INCOME TAXES

The components of earnings from continuing operations before income taxes and the provision for income taxes from continuing operations were as follows:



	Years ended December 31,
	2013		2012		2011
	(In thousands)
Earnings from continuing operations before income taxes:
United States	$	302,689	241,672		223,209
Foreign	66,206		61,445		56,178
Total	$	368,895	303,117		279,387
Current tax expense (benefit) from continuing operations:
Federal ⁽¹⁾	$	233	(4,157	)	1,615
State ⁽¹⁾	4,194		11,514		7,785
Foreign	7,691		7,759		8,603
	12,118		15,116		18,003
Deferred tax expense from continuing operations:
Federal	98,036		77,819		67,849
State	15,399		3,871		17,247
Foreign	146		5,412		4,920
	113,581		87,102		90,016
Provision for income taxes from continuing operations	$	125,699	102,218		108,019

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(1)	Excludes federal and state tax benefits resulting from the exercise of stock options and vesting of restricted stock awards, which were credited directly to “Additional paid-in capital.”

A reconciliation of the federal statutory tax rate with the effective tax rate from continuing operations follows:



	Years ended December 31,
	2013		2012		2011
	(Percentage of pre-tax earnings)
Federal statutory tax rate	35.0		35.0		35.0
Impact on deferred taxes for changes in tax rates	0.1		—		2.6
State income taxes, net of federal income tax benefit	4.0		4.1		3.9
Foreign rates varying from federal	(4.1	)	(2.8	)	(2.3	)
Tax reviews and audits	(0.8	)	(2.7	)	(0.9	)
Miscellaneous items, net	(0.1	)	0.1		0.4
Effective tax rate	34.1		33.7		38.7

Tax Law Changes

The effects of changes in tax laws on deferred tax balances are recognized in the period the new legislation is enacted. The following provides a summary of the impact of changes in tax laws on net earnings from continuing operations by tax jurisdiction:



Tax Jurisdiction	Enactment Date	Net Earnings
		(in thousands)
2013
Puerto Rico	June 30, 2013	$(503)
United Kingdom	July 17, 2013	$485

2012
United Kingdom	July 17, 2012	$(856)
Canada	June 20, 2012	$(671)

2011
State of Michigan	May 25, 2011	$(5,350)
State of Illinois	January 13, 2011	$(1,221)

Deferred Income Taxes

The components of the net deferred income tax liability were as follows:



	December 31,
	2013			2012
	(In thousands)
Deferred income tax assets:
Self-insurance accruals	$	69,291		52,177
Net operating loss carryforwards	361,136			258,808
Alternative minimum taxes	10,727			9,679
Accrued compensation and benefits	60,039			61,095
Federal benefit on state tax positions	18,417			17,925
Pension benefits	87,745			204,069
Miscellaneous other accruals	39,414			39,708
	646,769			643,461
Valuation allowance	(33,793		)	(38,182	)
	612,976			605,279
Deferred income tax liabilities:
Property and equipment bases difference	(1,943,923		)	(1,734,508	)
Other items	(22,503		)	(18,716	)
	(1,966,426		)	(1,753,224	)
Net deferred income tax liability ⁽¹⁾	$	(1,353,450	)	(1,147,945	)

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(1)	Deferred tax assets of $37 million and $29 million have been included in “Prepaid expenses and other current assets” at December 31, 2013 and 2012, respectively.

We do not provide for U.S. deferred income taxes on temporary differences related to our foreign investments that are considered permanent in duration. These temporary differences consist primarily of undistributed foreign earnings of $600 million at December 31, 2013. A full foreign tax provision has been made on these undistributed foreign earnings. Determination of the amount of deferred taxes on these temporary differences is not practicable due to foreign tax credits and exclusions.

At December 31, 2013, we had U.S. federal tax effected net operating loss carryforwards of $274 million and various U.S. subsidiaries had state tax effected net operating loss carryforwards of $57 million both expiring through tax year 2029. We also had foreign tax effected net operating losses of $30 million that are available to reduce future income tax payments in several countries, subject to varying expiration rules. A valuation allowance has been established to reduce deferred income tax assets, principally foreign tax loss carryforwards, to amounts more likely than not to be realized. We had unused alternative minimum tax credits, for tax purposes, of $11 million at December 31, 2013 available to reduce future income tax liabilities. The alternative minimum tax credits may be carried forward indefinitely.

