NOTE 11—Income Taxes

Income tax expense (benefit) applicable to continuing operations consists of the following (in thousands):

	For the years ended December 31,

	2013									2012									2011
	Current			Deferred(1)			Total			Current			Deferred			Total			Current		Deferred			Total
Federal	$	(54,312	)	$	103,851		$	49,539		$	49,236		$	(45,330	)	$	3,906		$	37,307	$	80,701		$	118,008
State		(3,906	)		15,040			11,134			3,860			(1,747	)		2,113			6,226		3,108			9,334
Foreign		(137	)		(102,374	)		(102,511	)		(20,080	)		(85,143	)		(105,223	)		20,889		(17,006	)		3,883


Total	$	(58,355	)	$	16,517		$	(41,838	)	$	33,016		$	(132,220	)	$	(99,204	)	$	64,422	$	66,803		$	131,225

The foreign provision (benefit) for income taxes is based on foreign pretax losses of $222.3 million in 2013 as compared with foreign pretax losses of $1.2 billion in 2012 and foreign pretax earnings of $84.0 million in 2011.

Deferred income tax assets and liabilities reflect the effects of tax losses, credits, and the future income tax effects of temporary differences between the consolidated financial statements carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

As of December 31, 2013 and December 31, 2012, the significant components of the Company's deferred income tax assets and liabilities were (in thousands):

	December 31,

	2013			2012
Deferred income tax assets:
Net operating losses and credit carryforwards	$	278,016		$	156,387
Accrued expenses		5,167			14,827
Contingent interest		42,763			39,581
Other postretirement benefits		223,346			247,578
Pension obligations		2,925			23,725
Other		15,243			34,214


Total		567,460			516,312
Less: valuation allowance for deferred income tax assets		(166,265	)		(20,919	)


Net deferred income tax assets		401,195			495,393


Deferred income tax liabilities:
Prepaid expenses		(13,494	)		(12,465	)
British Columbia mineral tax		(184,680	)		(243,229	)
Property, plant and equipment		(990,580	)		(943,523	)


Total deferred income tax liabilities		(1,188,754	)		(1,199,217	)


Net deferred income tax liability	$	(787,559	)	$	(703,824	)




Deferred income taxes are classified as follows:
Current deferred income tax asset	$	37,067		$	58,526
Noncurrent deferred income tax asset		—			160,422
Other current liabilities		(1,759	)		(1,085	)
Noncurrent deferred income tax liability		(822,867	)		(921,687	)


Net deferred tax liability	$	(787,559	)	$	(703,824	)

As of each reporting date, the Company's management considers new evidence, both positive and negative, that could impact management's view with regard to future realization of deferred income tax assets. As of December 31, 2013, management determined that sufficient negative evidence exists to conclude that it is more likely than not that deferred income tax assets of $166.3 million will not be realized. In recognition of this risk, the Company increased the valuation allowances by $145.3 million. The tax benefits related to any future reversals of the valuation allowances on deferred income tax assets as of December 31, 2013, will be accounted for as a reduction to income tax expense.

As of December 31, 2013, our U.S. net operating losses ("NOLs") consisted of $77.1 million of federal NOLs and $343.0 million of state NOLs available as offsets to future years' taxable income. The NOLs primarily expire between 2026 and 2033. Additionally, $10.8 million of federal and state capital losses were available as of December 31, 2013. The Company has alternative minimum tax credits of $52.3 million and general business credits of $6.6 million as of December 31, 2013 that may be carried forward indefinitely. In our evaluation of the need for a valuation allowance on our U.S. deferred income tax assets, we considered all available positive and negative evidence, including scheduled reversals of deferred income tax liabilities, carryback of future period losses to prior periods, projected future taxable income, tax planning strategies and recent financial performance. Based on our review of all positive and negative evidence, including a three year U.S. cumulative pre-tax loss, it was concluded that a valuation allowance should be recorded against our deferred income tax assets that are not expected to be realized through future sources of taxable income generated from carrybacks of future period losses, scheduled reversals of deferred income tax liabilities and tax planning strategies. As a result, a valuation allowance was recorded to reflect the portion of the U.S. federal and state deferred income tax assets that are not likely to be realized based upon all available evidence. If we later determine that we will more likely than not realize all, or a portion, of the U.S. deferred income tax assets, we will reverse the valuation allowance in a future period. All future reversals of the valuation allowance would result in a tax benefit in the period recognized.

