unrecognized tax benefits, ending balance	$	11,563		$	10,827

We file U.S. federal income tax returns, as well as income tax returns in various states and several foreign jurisdictions. The years 2009 through 2011 are open for examination by the U.S. Internal Revenue Service (“IRS”), and various years are open for examination by state and foreign tax authorities. State and foreign jurisdictional statutes of limitations generally range from three to four years.

In May 2010, the IRS began an audit of our 2007 and 2008 federal income tax returns. During the second quarter of 2012, we received a notice of deficiency including proposed penalties related to our like-kind exchange program for tractors and trailers (such program was discontinued in 2010). The proposed tax deficiency relates to timing differences for recognition of gains on sales of equipment and if upheld would allow us to file for tax refunds for tax years 2009-2011 relating to additional depreciation deductions. If the IRS position is upheld, we would be subject to interest charges, which we estimate as of December 31, 2012 to be approximately $2.1 million after considering the tax deductibility of the interest payments, and we believe it is unlikely that the IRS would prevail in the assessment of penalties. On July 19, 2012, we filed a petition in the United States Tax Court to contest the deficiency. The IRS responded to our petition on September 27, 2012. A pre-trial settlement conference has been scheduled for March 12, 2013. We believe our tax position complies with applicable tax law, and we will vigorously defend against the IRS position in tax court. We have not accrued a liability for any proposed penalties or interest because we believe we will ultimately prevail in this matter.