Note 6. Income Taxes

Our income tax provision (benefit) is as follows:



	Year Ended December 31,
In thousands	2012		2011			2010
Current income tax expense (benefit)
Federal	$	57,720	$	(12,552	)	$	15,683
State	18,034		20,801			17,511
Total current income tax expense	75,754		8,249			33,194

Deferred income tax expense
Federal	239,862		329,715			143,381
State	15,881		12,748			16,968
Total deferred income tax expense	255,743		342,463			160,349
Total income tax expense	$	331,497	$	350,712		$	193,543

During 2012, for federal income tax purposes, we structured the divestitures of our Bakken area assets and certain non-core assets as like-kind-exchange transactions for interests acquired in Thompson, Webster, Hartzog Draw and LaBarge fields and assets to be acquired in the Pending CCA Acquisition (See Note 13, Subsequent Events), thereby deferring the majority of the taxable gain on those divestitures. The increase in current taxes during 2012 is primarily due to the taxable gain recognized in the Bakken Exchange Transaction that we were unable to defer through a like-kind-exchange transaction.

At December 31, 2012, we had tax-effected state net operating loss carryforwards (“NOLs”) totaling $35.0 million, an estimated $17.3 million of enhanced oil recovery credits to carry forward related to our tertiary operations, and $34.8 million of alternative minimum tax credits. Our state NOLs expire in various years, starting in 2015, although most do not begin to expire until 2024. Our enhanced oil recovery credits will begin to expire in 2025.

Deferred income taxes reflect the available tax carryforwards and the temporary differences based on tax laws and statutory rates in effect at the December 31, 2012 and 2011 balance sheet dates. We believe that we will be able to realize all of our deferred tax assets at December 31, 2012, and therefore, have provided no valuation allowance against our deferred tax assets.

Significant components of our deferred tax assets and liabilities as of December 31, 2012 and 2011 are as follows:



	December 31,
In thousands	2012			2011
Deferred tax assets:
Loss carryforwards – federal	$	—		$	13,970
Loss carryforwards – state	35,007			41,960
Tax credit carryover	34,837			34,829
Derivative contracts	7,252			3,551
Enhanced oil recovery credit carryforwards	17,346			53,381
Stock based compensation	28,387			32,566
Other	37,226			35,279
Total deferred tax assets	160,055			215,536

Deferred tax liabilities:
Property and equipment	(2,277,388		)	(2,078,143		)
Other	(6,963		)	(5,813		)
Total deferred tax liabilities	(2,284,351		)	(2,083,956		)
Total net deferred tax liability	$	(2,124,296	)	$	(1,868,420	)

Our reconciliation of income tax expense computed by applying the U.S. federal statutory rate and the reported effective tax rate on income from continuing operations is as follows:



	Year Ended December 31,
In thousands	2012			2011			2010
Income tax provision calculated using the federal statutory income tax rate	$	299,900		$	323,416		$	167,674
State income taxes, net of federal income tax benefit	30,955			29,555			13,087
Effect of statutory rate change	(429		)	(578		)	11,502
Other	1,071			(1,681		)	1,280
Total income tax expense	$	331,497		$	350,712		$	193,543

In the third quarter of 2008, we obtained approval from the National Office of the Internal Revenue Service (“IRS”) to change our method of tax accounting for certain assets used in our tertiary oilfield recovery operations. As a result of the approved change in method of tax accounting, beginning with the 2007 tax year we began to deduct, rather than capitalize, such costs for tax purposes and applied for tax refunds associated with such change for our 2004 and 2006 tax years. Notwithstanding its consent to our change in tax accounting in 2008, the IRS exercised its prerogative to challenge the tax accounting method we used. In late January 2011, we received a Technical Advice Memorandum (“TAM”) issued by the IRS National Office disapproving our method of accounting and revoking its consent to our change, on a prospective basis only, commencing January 1, 2011. Beginning with the 2011 tax year, we returned to capitalizing and depreciating the costs of these assets for tax purposes. In December 2011, we received notification from the IRS that the review process was completed and that all issues related to the TAM were settled without further adjustments. As a result of the prospective nature of the IRS’s determination, there was no change in our position with respect to the deductibility of these costs for 2007, 2008, 2009 and 2010. Refund claims of $10.6 million for tax years through 2006 were received, plus accrued interest, in 2012.

We file consolidated and separate income tax returns in the U.S. federal jurisdiction and in many state jurisdictions. The IRS concluded its examination of our 2006, 2007 and 2008 tax years during the fourth quarter of 2011 with no adjustments. During the third quarter of 2012, the IRS concluded its audit of Encore Acquisition Company for the tax years 2008, 2009 and 2010 and Encore Operating LP for the tax years 2008 and 2009, with no significant adjustments. During the fourth quarter of 2012, the state of Mississippi concluded its audit of Denbury for the tax years 2004, 2005, 2006, and 2007, with no significant adjustments. Our income tax returns for tax years ending 2009 through 2011 currently remain subject to examination by the appropriate taxing authorities. We have not paid any significant interest or penalties associated with our income taxes.