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:



	2013		2012		2011
	(In thousands)
United States	$	199,374	$	210,830	$	196,788
Foreign	46,345		34,853		28,848
	$	245,719	$	245,683	$	225,636

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



	2013		2012			2011
	(In thousands)
Current:
United States	$	2,206	$	3,752		$	1,267
Foreign	12,445		8,776			5,844
State	7,864		6,036			5,781
Total current income taxes	22,515		18,564			12,892
Deferred:
United States	$	65,591	$	62,227		$	57,845
Foreign	21		(102		)	279
State	8,488		10,859			8,388
Total deferred income taxes	74,100		72,984			66,512
Total income taxes	$	96,615	$	91,548		$	79,404

We made income tax payments of $26.0 million, $23.1 million, and $13.1 million in 2013, 2012, and 2011, respectively, and received refunds of $0.5 million, $1.5 million, and $8.5 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:



	2013			2012			2011
	(In thousands)
Computed tax provision at the applicable federal statutory income tax rate	$	86,002		$	85,988		$	78,973
State and local taxes, net of federal income tax benefits	10,614			10,998			9,895
Dividends received deduction and tax exempt interest	(592		)	(525		)	(644		)
Foreign jurisdiction differences	(3,722		)	(3,491		)	(4,789		)
Permanent differences associated with dispositions	268			602			(6,329		)
Changes in uncertain tax positions	3,710			(479		)	1,584
Other	335			(1,545		)	714
Provision for income taxes	$	96,615		$	91,548		$	79,404
Total effective tax rate	39.3		%	37.3		%	35.2		%

The 2013 consolidated effective tax rate was 39.3%, compared to 37.3% and 35.2% in 2012 and 2011, respectively. The 2013 effective tax rate increased over prior year primarily due to non-deductible transaction cost associated with the Stewart acquisition and the change in our FIN 48 liability.

During 2012, we reached a partial settlement with the Internal Revenue Service ("IRS") in connection with its audit of our affiliate's, SCI Funeral and Cemetery Purchasing Cooperative, 2003 - 2005 federal income tax returns. In connection with this settlement we reduced our 2012 tax expense by $3.1 million for adjustments to our "unrecognized tax benefits" - that is, the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements. The lower effective tax rate for the year ended December 31, 2012 includes the benefit associated with the closure of that tax audit.

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 lower effective tax rate for the year ended December 31, 2011 is primarily due to that sale.

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:



	2013			2012
	(In thousands)
Inventories and cemetery property, principally due to purchase accounting adjustments	$	(385,714	)	$	(346,364	)
Property and equipment	(163,770		)	(97,469		)
Intangibles	(372,105		)	(182,864		)
Other	(22,083		)	—
Deferred tax liabilities	(943,672		)	(626,697		)
Loss and tax credit carry-forwards	170,900			141,739
Deferred revenue on preneed funeral and cemetery contracts	180,283			38,823
Accrued liabilities	109,838			84,016
Other	—			2,007
Deferred tax assets	461,021			266,585
Less: Valuation allowance	(74,918		)	(67,732		)
Net deferred income tax liability	$	(557,569	)	$	(427,844	)

As a result of our acquisition of Stewart Enterprises, Inc., our net deferred tax liability decreased by $49.9 million primarily as a result of deferred taxes being recorded as part of the purchase accounting entries recording assets and liabilities at fair market value.

Deferred tax assets and Deferred income tax liabilities are recognized in our consolidated balance sheet as the following (in thousands):



	2013			2012
Current deferred tax assets	$	39,074		$	42,864
Non-current deferred tax assets	22,557			490
Non-current deferred tax liabilities	(619,200		)	(471,198		)
Net deferred income tax liability	$	(557,569	)	$	(427,844	)

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, 2013 and 2012 we have windfall tax benefits of $36.3 million and $29.1 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.

At December 31, 2013 and 2012, U.S. income taxes had not been provided on $241.5 million and $263.1 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, 2011 to December 31, 2013 (in thousands):



	Federal, State and Foreign Tax
	(In thousands)
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
Reductions to tax positions related to the current year	(2,100		)
Reductions to tax positions related to prior years	(10,224		)
Balance at December 31, 2012	$	143,988
Additions to tax positions related to the current year	3,019
Additions to tax positions related to the acquisition of Stewart, offset to goodwill	1,556
Reductions to tax positions related to prior years	(8,800		)
Statute expirations	(2,844		)
Balance at December 31, 2013	$	136,919

Our total unrecognized tax benefits that, if recognized, would affect our effective tax rates were $37.1 million, $34.9 million, and $37.8 million as of December 31, 2013, 2012, and 2011, respectively.

During 2013, in accordance with the Income Tax Topic under the ASC, we recorded a decrease of $7.1 million in our liability for unrecognized tax benefits, of which $3.0 million was an increase to U.S. tax positions taken in the current year and $1.6 million was an increase related to U.S. tax positions related to acquired entities taken in prior fiscal years which was offset to goodwill. In addition we recorded a $8.8 million decrease to U.S. tax positions taken in prior years and a $2.8 million decrease related 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 $44.5 million, $41.6 million, and $41.8 million for the payment of interest, net of tax benefits, and penalties as of December 31, 2013, 2012, and 2011, respectively. We recognized an increase of interest and penalties of $3.0 million in each of the years ended December 31, 2013, and 2011, and a decrease of interest and penalties of $0.2 million for the year ended December 31, 2012. 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 authority in Canada is auditing various tax returns. While we have effectively concluded our 2003 - 2005 tax years with respect to our affiliate the COOP, SCI and Subsidiaries' tax years 1999 through 2005 remain under review at the IRS Appeals level. SCI and Subsidiaries received a letter of no change to its tax liability for the years 2008 through 2010. Furthermore, SCI and its affiliates are under audit by various state and foreign jurisdiction for years through 2010. 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 $3.2 billion with expiration dates through 2031. Such loss carry-forwards will expire as follows:



	Federal		State		Foreign		Total
			(In thousands)
2014	$	115	$	17,052	$	—	$	17,167
2015	58		156,981		—		157,039
2016	121		35,886		—		36,007
2017	—		14,755		—		14,755
Thereafter	77,703		2,924,985		5		3,002,693
Total	$	77,997	$	3,149,659	$	5	$	3,227,661

In addition to the above loss carry-forwards, we have $67.5 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 2013, we recorded a net $9.9 million increase in state valuation allowances, which is comprised of adjustments of $2.7 million to goodwill related to the Stewart acquisition and a $7.2 million increase in estimated net operating losses expected to expire unutilized. We recorded a $3.7 million decrease in federal valuation allowances related to net operating losses that we expect to utilize resulting in a decrease in federal valuation allowances which had been booked against deferred tax assets.

At December 31, 2013, 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	$	36,799	$	110,941	$	23,160	$	170,900
Valuation allowance	$	—	$	55,574	$	19,344	$	74,918

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(1)	Presented net of Federal benefit

Our federal loss and tax credit carryforwards exclude windfall tax benefits, suspended net operating losses and credit carryforwards which, when realized, will reduce current income taxes payable by an additional $25.1 million.