Income Taxes

Income tax provision applicable to continuing operations consists of the following:



	Year ended December 31,
(in thousands)	2012			2011			2010
Current:
Federal	$	23,816		$	39,015		$	22,288
State and local	3,492			5,603			3,613
Foreign	757			962			1,156
	$	28,065		$	45,580		$	27,057

Deferred:
Federal	$	14,808		$	5,281		$	13,558
State and local	1,982			553			595
Foreign	(287		)	(361		)	(1,948		)
	$	16,503		$	5,473		$	12,205

Total:
Federal	$	38,624		$	44,296		$	35,846
State and local	5,474			6,156			4,208
Foreign	470			601			(792		)
	$	44,568		$	51,053		$	39,262

Income before income taxes from continuing operations consists of the following:



	Year ended December 31,
(in thousands)	2012		2011		2010
U.S. income	$	119,325	$	146,420	$	106,184
Foreign	808		1,458		(2,041		)
	$	120,133	$	147,878	$	104,143

A reconciliation from the statutory U.S. federal tax rate to the effective tax rate follows:



	Year ended December 31,
	2012		2011		2010
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in rate resulting from:
Effect of qualified domestic production deduction	(0.8	)	(1.6	)	(1.1	)
Effect of Patient Protection and Affordable Care Act	(0.6	)	—		1.4
State and local income taxes, net of related federal taxes	3.0		2.7		2.5
Other, net	0.5		(1.6	)	(0.1	)
Effective tax rate	37.1	%	34.5	%	37.7	%

Income taxes paid in 2012, 2011 and 2010 were $36.3 million, $48.9 million and $24.8 million, respectively.

Significant components of the Company's deferred tax liabilities and assets are as follows:



	December 31,
(in thousands)	2012			2011
Deferred tax liabilities:
Property, plant and equipment and railcar assets leased to others	$	(85,556	)	$	(72,997	)
Prepaid employee benefits	(16,490		)	(15,419		)
Investments	(23,180		)	(23,262		)
Other	(6,402		)	(3,205		)
	(131,628		)	(114,883		)
Deferred tax assets:
Employee benefits	45,400			42,482
Accounts and notes receivable	1,920			1,909
Inventory	4,800			6,326
Deferred expenses	11,540			16,022
Net operating loss carryforwards	654			1,299
Other	5,038			3,688
Total deferred tax assets	69,352			71,726
Valuation allowance	—			—
	69,352			71,726
Net deferred tax liabilities	$	(62,276	)	$	(43,157	)

On December 31, 2012, the Company had $13.2 million in state net operating loss carryforwards that expire from 2017 to 2023. A deferred tax asset of $0.6 million has been recorded with respect to state net operating loss carryforwards. No valuation allowance has been established because based on all available evidence, the Company concluded it is more likely than not that it will realize the deferred tax asset. On December 31, 2011, the Company had recorded a $0.6 million deferred tax asset and no valuation allowance with respect to state net operating loss carryforwards.

On December 31, 2012, the Company had $0.4 million in cumulative Canadian net operating losses that expire in 2031. A deferred tax asset of $0.1 million has been recorded with respect to Canadian net operating loss carryforwards. No valuation allowance has been established because based on all available evidence, the Company concluded it is more likely than not that it will realize the deferred tax asset. On December 31, 2011 the Company had recorded a deferred tax asset, and no valuation allowance, of $0.7 million with respect to Canadian net operating loss carryforwards.

On December 31, 2012, the Company had recorded a $2.9 million deferred tax asset related to U.S. foreign tax credit carryforwards that expire from 2020 through 2023. No valuation allowance has been established because based on all available evidence, the Company concluded it is more likely than not that it will realize the deferred tax asset. On December 31, 2011, the Company had $2.0 million in U.S. foreign credit carryforwards that expire in 2020 and 2022 and no valuation allowance with respect to the foreign credit carryforwards.

The Company accounts for utilization of windfall tax benefits based on tax law ordering and considered only the direct effects of stock-based compensation for purposes of measuring the windfall at settlement of an award. During 2012, there was no cash resulting from the exercise of awards and the tax benefit the Company realized from the exercise of awards was $0.4 million. For 2011, there was no cash resulting from the exercise of awards and the Company realized no tax benefit from the exercise of awards.

The Company or one of its subsidiaries files income tax returns in the U.S., various foreign jurisdictions and various state and local jurisdictions. The Company is no longer subject to examinations by U.S. tax authorities for years before 2009 and is no longer subject to examinations by foreign jurisdictions for years before 2007. The Company is no longer subject to examination by state tax authorities in most states for tax years before 2009.

A reconciliation of the January 1, 2010 to December 31, 2012 amount of unrecognized tax benefits is as follows:



(in thousands)
Balance at January 1, 2010	$	318
Additions based on tax positions related to the current year	20
Additions based on tax positions related to prior years	474
Reductions as a result of a lapse in statute of limitations	(198		)
Balance at December 31, 2010	614

Additions based on tax positions related to the current year	—
Additions based on tax positions related to prior years	43
Reductions as a result of a lapse in statute of limitations	(22		)
Balance at December 31, 2011	635

Additions based on tax positions related to the current year	97
Additions based on tax positions related to prior years	415
Reductions as a result of a lapse in statute of limitations	(101		)
Balance at December 31, 2012	$	—

The unrecognized tax benefits at December 31, 2012 are associated with positions taken on state income tax returns, and would decrease the Company's effective tax rate if recognized. The Company does not anticipate any significant changes during 2013 in the amount of unrecognized tax benefits.

The Company has elected to classify interest and penalties as interest expense and penalty expense, respectively, rather than as income tax expense. The Company has $0.1 million accrued for the payment of interest and penalties at December 31, 2012. The net interest and penalties expense for 2012 is $0.1 million benefit, due to the reduction in uncertain tax positions and associated release of previously recorded interest and penalties. The Company had $0.2 million accrued for the payment of interest and penalties at December 31, 2011. The net interest and penalties expense for 2011 was $0.1 million benefit.