Income Taxes

The provision for income taxes results in effective tax rates that differ from the statutory rates. The following is a reconciliation between the statutory United States Federal income tax rate and the Company’s effective income tax rate:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
State taxes	2.0		3.2		2.0		2.8
Tax settlements	0.0		0.0		(0.8	)	0.0
Changes in tax reserves	(1.6	)	(0.9	)	(0.6	)	0.3
Foreign tax adjustments	(1.0	)	2.1		(0.6	)	0.3
Other, net	(0.2	)	0.6		(0.1	)	1.2
Effective rate	34.2	%	40.0	%	34.9	%	39.6	%

During the nine months ended September 30, 2012, we settled our audit with the Internal Revenue Service (“IRS”) for the 2004-2005 tax years. As a result of closing this audit, we recognized a $3.5 million tax benefit in the first quarter, primarily related to favorable claims filed and approved by the IRS in the final audit settlement.

During the three and nine months ended September 30, 2012, we recognized a tax benefit of $1.5 million and $1.8 million, respectively, due to the release of net tax reserves primarily as a result of certain state tax issues where the statute of limitations had lapsed.

The IRS field work for our 2006-2008 audit cycle has concluded and all issues, except for transfer pricing, have been agreed to and tentatively settled. The transfer pricing issue has been appealed and we are seeking Competent Authority review with Mexico to avoid double-taxation of income in the U.S. and in Mexico. As we do not control the timing of when our issues will be reviewed by Competent Authority, we cannot determine when the 2006-2008 cycle will close and all issues formally settled and thus when the statute of limitations for years after 2005 will close. In early October 2012, we were notified by the IRS of their intent to begin their examination of our 2009 and 2010 tax years as well as the June 30, 2009 tax year of Quixote Corporation, a wholly-owned subsidiary that we acquired in February 2010. We expect that our 2011 tax return will be added to this examination cycle as it was just recently filed during the third quarter of 2012.

We have various subsidiaries in Mexico that file separate tax returns and thus are subject to examination by taxing authorities at different times. The 2003 tax year of one of our Mexican subsidiaries is still under review and its statute of limitations remains open through June 2014. Another Mexican subsidiary’s statute of limitations for the 2005 tax year remains open through July 2013. The remaining entities are open for their 2006 tax years and forward.

Our two Swiss subsidiaries, one of which is a holding company and the other of which is dormant, have been audited by the taxing authorities through 2008 and 2009. The statute of limitations in Switzerland is generally five years from the end of the tax year, but can be extended up to 15 years in certain cases if the audit has commenced during the original five year period.

We also currently have sales offices in Europe and Canada that are subject to various statutes of limitations.

Generally, states’ statutes of limitations in the United States are open from 2003 forward due to the use of tax loss carryforwards in certain jurisdictions.

The change in unrecognized tax benefits for the nine months ended September 30, 2012 and 2011 was as follows:



	Nine Months Ended September 30,
	2012			2011
	(in millions)
Beginning balance	$	52.5		$	36.8
Additions for tax positions related to the current year	3.1			2.9
Additions for tax positions of prior years	—			15.1
Reductions for tax positions of prior years	(1.1		)	(0.1		)
Settlements	(3.4		)	(3.5		)
Expiration of statute of limitations	(0.8		)	(0.5		)
Ending balance	$	50.3		$	50.7

Additions for tax positions related to the current year in the amounts of $3.1 million and $2.9 million recorded in the nine months ended September 30, 2012 and 2011, respectively, were amounts provided for tax positions that will be taken for Federal and state income tax purposes when we file those tax returns.

Additions for tax positions of prior years for the nine months ended September 30, 2011 of $15.1 million are primarily due to Federal tax positions taken on prior year returns that were proposed by the IRS but had not been previously reserved. Since these items are primarily timing differences, we will be allowed a future tax deduction. During 2011, we recorded a corresponding deferred tax asset for the future tax reduction related to these adjustments.

The reduction in tax positions of prior years of $1.1 million for the nine months ended September 30, 2012, was primarily related to new guidance issued by the IRS regarding the capitalization of fixed assets that was issued in March 2012 as well as state taxes.

Settlements during the nine months ended September 30, 2012, primarily related to the settlement of our 2004-2005 IRS audit as well as the related impact on state tax returns. Settlements during the nine months ended September 30, 2011, primarily related to an audit of a separate tax return of our Swiss subsidiary.

Unrecognized tax benefits that are currently reserved are accounted for as both temporary in nature as well as permanent differences depending on the nature of the item. Those items that would result in temporary book/tax differences have a corresponding deferred tax asset recorded. In addition, we record deferred tax assets for the future deduction of state taxes and accrued interest. The total amount of unrecognized tax benefits including interest and penalties at September 30, 2012 and 2011, for which no deferred tax asset has been recorded and that would affect the Company’s effective tax rate if recognized was $15.9 million and $18.8 million, respectively. There is a reasonable possibility that unrecognized Federal and state tax benefits will decrease by September 30, 2013 due to a lapse in the statute of limitations for assessing tax. Amounts subject to a lapse by September 30, 2013 total $7.8 million. Further, there is a reasonable possibility that the unrecognized Federal tax benefits will decrease by September 30, 2013 due to settlements with taxing authorities. Amounts expected to settle by September 30, 2013 total $26.5 million.

Trinity accounts for interest expense and penalties related to income tax issues as income tax expense. Accordingly, interest expense and penalties associated with an uncertain tax position are included in the income tax provision. The total amount of accrued interest and penalties as of September 30, 2012 and December 31, 2011 was $11.3 million and $13.3 million, respectively. Income tax expense for the three and nine months ended September 30, 2012, included a decrease in income tax expense of $1.3 million and $2.1 million, respectively, in interest expense and penalties related to uncertain tax positions. Income tax expense for the three and nine months ended September 30, 2011, included a decrease in income tax expense of $0.3 million and an increase of $1.5 million, respectively, in interest expense and penalties related to uncertain tax positions.