9.	Income Taxes

Provision for Income Taxes

Our “Provision for income taxes” consisted of the following (in millions):


	Years Ended December 31,
	2012		2011		2010
Current:
Federal	$	268	$	240	$	354
State		72		38		99
Foreign		36		35		22

		376		313		475


Deferred:
Federal		48		162		85
State		17		36		64
Foreign		2		—		5

		67		198		154

Provision for income taxes	$	443	$	511	$	629

The U.S. federal statutory income tax rate is reconciled to the effective rate as follows:


	Years Ended December 31,
	2012			2011			2010
Income tax expense at U.S. federal statutory rate		35.00	%		35.00	%		35.00	%
State and local income taxes, net of federal income tax benefit		3.85			3.46			4.50
Miscellaneous federal tax credits		(4.13	)		(3.29	)		(1.67	)
Noncontrolling interests		(1.16	)		(1.11	)		(1.05	)
Taxing authority audit settlements and other tax adjustments		(0.02)			(0.47	)		0.54
Nondeductible costs relating to acquired intangibles		0.06			0.08			0.11
Tax rate differential on foreign income		(0.96	)		(0.70	)		(0.39	)
Cumulative effect of change in tax rates		0.18			0.12			1.74
Other		1.13			0.52			(0.25	)

Provision for income taxes		33.95	%		33.61	%		38.53	%

The comparability of our income taxes for the reported periods has been primarily affected by variations in our income before income taxes, tax audit settlements, changes in effective state and Canadian statutory tax rates, realization of federal and state net operating loss and credit carry-forwards, and miscellaneous federal tax credits. For financial reporting purposes, income before income taxes showing domestic and foreign sources was as follows (in millions) for the years ended December 31, 2012, 2011 and 2010:


	Years Ended December 31,
	2012		2011		2010
Domestic	$	1,175	$	1,394	$	1,517
Foreign		128		126		114

Income before income taxes	$	1,303	$	1,520	$	1,631

Tax Audit Settlements — The Company and its subsidiaries file income tax returns in the United States, Canada and Puerto Rico, as well as various state and local jurisdictions. We are currently under audit by the IRS and from time to time we are audited by other taxing authorities. Our audits are in various stages of completion.

During 2012 we settled various tax audits. The settlement of these tax audits resulted in a reduction to our provision for income taxes of $10 million, or $0.02 per diluted share, for the year ended December 31, 2012.

During 2011 we settled various state tax audits. The settlement of these tax audits resulted in a reduction to our provision for income taxes of $12 million, or $0.03 per diluted share, for the year ended December 31, 2011.

During 2010, we settled the IRS audit for the 2009 tax year as well as various state tax audits. In addition, we finalized audits in Canada through 2005. The settlement of these tax audits resulted in a reduction to our provision for income taxes of $8 million, or $0.02 per diluted share, for the year ended December 31, 2010.

We are currently in the examination phase of IRS audits for the tax years 2012 and 2013 and expect these audits to be completed within the next 12 and 24 months, respectively. We participate in the IRS’s Compliance Assurance Program, which means we work with the IRS throughout the year in order to resolve any material issues prior to the filing of our year-end tax return. We are also currently undergoing audits by various state and local jurisdictions that date back to 2000. We are not currently under audit in Canada and due to the expiration of statute of limitations all tax years prior to 2008 are closed. On July 28, 2011, we acquired Oakleaf, which is subject to IRS examinations for years dating back to 2009. Pursuant to the terms of our acquisition of Oakleaf, we are entitled to indemnification for Oakleaf’s pre-acquisition tax liabilities.

State Tax Rate Changes — During 2011, our state deferred income taxes increased by $3 million to reflect the impact of changes in the estimated tax rate at which existing temporary differences will be realized. During 2010, our current state tax rate increased from 6.25% to 6.75% resulting in an increase to our provision for income taxes of $5 million. In addition, our state deferred income taxes increased $37 million to reflect the impact of changes in the estimated tax rate at which existing temporary differences will be realized. The increases in these rates are primarily due to changes in tax law.

Canadian Tax Rate Changes — During 2012, the provincial tax rates in Ontario were increased, which resulted in a $5 million tax expense as a result of the revaluation of the related deferred tax balances.

State Net Operating Loss and Credit Carry-Forwards — During 2012, 2011 and 2010, we utilized state net operating loss and credit carry-forwards resulting in a reduction to our provision for income taxes for those periods of $5 million, $4 million and $4 million, respectively.

Federal Net Operating Loss Carry-Forwards — During 2012 we recognized additional federal net operating loss, or NOL, carry-forwards resulting in a reduction to our provision for income taxes of $8 million. As a result of the acquisition of Oakleaf in 2011, we received income tax attributes (primarily federal and state net operating losses) and allocated a portion of the purchase price to these acquired assets. At the time of the acquisition, we fully recognized all of the tax attributes identified by the seller and concluded the realization of these attributes would not affect our overall provision for income taxes. In the third quarter of 2012, as a result of new information, we recognized the above referenced tax benefit related to additional Oakleaf federal net operating losses received in the acquisition.

Investment in Refined Coal Facility — In January 2011, we acquired a noncontrolling interest in a limited liability company, which was established to invest in and manage a refined coal facility in North Dakota. The facility’s refinement processes qualify for federal tax credits that are expected to be realized through 2019 in accordance with Section 45 of the Internal Revenue Code. Our initial consideration for this investment consisted of a cash payment of $48 million.

