Income Taxes

The provision or benefit for income taxes includes U.S. federal income taxes (determined on a consolidated return basis), foreign income taxes, and state income taxes.

Income from continuing operations before income taxes for the years ended December 31 was composed of the following components:



	2011		2010		2009
	(In thousands)
United States	$	196,788	$	169,544	$	175,212
Foreign	28,848		49,915		24,156
	$	225,636	$	219,459	$	199,368

Income tax provision (benefit) for the years ended December 31 consisted of the following:



	2011		2010		2009
	(In thousands)
Current:
United States	$	1,267	$	1,752	$	13
Foreign	5,844		12,326		9,200
State	5,781		1,446		9,196
Total current income taxes	12,892		15,524		18,409
Deferred:
United States	$	57,845	$	64,814	$	57,767
Foreign	279		185		(806		)
State	8,388		11,935		905
Total deferred income taxes	66,512		76,934		57,866
Total income taxes	$	79,404	$	92,458	$	76,275

We made income tax payments of $13.1 million, $29.3 million, and $27.2 million in 2011, 2010, and 2009, respectively, and received refunds of $8.5 million, $8.3 million, and $5.6 million. The Internal Revenue Service approved our application for a change in accounting method in December 2010. As a result we overpaid our estimated 2010 Federal and state income taxes. The overpayment of our estimated Federal income tax is included in our 2011 refunds; however, we elected to apply the overpayment of our 2010 state income tax to our 2011 estimated income tax payments which lowered our 2011 cash tax payments.

The differences between the U.S. federal statutory income tax rate and our effective tax rate for the years ended December 31 were as follows:



	2011			2010			2009
	(In thousands)
Computed tax provision at the applicable federal statutory income tax rate	$	78,973		$	76,811		$	69,779
State and local taxes, net of federal income tax benefits	9,895			8,775			6,565
Dividends received deduction and tax exempt interest	(644		)	(1,168		)	(947		)
Foreign jurisdiction differences	(4,789		)	(3,101		)	(3,707		)
Permanent differences associated with dispositions	(6,329		)	7,192			2,950
Changes in uncertain tax positions	1,584			1,138			(134		)
Other	714			2,811			1,769
Provision for income taxes	$	79,404		$	92,458		$	76,275
Total effective tax rate	35.2		%	42.1		%	38.3		%

The 2011 consolidated effective tax rate was 35.2%, compared to 42.1% and 38.3% in 2010 and 2009, respectively. We sold our Puerto Rican subsidiary in the third quarter of 2011. Our outside tax basis in the business was significantly higher than our book basis. Consequently, we recognized a tax loss that was significantly higher than the book loss on the sale which is permanent in nature. The decrease in the effective tax rate for the year ended December 31, 2011 as compared to the previous two years is primarily due to that sale.

Our 2010 and 2009 effective tax rate was negatively impacted by permanent book and tax basis differences relate to North American asset divestitures. During 2010 we recognized U.S. tax on post-acquisition integration of certain Keystone entities into SCI’s structure. Our overall foreign tax expense increased in 2010 due to an increase in foreign earnings. This increase was partially offset by a decrease in foreign statutory rates. In 2010 our state tax expense was impacted by permanent items affecting our overall effective rate as well as an increase in state statutory tax rates. During 2009 we experienced a decrease in state tax expense due to a restructuring of some of our state operating entities.

During 2010, the Internal Revenue Service approved three requests for tax accounting method changes relating to the recognition of trust earnings accumulated in cemetery and funeral trusts, revenue from preneed sales of cemetery merchandise, and revenue from non-trusted customer payments for preneed funeral contracts. The effective date for these tax accounting method changes is for the fiscal year ended December 31, 2010. In accordance with § 481(a) of the U.S. Internal Revenue Code this adjustment recalculates the income previously recognized to determine what should have been recognized under the new tax accounting method. The cumulative impact of these accounting method changes resulted in an adjustment under § 481(a) for 2010 of $190.3 million that represents a decrease in current year taxable income, a decrease in a previously recognized deferred tax asset related to deferred revenue, and an increase in our deferred tax asset related to our net operation loss carryover. Although these changes had no tax impact on the overall effective tax rate, there was a savings in cash taxes including a refund of our 2010 Federal estimated tax payments of $7.1 million which was received in 2011.

Deferred taxes are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates. The tax effects of temporary differences and carry-forwards that give rise to significant portions of deferred tax assets and liabilities as of December 31 consisted of the following:



	2011			2010
	(In thousands)
Inventories and cemetery property, principally due to purchase accounting adjustments	$	(352,323	)	$	(344,160	)
Property and equipment, principally due to differences in depreciation methods and purchase accounting adjustments	(194,875		)	(170,305		)
Intangibles	(74,278		)	(82,587		)
Payables, principally due to sales of cemetery interment rights and related products	(32,949		)	(28,779		)
Deferred tax liabilities	(654,425		)	(625,831		)
Loss and tax credit carry-forwards	215,285			235,393
Deferred revenue on preneed funeral and cemetery contracts, principally due to earnings from trust funds	92,640			98,335
Accrued liabilities	11,308			24,469
Other	44,506			49,316
Deferred tax assets	363,739			407,513
Less: Valuation allowance	(63,681		)	(63,614		)
Net deferred income tax liability	$	(354,367	)	$	(281,932	)

Deferred tax assets and Deferred income tax liabilities consisted of the following as of December 31 (in thousands):



	2011			2010
Current deferred tax assets	$	44,316		$	40,740
Non-current deferred tax assets	6,932			631
Non-current deferred tax liabilities	(405,615		)	(323,303		)
Net deferred income tax liability	$	(354,367	)	$	(281,932	)

In addition to the loss and tax credit carry-forward amounts reflected as deferred tax assets in the table above, we have taken certain tax deductions related to the exercised employee stock options and vested restricted shares that are in excess of the stock-based compensation amounts recorded in our consolidated financial statements (“windfall tax benefits”). Pursuant to the Stock Compensation Topic under the ASC, such windfall tax benefits are not recognized in our consolidated financial statements unless they reduce income taxes payable. As of December 31, 2011 and 2010 we have windfall tax benefits of $13.0 million and $9.5 million, respectively, which when realized will be recorded as a reduction to current taxes payable and a credit to Capital in excess of par value in our consolidated financial statements.

