12. Income Taxes

Income taxes have been based on the following components of “Earnings before provision for income taxes and discontinued operations” in the Consolidated Statements of Earnings:



	Years Ended December 31,
	2013		2012		2011
Domestic	$	775,499	$	700,745	$	577,142
Foreign	461,913		436,826		433,120
	$	1,237,412	$	1,137,571	$	1,010,262

Income tax expense (benefit) relating to continuing operations for the years ended December 31, 2013, 2012, and 2011 is comprised of the following:



	Years Ended December 31,
	2013			2012			2011
Current:
U.S. Federal	$	155,151		$	219,850		$	159,250
State and local	20,298			(304		)	(12,058		)
Foreign	110,216			96,713			98,919
Total current	285,665			316,259			246,111
Deferred:
U.S. Federal	$	23,664		$	19,475		$	850
State and local	(5,864		)	(2,584		)	(2,535		)
Foreign	(31,858		)	(28,698		)	(7,350		)
Total deferred	(14,058		)	(11,807		)	(9,035		)
Total expense	$	271,607		$	304,452		$	237,076

Differences between the effective income tax rate and the U.S. federal income statutory rate are as follows:



	Years Ended December 31,
	2013		2012		2011
U.S. Federal income tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of Federal income tax benefit	1.1		1.1		1.1
Foreign operations tax effect	(7.1	)	(7.2	)	(6.9	)
R&E tax credits (1)	(0.8	)	—		(0.4	)
Domestic manufacturing deduction	(2.0	)	(1.8	)	(1.6	)
Foreign tax credits	0.4		0.2		0.3
Branch losses	(0.2	)	—		—
Release of valuation allowance	—		—		(1.0	)
Resolution of tax contingencies	(5.4	)	(1.4	)	(4.0	)
Other, principally non-tax deductible items	0.9		0.9		1.0
Effective rate from continuing operations	21.9	%	26.8	%	23.5	%


(1)	On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, and this legislation retroactively extended the R&E tax credit for two years, from January 1, 2012 through December 31, 2013. Income tax expense for 2013 includes $4.8 million for the entire benefit of the R&E tax credit attributable to 2012.

The Company's effective tax rate is favorably impacted by a significant tax holiday granted by Malaysia, effective through December 31, 2021. This tax holiday is subject to the Company's satisfaction of certain conditions, including investment or sales thresholds. If the Company fails to satisfy such conditions, the effective tax rate may be adversely impacted. The benefit of this incentive for the years ended December 31, 2013, 2012 and 2011 is estimated to be approximately $32.0 million, $45.0 million and $25.5 million, respectively.

The tax effects of temporary differences that give rise to future deferred tax assets and liabilities are as follows:



	December 31, 2013			December 31, 2012
Deferred Tax Assets:
Accrued compensation, principally postretirement and other employee benefits	$	136,712		$	197,253
Accrued expenses, principally for state income taxes, interest, and warranty	41,834			46,739
Net operating loss and other carryforwards	123,748			107,959
Inventories, principally due to reserves for financial reporting purposes and capitalization for tax purposes	23,756			23,239
Accounts receivable, principally due to allowance for doubtful accounts	5,247			5,479
Accrued insurance	4,364			5,002
Long-term liabilities, principally warranty, environmental, and exit costs	4,636			2,781
Other assets	12,215			9,235
Total gross deferred tax assets	352,512			397,687
Valuation allowance	(15,554		)	(18,887		)
Total deferred tax assets	$	336,958		$	378,800

Deferred Tax Liabilities:
Intangible assets, principally due to different tax and financial reporting bases and amortization lives	$	(720,951	)	$	(719,904	)
Plant and equipment, principally due to differences in depreciation	(66,285		)	(65,480		)
Accounts receivable	(6,674		)	(5,725		)
Total gross deferred tax liabilities	(793,910		)	(791,109		)
Net deferred tax liability	$	(456,952	)	$	(412,309	)

Classified as follows in the consolidated balance sheets:
Current deferred tax asset	$	74,631		$	54,219
Non-current deferred tax asset	18,670			10,236
Current deferred tax liability	(970		)	(3,395		)
Non-current deferred tax liability	(549,283		)	(473,369		)
	$	(456,952	)	$	(412,309	)

As of December 31, 2013, the Company has loss carryforwards for U.S. Federal purposes totaling approximately $122.4 million attributed to the 2011 Anthony acquisition, and loss carryforwards for non-U.S. purposes totaling $239.5 million. As of December 31, 2012, the Company had non-U.S loss carryforwards of $121.0 million. The federal loss carryforwards are available for use against the Company's consolidated federal taxable income and begin to expire in 2024. The entire balance of the non-U.S. losses as of December 31, 2013 is available to be carried forward, with $86.1 million of these losses beginning to expire during the years 2014 through 2033. The remaining $153.4 million of such losses can be carried forward indefinitely.

