Income Taxes

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



	Year ended December 31,
(in thousands)	2013		2012			2011
Current:
Federal	$	11,812	$	23,816		$	39,015
State and local	225		3,492			5,603
Foreign	1,400		757			962
	$	13,437	$	28,065		$	45,580

Deferred:
Federal	$	35,147	$	14,808		$	5,281
State and local	4,321		1,982			553
Foreign	906		(287		)	(361		)
	$	40,374	$	16,503		$	5,473

Total:
Federal	$	46,959	$	38,624		$	44,296
State and local	4,546		5,474			6,156
Foreign	2,306		470			601
	$	53,811	$	44,568		$	51,053

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



	Year ended December 31,
(in thousands)	2013		2012		2011
U.S. income	$	141,673	$	119,325	$	146,420
Foreign	7,840		808		1,458
	$	149,513	$	120,133	$	147,878

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



	Year ended December 31,
	2013		2012		2011
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in rate resulting from:
Effect of qualified domestic production deduction	(0.4	)	(0.8	)	(1.6	)
Effect of Patient Protection and Affordable Care Act	0.9		(0.6	)	—
Effect of noncontrolling interest	(1.3	)	1.1		(0.4	)
State and local income taxes, net of related federal taxes	2.0		3.0		2.7
Other, net	(0.2	)	(0.6	)	(1.2	)
Effective tax rate	36.0	%	37.1	%	34.5	%

Income taxes paid, net of refunds received, in 2013, 2012 and 2011 were $5.3 million, $36.3 million and $48.9 million, respectively.

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



	December 31,
(in thousands)	2013			2012
Deferred tax liabilities:
Property, plant and equipment and railcar assets leased to others	$	(110,472	)	$	(85,556	)
Prepaid employee benefits	(17,725		)	(16,490		)
Investments	(29,749		)	(23,180		)
Other	(5,426		)	(6,402		)
	(163,372		)	(131,628		)
Deferred tax assets:
Employee benefits	36,593			45,400
Accounts and notes receivable	1,890			1,920
Inventory	6,605			4,800
Deferred expenses	689			11,540
Net operating loss carryforwards	631			654
Other	1,905			5,038
Total deferred tax assets	48,313			69,352
Valuation allowance	(92		)	—
	48,221			69,352
Net deferred tax liabilities	$	(115,151	)	$	(62,276	)

On December 31, 2013 the Company had $12.4 million in state net operating loss carryforwards that expire from 2017 to 2023. A deferred tax asset of $0.5 million has been recorded with respect to state net operating loss carryforwards. A valuation allowance of $0.1 million was established in the current year against the deferred tax asset because it has been determined that the Company is unlikely to realize all the benefit of these carryforwards. On December 31, 2012, 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, 2013, the Company had $0.4 million in cumulative Canadian net operating losses that expire after 2030. 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, 2012 the Company had recorded a deferred tax asset, and no valuation allowance, of $0.1 million with respect to Canadian net operating loss carryforwards.

On December 31, 2013, the Company had recorded a $0.5 million deferred tax asset related to U.S. foreign tax credit carryforwards that expire after 2022. 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, 2012, the Company had $2.9 million in U.S. foreign credit carryforwards that expire from 2020 through 2023 and no valuation allowance with respect to the foreign credit carryforwards.

The Company's 2013 income tax provision includes deferred tax expense of $1.4 million due to a correction of other comprehensive income related to the portion of the Company's retiree health care plan liability and the Medicare Part D subsidy. The correction related to the years 2009 through 2012 and was recorded during the first quarter of 2013. The impact of this error on amounts previously reported was determined to be immaterial to the Consolidated Financial Statements. As a result of the correction of the error, deferred income tax expense for the twelve months ended December 31, 2013 increased and accumulated other comprehensive loss decreased by $1.4 million.

During the third quarter of 2013, the Company believed its share of foreign joint venture earnings would be considered indefinitely reinvested outside the U.S. However, after ongoing analysis of additional information related to the third quarter joint venture acquisition together with the impact of expiring tax legislation, the Company is now providing for taxes on foreign earnings, as the earnings are expected to be included in U.S. taxable income. The effect of this change was not material to the third quarter or full year 2013.

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 2013, there was no cash resulting from the exercise of awards and the tax benefit the Company realized from the exercise of awards was $1.3 million. For 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.

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 2010 and is no longer subject to examinations by foreign jurisdictions for years before 2008. The Company is no longer subject to examination by state tax authorities in most states for tax years before 2010.

A reconciliation of the January 1, 2011 to December 31, 2013 amount of unrecognized tax benefits is as follows:



(in thousands)
Balance at January 1, 2011	$	614
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	1,046

Additions based on tax positions related to the current year	114
Reductions based on tax positions related to prior years	(45		)
Reductions as a result of a lapse in statute of limitations	(5		)
Balance at December 31, 2013	$	1,110

The unrecognized tax benefits at December 31, 2013 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 2014 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 $0.2 million accrued for the payment of interest and penalties at December 31, 2013. The net interest and penalties expense for 2013 is $0.1 million, due to increased uncertain tax positions. The Company had $0.1 million accrued for the payment of interest and penalties at December 31, 2012. The net interest and penalties expense for 2012 was $0.1 million benefit.