During the fourth quarter of 2010, the Company underwent a restructuring of its Canadian subsidiaries. The restructuring triggered a U.S. dividend of $6.9 million for which U.S. federal taxes have been provided for the year ended December 31, 2010. The dividend is less than current year earnings and other prior year earnings required to be permanently reinvested. At December 31, 2011 and 2010, U.S. income taxes had not been provided on $93.0 million and $256.0 million, respectively, of the remaining undistributed earnings of our Canadian subsidiaries. We intend to permanently reinvest these undistributed foreign earnings in those businesses outside the United States. It is not practicable to determine the amount of federal income taxes, if any, that might become due if such earnings are repatriated.

The following table summarizes the activity related to our gross unrecognized tax benefits from January 1, 2009 to December 31, 2011 (in thousands):



	Federal, State and Foreign Tax
	(In thousands)
Balance at December 31, 2008	$	142,457
Additions to tax positions related to the current year	5,154
Additions to tax positions related to prior years	1,076
Statute expirations	(4,243		)
Balance at December 31, 2009	$	144,444
Additions to tax positions related to the current year	10,215
Additions to tax positions related to prior years	110
Statute expirations	(2,004		)
Balance at December 31, 2010	$	152,765
Additions to tax positions related to the current year	4,971
Additions to tax positions related to prior years	60
Statute expirations	(1,484		)
Balance at December 31, 2011	$	156,312

Our total unrecognized tax benefits that, if recognized, would affect our effective tax rates were $37.8 million, $39.3 million, and $41.2 million as of December 31, 2011, 2010, and 2009, respectively.

During 2011, in accordance with the Income Tax Topic under the ASC, we recorded an increase of $3.5 million in our liability for unrecognized tax benefits, of which $5.0 million was an increase to U.S. tax positions taken in the current year and $0.1 million was an increase related to U.S. tax positions taken in prior years. In addition, we recorded a $1.5 million decrease to our tax liability due to the expiration of statute of limitations on positions taken in previous fiscal years.

Consistent with our historical financial reporting, we include potential accrued interest and penalties related to unrecognized tax benefits within our income tax provision account. We have accrued $41.8 million, $38.8 million and $36.0 million for the payment of interest, net of tax benefits, and penalties as of December 31, 2011, 2010, and 2009, respectively. We recognized interest and penalties of $3.0 million, $3.6 million, and $3.8 million for the years ended December 31, 2011, 2010, and 2009, respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions or the uncertainty of deductions in the future, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

We file income tax returns, including tax returns for our subsidiaries, with federal, state, local, and foreign jurisdictions. Our tax returns are subject to routine compliance review by the taxing authorities in the jurisdictions in which we file tax returns in the ordinary course of business. We consider the United States to be our most significant tax jurisdiction; however, the taxing authorities in Canada and Spain are auditing various tax returns. Current audits are occurring in the United States and various state and foreign locations covering open tax years through 2010. The Internal Revenue Service is in various stages of auditing tax years 1999 through 2005. It is reasonably possible that changes to our global unrecognized tax benefits could be significant; however, due to the uncertainty regarding the timing of completion of audits and possible outcomes, a current estimate of the range of increases or decreases that may occur within the next twelve months cannot be made.

Various subsidiaries have foreign, federal, and state carry-forwards in the aggregate of $2.9 billion with expiration dates through 2030. Such loss carry-forwards will expire as follows:



	Federal		State		Foreign		Total
			(In thousands)
2012	$	691	$	56,990	$	—	$	57,681
2013	1,733		10,640		—		12,373
2014	115		42,324		64		42,503
2015	3,667		39,430		—		43,097
Thereafter	219,083		2,548,627		312		2,768,022
Total	$	225,289	$	2,698,011	$	376	$	2,923,676

In addition to the above loss carry-forwards, we have $64.1 million of foreign losses that have an indefinite expiration.

A valuation allowance has been established because more-likely-than-not uncertainties exist with respect to our future realization of certain loss carry-forwards. The valuation allowance is primarily attributable to state net operating losses and reflects our expectation that the net operating losses in certain jurisdictions will expire before we generate sufficient taxable income to utilize the losses. In 2011, we recorded a net $5.0 million increase in state valuation allowances due to an increase in net operating losses which is primarily attributable to state net operating losses and reflects our expectation that the net operating losses in certain jurisdictions will expire before we generate sufficient taxable income to utilize the losses. We recorded a $4.8 million decrease in foreign valuation allowances which is primarily related to the completion of the sale of our Puerto Rico subsidiary resulting in a decrease in foreign valuation allowances which had been booked against their deferred tax assets.

At December 31, 2011, our loss and tax credit carry-forward deferred tax assets and related valuation allowances by jurisdiction are as follows:



	Federal		State(1)		Foreign		Total
			(In thousands)
Loss and tax credit carry-forwards	$	99,457	$	93,393	$	22,435	$	215,285
Valuation allowance	$	4,107	$	41,330	$	18,244	$	63,681

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(1)	Presented net of Federal benefit