NOTE 12. INCOME TAXES

Income before income taxes was taxed in the following jurisdictions in each of the years ended December 31:


	2011		2010			2009
	(Dollars in thousands)
Domestic	$	266,586	$	223,623		$	231,915
Foreign		23,581		(1,943	)		15,684

Total	$	290,167	$	221,680		$	247,599

The components of the provision for income taxes are as follows:


	2011			2010			2009
	(Dollars in thousands)
Current:
Federal	$	61,905		$	49,763		$	55,633
State		4,039			6,914			9,659
Foreign		7,287			(1,001	)		7,582

Current income tax provision		73,231			55,676			72,874

Deferred:
Federal		25,059			20,808			13,286
State		(883	)		3,381			2,306
Foreign		(413	)		(2,831	)		(276	)

Deferred income tax provision		23,763			21,358			15,316

	$	96,994		$	77,034		$	88,190

The provision for income taxes varied from income taxes computed at the statutory U.S. federal income tax rate as a result of the following:


	2011			2010			2009
	(Dollars in thousands)
Income taxes computed at the statutory U.S. federal income tax rate	$	101,559		$	77,588		$	86,660
State income taxes, net of federal tax benefit		8,557			5,910			6,345
Tax liabilities required		507			2,488			2,578
Valuation allowance		(6,662	)		(88	)		1,525
Manufacturing exemption		(5,128	)		(6,834	)		(3,138	)
Tax credit refunds, net		(3,165	)		(2,096	)		(1,255	)
Foreign earnings taxed at other than 35%		94			(2,406	)		(2,292	)
Other		1,232			2,472			(2,233	)

	$	96,994		$	77,034		$	88,190


Effective tax rate		33.4	%		34.8	%		35.6	%

Deferred income taxes reflect the net tax effect of temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Significant components of our deferred tax assets and liabilities at December 31 are as follows:


	2011			2010
	(Dollars in thousands)
Deferred tax assets:
Pension and other postretirement liabilities	$	49,273		$	29,936
Rationalization and other accrued liabilities		25,481			19,886
AMT and other credit carryforwards		6,129			5,676
Net operating loss carryforwards		21,228			21,195
Foreign currency translation		2			3,279
Inventory and related reserves		981			12,084
Other		8,301			10,451

Total deferred tax assets		111,395			102,507

Deferred tax liabilities:
Property, plant and equipment		(205,177	)		(158,671	)
Other intangible assets		(27,387	)		(24,827	)
Foreign currency translation		(18,078	)		—
Other		(4,322	)		(7,452	)

Total deferred tax liabilities		(254,964	)		(190,950	)

Valuation allowance		(11,840	)		(16,231	)

	$	(155,409	)	$	(104,674	)

At December 31, 2011, the net deferred tax liability in our Consolidated Balance Sheets was comprised of current deferred tax assets of $14.7 million, long-term deferred tax assets of $7.9 million and long-term deferred tax liabilities of $178.0 million. At December 31, 2010, the net deferred tax liability in our Consolidated Balance Sheets was comprised of current deferred tax assets of $18.3 million, long-term deferred tax assets of $14.1 million, current deferred tax liabilities of $0.2 million and long-term deferred tax liabilities of $136.9 million.

We acquired VN during 2011. A portion of the VN purchase price was allocated to goodwill and other intangible assets, which are not deductible for tax purposes in the applicable jurisdictions. A portion of the purchase price of prior years’ acquisitions has been allocated to goodwill and other intangible assets, of which only the trade names and intellectual property are tax deductible and are being amortized over 15 years for tax purposes.

The valuation allowance in 2011 includes deferred tax assets of $1.0 million resulting from federal net operating loss carryforwards, or NOLs. The valuation allowance also includes losses of certain foreign operations of $6.9 million, state and local credit carryforwards totaling $0.9 million and foreign tax credit carryforwards totaling $3.1 million. The valuation allowance for deferred tax assets decreased in 2011 by $4.5 million primarily due to the utilization of federal, state and foreign NOLs as well as state credit carryforwards.

We file a consolidated U.S. federal income tax return that includes all domestic subsidiaries except Silgan Can Company, or Silgan Can, and Silgan Equipment Company, or Silgan Equipment. Silgan Can and Silgan Equipment file separate U.S. federal income tax returns. Silgan Equipment has federal NOLs of approximately $1.0 million that expire in 2021 and which have a full valuation allowance recorded against them.

At December 31, 2011, we had state tax NOLs of approximately $4.5 million that are available to offset future taxable income and that expire from 2013 to 2028.

Silgan and its subsidiaries file U.S. Federal income tax returns, as well as income tax returns in various states and foreign jurisdictions. With limited exceptions and due to the impact of net operating loss and other credit carryforwards, we may be effectively subject to U.S. Federal income tax examinations for periods after 1990. We are subject to examination by state and local tax authorities generally for the period mandated by statute, with the exception of states where waivers of the statute of limitations have been executed. These states and the earliest open period include Wisconsin (1995) and Indiana (2007). Our foreign subsidiaries are generally not subject to examination by tax authorities for periods before 2005, and we have contractual indemnities with third parties with respect to open periods that predate our ownership of certain foreign subsidiaries. Subsequent periods may be examined by the relevant tax authorities. The Internal Revenue Service, or IRS, has commenced an examination of Silgan’s income tax return for the periods ended December 31, 2004 through December 31, 2010. It is reasonably possible that all or a portion of this IRS audit will be concluded within the next twelve months, and conclusion of any such audits may result in a significant change to our reported unrecognized tax benefits. Due to the ongoing nature of these audits, we are unable to estimate the amount of this potential impact.

We recognize accrued interest and penalties related to unrecognized taxes as additional tax expense. At December 31, 2011 and December 31, 2010, we had $4.5 million and $3.7 million, respectively, accrued for potential interest and penalties.

The total amount of unrecognized tax benefits as of December 31, 2011 and December 31, 2010 were $41.0 million and $39.1 million, respectively, net of associated tax assets and excluding the federal tax benefit of state taxes, interest and penalties.

Tax assets associated with uncertain tax positions primarily represent our estimate of the potential tax benefits in one tax jurisdiction that could result from the payment of income taxes in another jurisdiction. At December 31, 2011, we had approximately $7.0 million in assets associated with uncertain tax positions recorded in other assets in our Consolidated Balance Sheet.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits included as other liabilities in our Consolidated Balance Sheets is as follows:


	2011			2010
	(Dollars in thousands)
Balance at January 1,	$	39,065		$	37,046
Increase based upon tax positions of current year		773			1,555
Increase based upon tax positions of a prior year		1,594			993
Increase due to acquisitions		8,968			—
Decrease based upon a lapse in the statute of limitations		(2,345	)		(529	)

Balance at December 31,	$	48,055		$	39,065

The total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, at December 31, 2011 and December 31, 2010 were $33.0 million and $30.1 million, respectively.

We had undistributed earnings from foreign subsidiaries of $39.8 million at December 31, 2011. If the earnings of foreign subsidiaries were not indefinitely reinvested, a deferred tax liability of $13.9 million would be required, excluding the potential use of foreign tax credits in the United States.