Uncertain Tax Positions

We are subject to tax audits in numerous jurisdictions in the U.S. and foreign countries. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the Internal Revenue Service (IRS) and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of our calculation of the provision for income taxes on earnings, we recognize the tax benefit from uncertain tax positions that are at least more likely than not of being sustained upon audit, based on the technical merits of the tax position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Such calculations require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. Actual results could vary materially from these estimates.

The following is a summary of tax years that are no longer subject to examination:

Federal — audits of our U.S. federal income tax returns are closed through fiscal year 2008.

State — for the majority of states, tax returns are closed through fiscal year 2008.

Foreign — we are no longer subject to foreign tax examinations by tax authorities for tax years before 2006 in Canada, 2008 in Brazil, 2008 in Mexico and 2011 in the U.K., which are our major foreign tax jurisdictions. Refer to Note 4, "Discontinued Operations," for further discussion on various assessments related to our former South American operations.

The following table summarizes the activity related to unrecognized tax benefits (excluding the federal benefit received from state positions):



	December 31,
	2013			2012		2011
	(In thousands)
Balance at January 1	$	52,271		62,247		61,236
Additions based on tax positions related to the current year	7,606			3,980		3,776
Reductions due to lapse of applicable statutes of limitation	(3,064		)	(13,956	)	(2,765	)
Gross balance at December 31	56,813			52,271		62,247
Interest and penalties	5,756			5,319		6,933
Balance at December 31	$	62,569		57,590		69,180

Of the total unrecognized tax benefits, $44 million (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods. The total amount includes $5 million and $4 million of interest and penalties, at December 31, 2013 and 2012, respectively, net of the federal benefit on state issues. For the years ended December 31, 2013, 2012 and 2011, we recognized an income tax benefit related to interest and penalties of $1 million in each period, within “Provision for income taxes” in our Consolidated Statements of Earnings. Unrecognized tax benefits related to federal, state and foreign tax positions may decrease by $3 million by December 31, 2014, if audits are completed or tax years close during 2014.

Like-Kind Exchange Program

We have a like-kind exchange program for certain of our U.S.-based revenue earning equipment. Pursuant to the program, we dispose of vehicles and acquire replacement vehicles in a form whereby tax gains on disposal of eligible vehicles are deferred. To qualify for like-kind exchange treatment, we exchange through a qualified intermediary eligible vehicles being disposed of with vehicles being acquired, allowing us to generally carryover the tax basis of the vehicles sold (“like-kind exchanges”). The program results in a material deferral of federal and state income taxes, and a decrease in cash taxes in periods when we are not in a net operating loss (NOL) position. As part of the program, the proceeds from the sale of eligible vehicles are restricted for the acquisition of replacement vehicles and other specified applications. Due to the structure utilized to facilitate the like-kind exchanges, the qualified intermediary that holds the proceeds from the sales of eligible vehicles and the entity that holds the vehicles to be acquired under the program are required to be consolidated in the accompanying Consolidated Financial Statements in accordance with U.S. GAAP. The total assets, primarily revenue earning equipment, and the total liabilities, primarily vehicle accounts payable, held by these consolidated entities are equal in value as these entities are solely structured to facilitate the like-kind exchanges. At December 31, 2013 and 2012, these consolidated entities had total assets, primarily revenue earning equipment, and total liabilities, primarily accounts payable of $246 million and $26 million, respectively.

In the second quarter of 2012, we began to restructure and centralize the administration of vehicle purchasing, licensing and sales in order to reduce vehicle acquisition costs as well as realize operational efficiencies. During 2012, we were in a NOL position for tax purposes and were not realizing any benefits from the like-kind exchange program. As a result of those events, effective April 1, 2012, we temporarily suspended the like-kind exchange program. Once we suspended the program, tax gains on vehicles sold during that period were no longer deferred. Those tax gains resulted in an immaterial decrease in the NOL. Although the suspension did not impact our 2012 tax provision or capital spending program, our cash flows increased by $19 million from the release of the program's restricted cash.

In the first quarter of 2013, once we had completed our restructuring of the administrative processes for purchasing and selling vehicles, we reinstated our like-kind exchange program. The reinstated program operates, and will provide cash tax benefits, in the same manner as it did prior to suspension once we are no longer in a NOL position. Our cash flow declined $11 million as a result of the program's restricted cash. There were no other impacts to cash flow as a result of the program's reinstatement.