Note 8 – Income Taxes

The components of income (loss) from continuing operations before income taxes, categorized based on the location of the taxing authorities, were as follows:

	Successor									Predecessor
	Years Ended December 31,						Period from February 26 to December 31,			Period from January 1 to February 26,
(In thousands)	2012			2011			2010			2010
United States	$	(181,955	)	$	(16,214	)	$	(140,719	)	$	49,214
Foreign		2,862			9,625			5,028			(1,062	)
Total	$	(179,093	)	$	(6,589	)	$	(135,691	)	$	48,152

The income tax provisions (benefits) are as follows:

	Successor									Predecessor
	Years Ended December 31,						Period from February 26 to December 31,			Period from January 1 to February 26,
(In thousands)	2012			2011			2010			2010
Current:
Federal	$	313		$	215		$	(600	)	$	—
State		400			(9	)		292			—
Foreign		1,433			2,907			626			—
		2,146			3,113			318			—
Deferred:
Federal		(43,749	)		(5,035	)		(5,701	)		(12,233	)
State		(19	)		(5,878	)		(2,700	)		(2,084	)
Foreign		(2,232	)		(195	)		430			—
Valuation allowance		42,197			15,756			5,446			12,386
		(3,803	)		4,648			(2,525	)		(1,931	)
Total provision (benefit)	$	(1,657	)	$	7,761		$	(2,207	)	$	(1,931	)

A reconciliation of the U.S. statutory tax rate to our effective tax rate (benefit) is as follows:

	Successor									Predecessor
	Years Ended December 31,						Period from February 26 to December 31,			Period from January 1 to February 26,
	2012			2011			2010			2010
Statutory tax rate		(35.0	)%		(35.0	)%		(35.0	)%		35.0	%
State and local income taxes		0.2			(89.3	)		(2.0	)		(4.3	)
Incremental foreign tax (benefit)		(0.1	)		(10.6	)		(0.6	)		0.8
Change in valuation allowance		23.6			239.1			4.1			25.3
Goodwill impairment		12.3			—			—			—
Change in liability for unrecognized tax benefits		(0.5	)		14.3			(0.4	)		—
Reorganization costs		—			—			28.3			(61.9	)
Inducement expense		—			—			21.1			—
Mark to market valuation of convertible debt		—			—			(19.5	)		—
Other items—net		(1.4	)		(0.7	)		2.4			1.1
Effective tax rate		(0.9	)%		117.8	%		(1.6	)%		(4.0	)%

Deferred income tax assets and liabilities comprised the following at December 31:

(In thousands)	2012			2011
Deferred tax assets:
Postretirement and postemployment benefits	$	27,208		$	27,138
Accrued liabilities, reserves and other		10,219			3,241
Debt transaction and refinancing costs		2,498			1,985
Inventories		2,340			1,531
Accrued compensation and benefits		3,008			4,854
Worker's compensation		1,999			1,923
Pension benefit		18,108			21,361
State income taxes		1,442			1,442
Tax credits		3,728			1,335
Indirect effect of unrecognized tax benefits		2,243			1,333
Loss carryforwards		74,357			63,364
Valuation allowance		(101,248	)		(55,355	)
Total deferred tax assets		45,902			74,152
Deferred tax liabilities:
Asset basis and depreciation		(9,475	)		(21,041	)
Intangible assets		(45,805	)		(66,437	)
Total deferred tax liabilities		(55,280	)		(87,478	)
Net deferred tax liability		(9,378	)		(13,326	)
Current deferred tax asset		4,591			7,675
Long-term deferred tax asset		5,052			—
Long-term deferred income tax asset (liability)—net	$	(19,021	)	$	(21,001	)

