Income Taxes

The components of the provision for income taxes from continuing operations are as follows:



	Year Ended December 31,
	2013			2012			2011
	(in millions)
Current:
Federal	$	141.8		$	(5.7	)	$	20.8
State	13.7			7.0			5.5
Foreign	3.1			6.4			5.4
Total current	158.6			7.7			31.7
Deferred:
Federal	44.3			126.6			62.2
State	2.3			3.2			1.3
Foreign	(0.8		)	(3.5		)	(3.0		)
Total deferred	45.8			126.3			60.5
Provision	$	204.4		$	134.0		$	92.2

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:



	Year Ended December 31,
	2013		2012		2011
Statutory rate	35.0	%	35.0	%	35.0	%
State taxes	2.1		2.0		2.1
Domestic production activities deduction	(1.4	)	—		—
Noncontrolling interest in partially-owned subsidiaries	(0.9	)	—		—
Tax assessments and settlements	—		(0.6	)	—
Changes in valuation allowance and reserves	(0.8	)	(1.4	)	0.4
Other, net	0.6		(0.3	)	1.1
Effective rate	34.6	%	34.7	%	38.6	%

Income from continuing operations before income taxes for the years ended December 31, 2013, 2012, and 2011 was $571.2 million, $376.3 million, and $225.9 million, respectively, for U.S. operations, and $19.3 million, $9.6 million, and $13.1 million, respectively, for foreign operations, principally Mexico. The Company provides deferred income taxes on the un-repatriated earnings of its foreign operations where it results in a deferred tax liability. Our effective tax rate reflects the 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.

During 2013, after the filing of its 2012 Federal income tax return, the Company determined that it would utilize previously reserved foreign tax credits on our 2013 Federal income tax return which were due to expire in 2014-2016. Accordingly, the related $6.4 million valuation allowance was reversed and recorded as an income tax benefit during 2013. During the year ended December 31, 2013, the Company completed a review of its state tax filing positions based upon its current operational footprint. As a result of this review, we recorded a charge of $5.1 million in order to adjust our net overall deferred tax liability based upon our current state tax filing responsibilities.

Deferred income taxes represent the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred tax liabilities and assets are as follows:



	December 31,
	2013			2012
	(in millions)
Deferred tax liabilities:
Depreciation, depletion, and amortization	$	668.9		$	887.6
Derivatives	—			12.4
Accrued liabilities and other	48.3			—
Convertible debt	105.4			96.5
Total deferred tax liabilities	822.6			996.5
Deferred tax assets:
Workers compensation, pensions, and other benefits	61.3			52.4
Warranties and reserves	13.8			15.6
Equity items	33.4			81.5
Tax loss carryforwards and credits	27.5			249.7
Inventory	18.8			17.9
Accrued liabilities and other	—			3.9
Total deferred tax assets	154.8			421.0
Net deferred tax liabilities before valuation allowance	667.8			575.5
Valuation allowance	10.2			19.7
Net deferred tax liabilities before reserve for uncertain tax positions	678.0			595.2
Deferred tax assets included in reserve for uncertain tax positions	(38.6		)	(39.4		)
Adjusted net deferred tax liabilities	$	639.4		$	555.8

During the year ended December 31, 2013, the Company utilized $63.9 million in Federal consolidated net operating loss carryforwards and all of its foreign tax credit carryforwards of $42.2 million. As a result of a 2013 election to treat TRIP Holdings as a partnership for tax purposes, TRIP Holdings utilized its $439.7 million Federal tax operating loss carryforward during 2013. At December 31, 2013, the Company had $39.4 million of Federal consolidated net operating loss carryforwards and $5.2 million of tax-effected state loss carryforwards remaining. The majority of the Federal net operating loss carryforwards were acquired as part of an acquisition of a company in 2010 and are subject to limitations on the amount that can be utilized in any one tax year. The Federal net operating loss carryforwards are due to expire between 2028 and 2029. We have established a valuation allowance for Federal, state, and foreign tax operating losses and credits which we have estimated may not be realizable.

Taxing authority examinations

During the year ended December 31, 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, primarily related to favorable claims filed and approved by the IRS in the final audit settlement. Additionally, we recognized a tax benefit of $4.4 million 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 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 or the 2009-2011 cycle 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 for transfer pricing purposes only, 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.

Unrecognized tax benefits

The change in unrecognized tax benefits for the years ended December 31, 2013, 2012, and 2011 was as follows:



	Year Ended December 31,
	2013			2012			2011
	(in millions)
Beginning balance	$	48.7		$	52.5		$	36.8
Additions for tax positions related to the current year	4.8			4.1			3.8
Additions for tax positions of prior years	2.8			—			16.4
Reductions for tax positions of prior years	—			(1.1		)	(0.1		)
Settlements	(0.3		)	(3.4		)	(3.5		)
Expiration of statute of limitations	(1.0		)	(3.4		)	(0.9		)
Ending balance	$	55.0		$	48.7		$	52.5

Additions for tax positions related to the current year for 2013 and 2012 were amounts provided for tax positions taken for Federal, state, and Mexican income tax purposes. Additions for tax positions related to the current year for 2011 were amounts provided for tax positions previously taken in foreign jurisdictions and tax positions taken for Federal and state income tax purposes as well as deferred tax liabilities that have been reclassified to uncertain tax positions.

Additions for tax positions of prior years in the amount of $2.8 million and recorded in the current year, were for Federal, state, and Mexican tax positions taken on the prior year tax returns which the taxing authorities have previously identified. Additions for tax positions of prior years for 2011 were primarily due to Federal tax positions taken on prior year returns where the IRS proposed an adjustment that was not previously reserved. A corresponding deferred tax asset was recorded for uncertain tax positions where a future deduction will be allowed.

The reduction in tax positions of prior years of $1.1 million for the twelve months ended December 31, 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 twelve months ended December 31, 2013 relate to settled positions with the IRS for one of our subsidiaries as well as settled positions with Mexican taxing authorities in the settlement of the 2003 exam. Settlements during 2012 primarily related to the settlement of our 2004-2005 IRS audit as well as the related impact on state tax returns. Settlements during 2011 primarily related to an audit of a separate tax return of our Swiss subsidiary. The expiration of statute of limitations relates to state taxes where the statute of limitations has closed.

The total amount of unrecognized tax benefits including interest and penalties at December 31, 2013 and 2012, that would affect the Company’s overall effective tax rate if recognized was $13.8 million and $13.2 million, respectively. There is a reasonable possibility that unrecognized Federal and state tax benefits will decrease by $3.6 million by December 31, 2014 due to settlements and lapses in statutes of limitations for assessing tax. During 2013, we entered into an agreement with the IRS to extend the statute of limitations to assess tax on our 2006-2008 tax years. Thus, items that were previously expected to settle during 2013 are now expected to settle during 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 December 31, 2013 and 2012 was $10.8 million and $10.3 million, respectively. Income tax expense for the years ended December 31, 2013, 2012, and 2011 included an increase of $0.5 million, a decrease of $3.0 million, and an increase of $2.1 million, respectively, with regard to interest expense and penalties related to uncertain tax positions.