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 U.S. Federal income tax rate and the Company’s effective income tax rate on income from continuing operations:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
State taxes	2.5		2.0		2.3		2.0
Domestic production activities deduction	(2.7	)	—		(1.6	)	—
Noncontrolling interest	(1.0	)	—		(0.9	)	—
Tax assessments and settlements	—		—		—		(0.8	)
Changes in valuation allowance and reserves	(3.0	)	(1.6	)	(1.2	)	(0.6	)
Foreign tax adjustments	—		(1.0	)	—		(0.6	)
State adjustments	3.2		—		1.2		—
Other, net	0.2		(0.3	)	0.1		(0.1	)
Effective rate	34.2	%	34.1	%	34.9	%	34.9	%

Our effective tax rate reflects a current tax benefit available for U.S. manufacturing activity. In May 2013, TRIP Holdings and RIV 2013 elected to be treated as partnerships for income tax purposes and consequently no income tax expense has been provided with respect to income earned after this election attributable to the noncontrolling interests. See Note 5 Partially-Owned Leasing Subsidiaries for a further explanation of activities with respect to TRIP Holdings and RIV 2013.

The Company assesses available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. During the third quarter of 2013 and after the filing of its 2012 Federal income tax return, the Company determined that, based on the positive evidence, we expect to utilize foreign tax credits that were previously reserved and due to expire in 2014-2016 on its 2013 Federal income tax return. Accordingly, the valuation allowance that was recorded in the second quarter of 2009 for this item has been reversed. The positive evidence included the utilization of net operating losses, projected taxable income in 2013 based upon our backlog, and sufficient foreign sourced income.

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.

Also, during the three months ended September 30, 2013, the Company completed a review of its state tax filing positions based upon our current operational footprint. As a result of this review, we recorded a charge of $5.1 million in order to adjust our overall net deferred tax liability based upon our current state tax filing responsibilities. We also adjusted our state tax rate for 2013 during the three and nine months ended September 30, 2013 as a result of this review.

The IRS field work for our 2006-2008 audit cycle has concluded and all issues, except for transfer pricing, have been agreed upon and tentatively settled. The transfer pricing issue has been appealed and we are working with both the U.S. and Mexican taxing authorities to coordinate taxation in a formal mutual agreement process (“MAP”). On September 30, 2013, we received the revenue agent report for the 2009-2011 audit cycle. All issues have been concluded and agreed to except for transfer pricing issues. These issues have been appealed and we have requested they be addressed in the same MAP of the 2006-2008 cycle. At this time, we cannot determine when the 2006-2008 cycle or the 2009-2011 cycles will close and all issues formally settled.

We have various subsidiaries in Mexico that file separate tax returns and are subject to examination by taxing authorities at different times. The 2007 tax year of one of our Mexican subsidiaries is still under review and its statute of limitations remains open through the later of the resolution of the MAP or August 2017. The remaining entities are generally open for their 2008 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 with regard to their tax status. Generally, states’ statutes of limitations in the U.S. 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, 2013 and 2012 was as follows:



	Nine Months Ended September 30,
	2013			2012
	(in millions)
Beginning balance	$	48.7		$	52.5
Additions for tax positions related to the current year	3.4			3.1
Additions for tax positions of prior years	1.9			—
Reductions for tax positions of prior years	—			(1.1		)
Settlements	(0.1		)	(3.4		)
Expiration of statute of limitations	(0.1		)	(0.8		)
Ending balance	$	53.8		$	50.3

Additions for tax positions related to the current year in the amounts of $3.4 million and $3.1 million recorded in the nine months ended September 30, 2013 and 2012, 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 related to prior years in the amount of $1.9 million recorded in the nine months ended September 30, 2013, were for Federal tax positions taken on the prior year tax returns which the IRS has identified in the current period.

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 in March 2012 by the IRS regarding the capitalization of fixed assets as well as state taxes.

Settlements during the nine months ended September 30, 2013 relate to settled positions with the Mexican taxing authorities in the settlement of the 2003 exam while settlements during 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.

The expiration of statute of limitations relates to state taxes where the statute has closed.

The total amount of unrecognized tax benefits including interest and penalties at September 30, 2013 and 2012, that would affect the Company’s overall effective tax rate if recognized was $13.9 million and $15.9 million, respectively. There is a reasonable possibility that unrecognized Federal and state tax benefits will decrease by $4.5 million by September 30, 2014 due to settlements and lapses in statutes of limitations for assessing tax. During the first quarter of 2013, we entered into an agreement with the IRS to extend the statute of limitations to assess tax on our December 31, 2006-2008 tax years. Thus, items that were previously expected to settle during the year ended December 31, 2013 are now expected to settle during the year ended December 31, 2014.

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, 2013 and December 31, 2012 was $11.0 million and $10.3 million, respectively. Income tax expense for the three and nine months ended September 30, 2013, included an increase in income tax expense of $0.2 million and $0.7 million, respectively, in interest expense and penalties related to uncertain tax positions. Income tax expense for the three and nine months ended September 30, 2012, included a decrease of $1.3 million and $2.1 million, respectively, in interest expense and penalties related to uncertain tax positions.