The Company has recorded a deferred tax asset reflecting a benefit of $178.4 million of federal loss carryforwards and $246.0 million of state loss carryforwards as of December 31, 2012. As a result of the reorganization transaction the company underwent an ownership change that subjects these losses to limitations pursuant to IRS Code Section 382. As a result of this limitation, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities. These deferred tax assets will expire beginning 2014 through 2032. We have deferred tax assets for additional state tax credits which will expire beginning 2017 through 2025. We also have recorded deferred tax assets for federal tax credits which will expire beginning 2031. At December 31, 2010 the Company made the decision to amend prior years' federal income tax returns to deduct foreign taxes in lieu of utilizing our foreign tax credit thus resulting in an increase in our net operating loss carryforward. Realization of deferred tax assets is dependent upon taxable income within the carryforward periods available under the applicable tax laws. Although realization of deferred tax assets in excess of deferred tax liabilities is not certain, management has concluded that it is more likely than not the Company will realize the full benefit of deferred tax assets in foreign jurisdictions. However, during 2011 and 2012, management has concluded that it is more likely than not that we will not realize the full benefit of our U.S. federal and state deferred tax assets due to three cumulative years of net losses and changes of management's estimate of future earnings, and recorded a valuation allowance against the amounts that are not likely to be recognized as of 2011 and 2012. For the period ended December 31, 2012, the valuation allowance increased by $45.9 million, of which $42.2 million is attributable to continuing operations and $3.7 million is attributable to OCI. For the period ended December 31, 2011, the valuation allowance increased by $22.2 million, of which $15.8 million was attributable to continuing operations and $6.4 million was attributable to OCI.

No provision has been made for U.S. income taxes related to undistributed earnings of our Canadian foreign subsidiary that we intend to permanently reinvest in order to finance capital improvements and/or expand operations either through the expansion of the current operations or the purchase of new operations. At December 31, 2012, Accuride Canada had $11.9 million of cumulative retained earnings. The Company distributes earnings for the Mexican foreign subsidiary and expects to distribute earnings annually. Therefore, deferred tax liabilities in the amounts of $1.9 million and $0.0 million for 2011 and 2012, respectively, have been established for the undistributed earnings of our Mexican foreign subsidiary.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits are as follows:

	Successor									Predecessor
	Years Ended December 31,						Period from February 26 to December 31,			Period from January 1 to February 26,
(In thousands)	2012			2011			2010			2010
Balance at beginning of the period	$	7,033		$	6,184		$	7,060		$	7,060
Additions based on tax positions related to the current year		4			161			489			—
Additions for tax positions of prior years					818			93			—
Reductions for tax positions of prior years		(800	)		—			—			—
Removal of penalties and interest		—			—			—			—
Reductions due to lapse of statute of limitations		(1,597	)		(130	)		(1,458	)		—
Settlements with taxing authorities		—			—			—			—
Balance at end of period	$	4,640		$	7,033		$	6,184		$	7,060

The total amount of unrecognized tax benefits that would, if recognized, impact the effective income tax rate was approximately $3.4 million as of December 31, 2012. Also included in the balance of unrecognized tax benefits is $1.3 million of tax benefits that, if recognized, would affect other tax accounts.

We also recognize accrued interest expense and penalties related to the unrecognized tax benefits as additional tax expense, which is consistent with prior periods. The total amount of accrued interest and penalties was $3.5 million and $1.4 million respectively, as of December 31, 2012. An increase in interest of $0.4 million was recognized in 2012. The total amount of accrued interest and penalties was approximately $3.1 million and $1.4 million, respectively, as of December 31, 2011.

As of December 31, 2012, we were open to examination in the U.S. federal tax jurisdiction for the 2009-2011 tax years, in Canada for the years of 2004-2011, and in Mexico for the years of 2006-2011. We were also open to examination in various state and local jurisdictions for the 2008-2011 tax years, none of which were individually material. Tax years 2007 and 2008 in the U.S. federal tax jurisdiction, and 1998-2007 in various state and local jurisdictions, remain open subject to the future utilization of net operating losses generated in those years. We believe that our accrual for tax liabilities is adequate for all open audit years. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events.

The Company is not currently under any U.S. federal, state or local or non-U.S. income tax examinations and therefore does not anticipate significant increases or decreases in its remaining unrecognized tax benefits within the next twelve months.