The Company has $208.1 million and $133.8 million of state tax loss carryforwards as of December 31, 2013 and 2012, respectively, that are available for use by the Company between 2014 and 2033.

As of December 31, 2013, the Company has research and development credit carryforwards for U.S. Federal purposes of $0.8 million attributable to the 2011 Anthony acquisition and no alternative minimum tax credits. The research and development credits begin to expire in 2025. The Company had research and development tax credit carryforwards of $0.8 million and alternative minimum tax credits of $4.3 million at December 31, 2012.

The Company maintains valuation allowances by jurisdiction against the deferred tax assets related to certain of these carryforwards as utilization of these tax benefits is not assured for certain jurisdictions.

The Company has not provided for U.S. federal income taxes or tax benefits on the undistributed earnings of its international subsidiaries, totaling approximately $2.1 billion at December 31, 2013, because such earnings are reinvested and it is currently intended that they will continue to be reinvested indefinitely. It is not practicable to estimate the amount of tax that might be payable if some or all of such earnings were to be repatriated, and the amount of foreign tax credits that would be available to reduce or eliminate the resulting U.S. income tax liability.

Unrecognized Tax Benefits

The Company files U.S., state, local, and foreign tax returns. The Company is routinely audited by the tax authorities in these jurisdictions, and a number of audits are currently underway. It is reasonably possible during the next twelve months that uncertain tax positions may be settled, which could result in a decrease in the gross amount of unrecognized tax benefits. This decrease may result in an income tax benefit. Due to the potential for resolution of federal, state, and foreign examinations, and the expiration of various statutes of limitation, the Company's gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $37.2 million. Some portion of any such change may be reported as discontinued operations. The Company is no longer subject to examinations of its federal income tax returns for years through 2010. All significant state, local, and international matters have been concluded for years through 2005 and 2007, respectively. The Company believes adequate provision has been made for all income tax uncertainties.

The following table is a reconciliation of the beginning and ending balances of the Company’s unrecognized tax benefits:



	Continuing				Discontinued			Total
Unrecognized tax benefits at January 1, 2011	$	166,906			$	67,275		$	234,181
Additions based on tax positions related to the current year	10,835				986			11,821
Additions for tax positions of prior years	14,636				1,971			16,607
Reductions for tax positions of prior years	(40,563		)		(12,302		)	(52,865		)
Settlements	(6,673		)		(3,469		)	(10,142		)
Lapse of statutes	(6,197		)		(216		)	(6,413		)
Unrecognized tax benefits at December 31, 2011	138,944				54,245			193,189
Additions based on tax positions related to the current year	10,188				26			10,214
Additions for tax positions of prior years	4,128				3,470			7,598
Reductions for tax positions of prior years	(14,257		)		(25		)	(14,282		)
Settlements	(418		)		(85		)	(503		)
Lapse of statutes	(12,550		)		(3,429		)	(15,979		)
Unrecognized tax benefits at December 31, 2012	126,035				54,202			180,237
Additions based on tax positions related to the current year	9,056				1			9,057
Additions for tax positions of prior years	7,584				3,315			10,899
Reductions for tax positions of prior years (A)	(62,610		)		(40,240		)	(102,850		)
Settlements	(2,823		)		(2,523		)	(5,346		)
Lapse of statutes	(7,845		)		(1,564		)	(9,409		)
Unrecognized tax benefits at December 31, 2013	$	69,397		(B)	$	13,191		$	82,588

_________


(A)	The settlement of certain income tax examinations of the 2009 and 2010 tax years resulted in a significant decrease in gross unrecognized tax benefits.

(B)

If recognized, the net amount of potential tax benefits that would impact the Company’s effective tax rate is $50.6 million. During the years ended December 31, 2013, 2012, and 2011, the Company recorded potential interest and penalty expense (income) of $(5.5) million, $0.1 million and $(9.1) million, respectively, related to its unrecognized tax benefits as a component of provision for income taxes. The Company had accrued interest and penalties of $17.1 million at December 31, 2013 and $25.0 million at December 31, 2012, which are not included in the above table.