11. The effective tax rate for income from continuing operations the first nine months of 2012 was 28.0% compared to 19.9% in first nine months of 2011. The significant differences between the U.S. federal statutory rate and the effective income tax rate for continuing operations for the nine months ended September 30, 2012 and 2011 are as follows:


	Percent of Income Before Income Taxes
Nine Months Ended September 30	2012		2011
Income taxexpense at federal statutory rate	35.0		35.0
Valuation allowance for capital loss carry-forwards	3.3		(.1	)
State taxes, net of federal income taxbenefit	1.4		2.1
Unremitted earnings from foreign operations	.7		1.9
Valuation allowance for foreign operating loss carry-forwards	.3		.9
Non-deductible expenses	.2		3.3
Changes in estimates related to prior year taxprovision	.1		.4
Research and development taxcredit	-		(.9	)
Deduction for divestiture of subsidiary stock	-		(18.8	)
Domestic production activities deduction	(.2	)	-
Income taxcontingency accruals/reversals	(.3	)	.4
Foreign rate differences	(3.2	)	(4.5	)
Foreign taxincentives	(9.2	)	-
Other	(.1	)	.2
Effective income taxrate for income from continuing operations	28.0		19.9

The Brazilian federal statutory income tax rate is a composite of 34.0% (25.0% of income tax and 9.0% of social contribution on income). Terphane's manufacturing facility in Brazil is the beneficiary of certain income tax incentives that allow for a reduction in the statutory Brazilian federal income tax rate levied on the operating profit of its products. These incentives produce a current effective tax rate of 15.25% for Terphane Ltda. (6.25% of income tax and 9.0% social contribution on income). The current incentives will expire at the end of 2014, but we anticipate that we will qualify for additional incentives that will extend beyond 2014.

Income taxes for the first nine months of 2012 include the recognition of an additional valuation allowance of $1.3 million related to expected limitations on the utilization of assumed capital losses on certain investments recognized in previous years.

We claimed an ordinary loss on the write-off of our investment in our aluminum extrusions operations in Canada (sold in February 2008) on our 2008 consolidated tax return (included in discontinued operations in the consolidated statement of income in 2007). During an audit, the Internal Revenue Service ("IRS") challenged the ordinary nature of the loss, asserting that the loss should be re-characterized as capital in nature. Had the IRS prevailed in final, non-appealable determinations, it is possible that the matter would have resulted in additional tax payments of up to $12 million, plus any interest and penalties. Prior to issuing a Notice of Deficiency, however, the IRS revised their audit report to allow the ordinary loss treatment to stand. The audit findings are subject to IRS Joint Committee review, and, while we expect no further challenge on this issue, if challenged, we will vigorously defend our position and believe that we will prevail but there can be no assurance of such a result.

Tredegar and its subsidiaries file income tax returns in the U.S., various states and jurisdictions outside the U.S. Generally, except for refund claims and amended returns, Tredegar is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2008.