As of December 31, 2013, our foreign subsidiaries had $707.2 million of ordinary non-U.S. NOLs and $8.6 million of non-U.S. capital losses available for carryforward. Canadian ordinary NOLs of $581.9 million will expire between 2031 and 2033 while Canadian capital losses of $1.2 million have an indefinite carryforward period. U.K. ordinary NOLs of $125.3 million have an indefinite carryforward period. We believe the Canadian and U.K operations non-capital NOLs and the Canadian capital losses will more likely than not be realized prior to their expiration from the reversal of taxable temporary differences in the future. We have valuation allowances on U.K. capital losses equal to the capital loss carryforward of $7.4 million which is not expected to provide future tax benefits. We have $13.8 million of Canadian unrealized losses for which we have a full valuation allowance. Additionally, we have established a full valuation allowance against $9.6 million of future British Columbia mineral tax attributes that are not expected to provide future tax benefits.

The income tax expense (benefit) at the Company's effective tax rate differed from the U.S. statutory rate of 35% as follows (in thousands):

	For the years ended December 31,

	2013			2012			2011
Income (loss) from continuing operations before income tax expense	$	(400,841	)	$	(1,164,759	)	$	494,823




Tax expense (benefit) at statutory tax rate of 35%		(140,294	)	$	(407,665	)	$	173,188
Effect of:
Excess depletion benefit		(17,524	)		(26,107	)		(32,370	)
Taxation of foreign operations		(5,663	)		(11,945	)		(36,545	)
British Columbia mineral tax foreign currency effect		(26,778	)		3,643			(12,336	)
British Columbia mineral tax		(14,697	)		(22,365	)		24,290
Goodwill impairment		—			372,543			—
State and local income tax, net of federal effect		(6,947	)		2,470			7,394
U.S. domestic production activities benefit		—			(2,950	)		(5,583	)
Valuation allowance on deferred tax assets		145,322			19,189			—
Impact of statutory tax rate changes		14,660			(3,772	)		—
Credits and other incentives		(659	)		(2,301	)		—
Impact of West Virginia legal entity restructuring		10,084			—			—
Acquisition costs		—			—			8,078
Other		658			(19,944	)		5,109


Tax expense (benefit) recognized	$	(41,838	)	$	(99,204	)	$	131,225

During 2013, income tax expense attributable to equity-based compensation transactions that were allocated to stockholders' equity totaled $0.7 million as compared to net excess tax benefits of $0.8 million, and $8.9 million in 2012 and 2011, respectively.

The Company files income tax returns in the U.S., Canada, U.K., Australia and in various state, provincial and local jurisdictions which are routinely examined by tax authorities in these jurisdictions. The statute of limitations related to the U.S. consolidated federal income tax returns is closed for years prior to August 31, 1983 and for the years ended May 31, 1997, 1998 and 1999. The impact of any U.S. federal changes for these years on state income taxes remains subject to examination for a period up to five years after formal notification to the states. The Company generally remains subject to income tax in various states for prior periods ranging from three to eleven years depending on jurisdiction. In our major non-U.S. jurisdictions, tax years are typically subject to examination for three to six years.

On December 27, 1989, the Company and most of its U.S. subsidiaries each filed a voluntary petition for reorganization under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Proceedings") in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division (the "Bankruptcy Court"). The Company emerged from bankruptcy on March 17, 1995 (the "Effective Date") pursuant to the Amended Joint Plan of Reorganization dated as of December 9, 1994, as modified on March 1, 1995 (as so modified the "Consensual Plan"). Despite the confirmation and effectiveness of the Consensual Plan, the Bankruptcy Court continues to have jurisdiction over, among other things, the resolution of disputed prepetition claims against the Company and other matters that may arise in connection with or related to the Consensual Plan, including claims related to federal income taxes.

In connection with the U.S. Bankruptcy Proceedings, the Internal Revenue Service ("IRS") filed a proof of claim in the Bankruptcy Court (the "Proof of Claim") for a substantial amount of taxes, interest and penalties with respect to fiscal years ended August 31, 1983 through May 31, 1994. The Company filed an adversary proceeding in the Bankruptcy Court disputing the Proof of Claim (the "Adversary Proceeding") and the various issues have been litigated in the Bankruptcy Court. An opinion was issued by the Bankruptcy Court in June 2010 as to the remaining disputed issues. The Bankruptcy Court instructed both parties to submit a final order addressing all issues that have been litigated for the tax years 1983 through 1995 in the Adversary Proceeding by late August 2010. At the request of both parties, the Bankruptcy Court granted an extension of time of 90 days from the initial submission date to submit the final order. Additional extensions of time to submit the proposed final order were granted in November 2010, February 2011, May 2011, September 2011, January 2013, May 2013 and December 2013. At the request of the Internal Revenue Service, in December 2013 the Bankruptcy Court granted an additional extension of time to submit the final order.

