INCOME TAXES

The components of earnings before income taxes for our domestic and foreign operations were as follows:



	Year Ended December 31,
(in thousands of U.S. dollars)	2012		2011		2010
United States	$	184,237	$	174,357	$	626,755
Foreign	629		5,387		5,900
Earnings before income taxes	$	184,866	$	179,744	$	632,655

Income taxes have been charged to earnings as follows:



	Year Ended December 31,
(in thousands of U.S. dollars)	2012			2011			2010
Current:
Federal	$	59,121		$	64,328		$	228,683
Foreign	884			1,554			1,825
State	13,578			10,553			35,028
Total current taxes	73,583			76,435			265,536

Deferred:
Federal	(8,270		)	(6,834		)	(19,647		)
Foreign	(146		)	223			1,743
State	714			(3,510		)	(382		)
Total deferred taxes	(7,702		)	(10,121		)	(18,286		)
Income tax expense	$	65,881		$	66,314		$	247,250

Undistributed earnings of foreign subsidiaries that are deemed to be permanently reinvested totaled $27.3 million and $30.5 million at December 31, 2012 and December, 31 2011, respectively. As such, we have not provided U.S. income taxes on these reinvested earnings.

The actual income tax expense differs from expected amounts computed by applying the U.S. federal income tax rate to earnings before income taxes as follows:



	Year Ended December 31,
(in thousands of U.S. dollars)	2012			2011			2010
Expected income tax expense at statutory rate	$	64,703		$	62,910		$	221,429

Increase (decrease) in taxes resulting from:
Domestic production activities	(3,150		)	(2,450		)	(2,625		)
Statutory expirations of unrecognized tax benefits	(7,862		)	(477		)	(100		)
State and local income taxes, net of federal benefit	9,293			4,766			22,275
Other items, net	2,897			1,565			6,271
Income tax expense	$	65,881		$	66,314		$	247,250

Significant components of our deferred tax assets and liabilities are as follows:



	Year Ended December 31,
(in thousands of U.S. dollars)	2012			2011
Long-term deferred income tax assets (liabilities):
Intangible assets	$	(77,347	)	$	(80,372	)
Depreciation on plant and equipment	(25,322		)	(33,037		)
Deferred compensation	20,726			20,008
Cancellation of indebtedness income	(3,833		)	(3,830		)
Net operating loss and tax credit carryforwards	12,288			7,316
Stock-based compensation	4,065			4,552
Partnership losses	—			2,603
Investment impairments	5,233			5,202
Foreign	299			315
Acquisition costs	13,425			13,634
Interest rate swaps	2,198			2,083
Allowance for uncollectible accounts	1,067			1,288
Other reserves	7,441			8,958
Long-term deferred income tax liabilities	(39,760		)	(51,280		)
Valuation allowance	(17,498		)	(16,124		)
Deferred income tax liabilities	(57,258		)	(67,404		)

Current deferred income tax assets (liabilities):
Inventory	$	815		$	622
Accrued expenses	3,770			5,141
Allowance for uncollectible accounts	6,469			7,972
Other reserves	46			(203		)
Prepaid expense	(3,473		)	(3,465		)
Intangible assets	(5,940		)	(4,976		)
Current deferred income tax assets	1,687			5,091
Valuation allowance	(1,536		)	(1,731		)
Net current deferred income tax assets	$	151		$	3,360

Our net current deferred income tax assets of $0.2 million and $3.4 million as of December 31, 2012 and 2011, respectively, are recorded in prepaid expenses and other in the consolidated balance sheets.

Our net deferred tax assets and liabilities are summarized as follows:



	Year Ended December 31,
(in thousands of U.S. dollars)	2012			2011
Total deferred tax assets	$	63,833		$	76,193
Total deferred tax liabilities	(120,940		)	(140,237		)
Net deferred income tax liabilities	$	(57,107	)	$	(64,044	)

For financial statement purposes, the tax benefits of net operating/capital loss and tax credit carryforwards are recognized as deferred tax assets and are subject to appropriate valuation allowances when we determine that the likelihood of recovering the deferred tax asset falls below the “more likely than not” threshold. We evaluate our net operating loss and credit carryforwards on an ongoing basis. The following table summarizes the expiration periods and corresponding valuation allowances for the deferred tax assets related to net operating/capital loss and tax credit carryforwards:



(in millions of U.S. dollars)	2013 - 2017			2018 - 2027			2028 - 2032			Indefinite			Total
Gross deferred tax asset	$	0.7		$	0.8		$	5.9		$	4.9		$	12.3
Valuation allowance	(0.5		)	(0.5		)	(1.3		)	(3.3		)	(5.6		)
Net deferred tax asset	$	0.2		$	0.3		$	4.6		$	1.6		$	6.7

An additional valuation allowance of $13.4 million exists for capitalized costs associated with the ADVO acquisition.

We recognize tax benefits only for tax positions that are more-likely-than-not to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefit of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, the company cannot recognize any benefit for the tax position. In addition, the tax position must continue to meet the more-likely-than-not threshold in each reporting period after initial recognition in order to support continued recognition of a benefit. The following table provides a reconciliation of the beginning and ending balances of gross unrecognized tax benefits:



	Year Ended December 31,
(in thousands of U.S. dollars)	2012			2011
Gross unrecognized tax benefits - January 1,	$	9,609		$	12,536
Gross increases in tax positions for prior years	1,681			404
Gross decreases in tax positions for prior years	(292		)	(1,728		)
Gross increases in tax positions for current year	412			38
Gross decreases in tax positions for current year	(6		)	(15		)
Settlements	(90		)	(444		)
Lapse of statute of limitations	(7,226		)	(1,182		)
Gross unrecognized tax benefits - December 31,	$	4,088		$	9,609

A portion of our unrecognized tax benefits would, if recognized, reduce our effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which only the timing of the benefit is uncertain. As of December 31, 2012 and 2011, the amounts of gross unrecognized tax benefits that would reduce our effective income tax rate were $3.7 million and $9.1 million, respectively.

As of December 31, 2012, we anticipate events may occur over the next twelve months that could have an effect on the liabilities for unrecognized tax benefits. These events could result in a decrease in our liability for unrecognized tax benefits of up to $3.0 million. Other events may occur over the next twelve months that could impact our unrecognized tax benefits; however, it is not possible to reasonably estimate the expected change for these events.

Our policy for recording interest and penalties associated with liabilities for unrecognized tax benefits is to record these items as part of income tax expense, which is consistent with prior periods. We recorded $0.7 million of income tax benefit related to interest on unrecognized tax benefits for the year ended December 31, 2012. Gross interest of $1.7 million and penalties of $0.1 million were accrued as of December 31, 2012, and gross interest of $2.4 million and penalties of $0.1 million were accrued as of December 31, 2011.

We file tax returns in various federal, state, and local jurisdictions. In many cases, our liabilities for unrecognized tax benefits relate to tax years that remain open for examination by a jurisdiction's taxing authority. The following table summarizes open tax years by major jurisdiction:



	Jurisdiction	Open Tax Years
	United States	9/2005 - 3/2/2007; 2009 - 2012
	California	2007 - 2012
	Connecticut	2008 - 2012
	Illinois	2009 - 2012
	Kansas	2009 - 2012
	Massachusetts	2009 - 2012
	Michigan	2008 - 2012
	North Carolina	2009 - 2012
	Pennsylvania	2008 - 2012
	Texas	2008 - 2012