13. Income Taxes

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


	Year ended December 31,
(in thousands)	2011			2010			2009
Current:
Federal	$	39,015		$	22,288		$	4,848
State and local		5,603			3,613			828
Foreign		962			1,156			(176	)

	$	45,580		$	27,057		$	5,500


Deferred:
Federal	$	5,281		$	13,558		$	15,638
State and local		553			595			1,833
Foreign		(361	)		(1,948	)		(1,041	)

	$	5,473		$	12,205		$	16,430


Total:
Federal	$	44,296		$	35,846		$	20,486
State and local		6,156			4,208			2,661
Foreign		601			(792	)		(1,217	)

	$	51,053		$	39,262		$	21,930

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


	Year ended December 31,
(in thousands)	2011		2010			2009
U.S. income	$	146,420	$	106,184		$	64,359
Foreign		1,458		(2,041	)		(2,863	)

	$	147,878	$	104,143		$	61,496

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


	Year ended December 31,
	2011			2010			2009
Statutory U.S. federal tax rate		35.0	%		35.0	%		35.0	%
Increase (decrease) in rate resulting from:
Effect of qualified domestic production deduction		(1.6	)		(1.1	)		(0.4	)
Effect of Patient Protection and Affordable Care Act		—			1.4			—
State and local income taxes, net of related federal taxes		2.7			2.5			2.8
Other, net		(1.6	)		(0.1	)		(1.7	)

Effective tax rate		34.5	%		37.7	%		35.7	%

Income taxes paid in 2011 were $48.9 million. Income taxes paid in 2010 were $24.8 million. Income tax refunds of $24.2 million were received in 2009.

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


	December 31,
(in thousands)	2011			2010
Deferred tax liabilities:
Property, plant and equipment and railcar assets leased to others	$	(72,997	)	$	(64,392	)
Prepaid employee benefits		(15,419	)		(12,724	)
Investments		(23,262	)		(20,242	)
Other		(3,205	)		(3,877	)

		(114,883	)		(101,235	)


Deferred tax assets:
Employee benefits		42,482			32,463
Accounts and notes receivable		1,909			2,212
Inventory		6,326			7,056
Deferred expenses		16,022			10,036
Net operating loss carryforwards		1,299			1,207
Other		3,688			2,425

Total deferred tax assets		71,726			55,399
Valuation allowance

		71,726			55,399

Net deferred tax liabilities	$	(43,157	)	$	(45,836	)

On December 31, 2011 the Company had $13.9 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, 2010 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, 2011, the Company had $2.9 million in cumulative Canadian net operating losses that expire from 2029 to 2031. A deferred tax asset of $0.7 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, 2010 the Company had recorded a deferred tax asset, and no valuation allowance, of $0.6 million with respect to Canadian net operating loss carryforwards.

On December 31, 2011, the Company had recorded a $2.0 million deferred tax asset related to U.S. foreign tax credit carryforwards that expire from 2020 through 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, 2010, the Company had $0.8 million in U.S. foreign credit carryforwards that expire in 2020 and 2021 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 2011, there was no cash resulting from the exercise of awards and the Company realized no tax benefit from the exercise of awards. For 2010, the amount of cash resulting from the exercise of awards was $0.2 million and the tax benefit the Company realized from the exercise of awards was $0.8 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 2007 and is no longer subject to examinations by foreign jurisdictions for years before 2006. The Company is no longer subject to examination by state tax authorities in most states for tax years before 2008.

A reconciliation of the January 1, 2009 to December 31, 2011 amount of unrecognized tax benefits is as follows:


(in thousands)

Balance at January 1, 2009	$	727
Additions based on tax positions related to the current year		28
Reductions based on tax positions related to prior years		(25	)
Reductions for settlements with taxing authorities		(153	)
Reductions as a result of a lapse in statute of limitations		(259	)

Balance at December 31, 2009		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

The unrecognized tax benefits at December 31, 2011 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 2012 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, 2011. The net interest and penalties expense for 2011 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 $0.3 million accrued for the payment of interest and penalties at December 31, 2010. The net interest and penalties expense for 2010 was $0.1 million.