The amounts initially asserted by the Proof of Claim do not reflect the subsequent resolution of various issues through settlements or concessions by the parties. The Company believes that any financial exposure with respect to those issues that have not been resolved or settled in the Proof of Claim is limited to interest and possible penalties and the amount of tax assessed has been offset by tax reductions in future years. All of the issues in the Proof of Claim, which have not been settled or conceded, have been litigated before the Bankruptcy Court and are subject to appeal but only at the conclusion of the entire Adversary Proceeding.

The IRS completed its audit of the Company's federal income tax returns for the years ended May 31, 2000 through December 31, 2005. The IRS issued 30-Day Letters to the Company in June 2010, proposing changes to tax for these tax years. The Company believes its tax filing positions have substantial merit and filed a formal protest with the IRS within the prescribed 30-day time limit for those issues which have not been previously settled or conceded. The IRS filed a rebuttal to the Company's formal protest and the case was assigned to the Appeals Division of the IRS. The Appeals Division convened a hearing on March 8, 2011 and heard arguments from both parties as to issues not settled or conceded for the 2000 through 2005 audit period. As of December 31, 2013, a final resolution has not been reached with the Appeals Division pertaining to these matters. The disputed issues in this audit period are similar to the issues remaining in the Proof of Claim.

In the second quarter of 2012, the IRS completed its audit of the Company's federal income tax returns for the years 2006 through 2008 and proposed adjustments to tax for these periods. The IRS issued a 30-Day Letter with proposed adjustments and the Company responded to the IRS within the prescribed 30-day time limit. The proposed adjustments are similar to issues in the prior Proof of Claim and included a proposed adjustment to a worthless stock deduction reported in the Company's 2008 federal income tax return. In the third quarter of 2012, the Company received notification from the IRS that the audit of the 2006 through 2008 tax years had been reopened for further review. The IRS issued a revised IRS Appeals Transmittal Letter in April 2013 conceding the proposed adjustment to the worthless stock deduction. As of December 31, 2013, a final resolution has not been reached with the Appeals Division pertaining to the remaining disputed matters. The remaining disputed issues in this audit period are similar to the issues remaining in the Proof of Claim.

The IRS is conducting an audit of the Company's income tax returns filed for 2009 and 2010. Since the examination is ongoing, any resulting tax deficiency or overpayment cannot be estimated at this time. During 2014, the statute of limitations for assessing additional income tax deficiencies will expire for certain tax years in several state tax jurisdictions. The expiration of the statute of limitations for these years is expected to have an immaterial impact on the total uncertain income tax positions and net income.

It is reasonably possible that the amount of unrecognized tax benefits will change in the next year. The Company anticipates a final order will be issued by the Bankruptcy Court in 2014 settling the issues in the Proof of Claim. The final order by the Bankruptcy Court would permit a resolution of similar issues for the tax years currently in Appeals (2000-2008). As of December 31, 2013, the Company had $38.0 million of accruals for unrecognized tax benefits on the matters subject to disposition. Due to the uncertainty related to the potential outcome of these matters, any possible changes in unrecognized tax benefits cannot be reasonably estimated.

The Company believes that all of its current and prior tax filing positions have substantial merit and intends to vigorously defend any tax claims asserted. The Company believes that it has sufficient accruals to address any claims, including interest and penalties, and does not believe that any potential difference between the final settlements and the amounts accrued will have a material effect on the Company's financial position, but such potential difference could be material to results of operations in a future reporting period.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits excluding penalties and interest is as follows (in thousands):

	December 31,

	2013			2012			2011
Gross unrecognized tax benefits at beginning of year	$	89,631		$	92,758		$	39,191
Increases for tax positions taken in prior years		347			10,019			31,704
Increases in tax positions for the current year		—			8,058			23,169
Decreases for tax positions taken in prior years		(13,690	)		(18,440	)		—
Decreases for lapse of statute of limitations		—			(2,764	)		—
Decreases for changes in temporary differences		—			—			(1,306	)


Gross unrecognized tax benefits at end of year	$	76,288		$	89,631		$	92,758

The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate totaled $69.1 million, $87.6 million and $92.1 million at December 31, 2013, 2012, and 2011, respectively. The Company recognizes interest expense and penalties related to unrecognized tax benefits as components of interest expense and selling, general and administrative expenses.

For the years ended December 31, 2013, 2012 and 2011, interest expense includes $9.0 million, $10.4 million and $7.2 million, respectively, for interest accrued on the liability for unrecognized tax benefits and for issues identified in the Proof of Claim. As of December 31, 2013, the Company had accrued interest and penalties related to unrecognized tax benefits and the Adversary Proceeding of $112.8 million, of which $111.6 million is included in other current liabilities and $1.2 million is including in other long-term liabilities in the Consolidated Balance Sheets as of December 31, 2013.