We account for our investment in this entity using the equity method of accounting, recognizing our share of the entity’s results and other reductions in “Equity in net losses of unconsolidated entities,” within our Consolidated Statement of Operations. During the years ended December 31, 2012 and 2011, we recognized $7 million and $6 million, respectively, of net losses resulting from our share of the entity’s operating losses. Our tax provision for the years ended December 31, 2012 and 2011was reduced by $21 million and $17 million, respectively, primarily as a result of tax credits realized from this investment. See Note 20 for additional information related to this investment.

Investment in Federal Low-income Housing Tax Credits — In April 2010, we acquired a noncontrolling interest in a limited liability company established to invest in and manage low-income housing properties. The entity’s low-income housing investments qualify for federal tax credits that are expected to be realized through 2020 in accordance with Section 42 of the Internal Revenue Code.

We account for our investment in this entity using the equity method of accounting. We recognize our share of the entity’s results and reductions in value of our investment in “Equity in net losses of unconsolidated entities,” within our Consolidated Statement of Operations. The value of our investment decreases as the tax credits are generated and utilized. During the years ended December 31, 2012, 2011 and 2010, we recognized $24 million, $23 million and $19 million of losses relating to our equity investment in this entity, $7 million, $8 million and $5 million of interest expense, and a reduction in our tax provision of $38 million (including $26 million of tax credits), $38 million (including $26 million of tax credits) and $26 million (including $16 million of tax credits), respectively. See Note 20 for additional information related to this investment.

Unremitted Earnings in Foreign Subsidiaries — At December 31, 2012, remaining unremitted earnings in foreign operations were approximately $850 million, which are considered permanently invested and, therefore, no provision for U.S. income taxes has been accrued for these unremitted earnings. Determination of the unrecognized deferred U.S. income tax liability is not practicable due to uncertainties related to the timing and source of any potential distribution of such funds, along with other important factors such as the amount of associated foreign tax credits.

Deferred Tax Assets (Liabilities)

The components of the net deferred tax assets (liabilities) at December 31 are as follows (in millions):


	December 31,
	2012			2011
Deferred tax assets:
Net operating loss, capital loss and tax credit carry-forwards	$	189		$	175
Landfill and environmental remediation liabilities		—			17
Miscellaneous and other reserves, net		301			286

Subtotal		490			478
Valuation allowance		(120	)		(100	)
Deferred tax liabilities:
Landfill and environmental remediation liabilities		(11	)		—
Property and equipment		(1,180	)		(1,204	)
Goodwill and other intangibles		(1,050	)		(980	)

Net deferred tax liabilities	$	(1,871	)	$	(1,806	)

The valuation allowance increased by $20 million in 2012 due to changes in our capital loss carry-forward and changes in our state NOL and credit carry-forwards.

At December 31, 2012, we had $91 million of federal NOL carry-forwards and $1.6 billion of state NOL carry-forwards. The federal and state NOL carry-forwards have expiration dates through the year 2032. We also have a $104 million capital loss carry-forward that expires in 2014. In addition, we have $42 million of state tax credit carry-forwards at December 31, 2012.

We have established valuation allowances for uncertainties in realizing the benefit of certain tax loss and credit carry-forwards and other deferred tax assets. While we expect to realize the deferred tax assets, net of the valuation allowances, changes in estimates of future taxable income or in tax laws may alter this expectation.

Liabilities for Uncertain Tax Positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, including accrued interest for 2012, 2011 and 2010 is as follows (in millions):


	2012			2011			2010
Balance at January 1	$	49		$	53		$	75
Additions based on tax positions related to the current year		15			9			5
Additions based on tax positions of prior years		—			—			—
Additions due to acquisitions		—			2			—
Accrued interest		2			2			3
Reductions for tax positions of prior years		(1	)		—			(1	)
Settlements		(4	)		(10	)		(23	)
Lapse of statute of limitations		(7	)		(7	)		(6	)

Balance at December 31	$	54		$	49		$	53

These liabilities are primarily included as a component of long-term “Other liabilities” in our Consolidated Balance Sheets because the Company generally does not anticipate that settlement of the liabilities will require payment of cash within the next twelve months. As of December 31, 2012, $38 million of net unrecognized tax benefits, if recognized in future periods, would impact our effective tax rate.

We recognize interest expense related to unrecognized tax benefits in tax expense. During the years ended December 31, 2012, 2011 and 2010 we recognized approximately $2 million, $2 million and $3 million, respectively, of such interest expense as a component of our provision for income taxes. We had approximately $7 million of accrued interest in our Consolidated Balance Sheets as of December 31, 2012 and 2011. We do not have any accrued liabilities or expense for penalties related to unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010.

We are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity. We anticipate that approximately $14 million of liabilities for unrecognized tax benefits, including accrued interest, and $3 million of related deferred tax assets may be reversed within the next 12 months. The anticipated reversals are related to state tax items, none of which are material, and are expected to result from audit settlements or the expiration of the applicable statute of limitations period. In addition, there are federal items related to the tax implications of the book impairments discussed in Note 13 that also are anticipated to reverse within the next 12 months.

Recent Legislation

The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013 and includes an extension for one year of the 50% bonus depreciation allowance. The provision specifically applies to qualifying property placed in service before January 1, 2014. The acceleration of deductions on 2012 qualifying capital expenditures resulting from the bonus depreciation provision had no impact on our 2012 effective tax rate.