Income Taxes

The provision or benefit for income taxes includes U.S. federal income taxes (determined on a consolidated return basis), foreign income taxes, and state income taxes.

Income from continuing operations before income taxes for the years ended December 31 was composed of the following components:



	2014		2013		2012
	(In thousands)
United States	$	360,800	$	199,374	$	210,830
Foreign	41,800		45,832		34,453
	$	402,600	$	245,206	$	245,283

Income tax provision (benefit) for the years ended December 31 consisted of the following:



	2014			2013		2012
	(In thousands)
Current:
United States	$	67,511		$	2,207	$	3,752
Foreign	10,859			12,445		8,638
State	17,939			6,664		6,036
Total current income taxes	96,309			21,316		18,426
Deferred:
United States	$	108,514		$	64,355	$	60,699
Foreign	(653		)	58		118
State	21,810			7,295		10,868
Total deferred income taxes	129,671			71,708		71,685
Total income taxes	$	225,980		$	93,024	$	90,111

We made income tax payments of $106.3 million, $26.0 million, and $23.1 million in 2014, 2013, and 2012, respectively, and received refunds of $0.6 million, $0.5 million, and $1.5 million.

The differences between the U.S. federal statutory income tax rate and our effective tax rate for the years ended December 31 were as follows:



	2014			2013			2012
	(In thousands)
Computed tax provision at the applicable federal statutory income tax rate	$	140,910		$	86,002		$	85,988
State and local taxes, net of federal income tax benefits	25,736			8,221			11,007
Dividends received deduction and tax exempt interest	(1,612		)	(592		)	(525		)
Foreign jurisdiction differences	(4,424		)	(3,685		)	(3,409		)
Permanent differences associated with dispositions	61,892			268			602
Changes in uncertain tax positions	4,624			3,710			(479		)
Other	(1,146		)	(900		)	(3,073		)
Provision for income taxes	$	225,980		$	93,024		$	90,111
Total effective tax rate	56.1		%	37.9		%	36.7		%

The 2014 consolidated effective tax rate was 56.1%, compared to 37.9% and 36.7% in 2013 and 2012, respectively. The 2014 effective tax rate increased 18.2% over prior year primarily due to non-deductible goodwill resulting from gains on required divestitures associated with the Stewart acquisition and the increase in the unrecognized tax benefits coupled with higher state tax expenses which are partially offset by state legislative changes and foreign earnings taxed at lower rates.

During 2012, we reached a partial settlement with the Internal Revenue Service ("IRS") in connection with its audit of our affiliate's, SCI Funeral and Cemetery Purchasing Cooperative, 2003 - 2005 federal income tax returns. In connection with this settlement we reduced our 2012 tax expense by $3.1 million for adjustments to our "unrecognized tax benefits" - that is, the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements. The lower effective tax rate for the year ended December 31, 2012 includes the benefit associated with the closure of that tax audit.

Deferred taxes are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates. The tax effects of temporary differences and carry-forwards that give rise to significant portions of deferred tax assets and liabilities as of December 31 consisted of the following:



	2014			2013
	(In thousands)
Inventories and cemetery property	$	(338,446	)	$	(368,650	)
Property and equipment	(183,332		)	(159,734		)
Intangibles	(309,271		)	(323,311		)
Other	(6,870		)	(35,103		)
Deferred tax liabilities	(837,919		)	(886,798		)
Loss and tax credit carry-forwards	181,092			252,272
Deferred revenue on preneed funeral and cemetery contracts	262,202			305,504
Accrued liabilities	99,908			109,103
Deferred tax assets	543,202			666,879
Less: Valuation allowance	(134,201		)	(114,719		)
Net deferred income tax liability	$	(428,918	)	$	(334,638	)

As a result of our acquisition of Stewart, our net deferred tax liability increased by $14.7 million primarily as a result of deferred taxes being recorded as part of the purchase accounting entries recording assets and liabilities at fair value.

Deferred tax assets and Deferred income tax liabilities are recognized in our consolidated balance sheet at December 31 as follows:



	2014			2013
	(in thousands)
Current deferred tax assets	$	1,128		$	30,282
Non-current deferred tax assets	18,778			22,249
Non-current deferred tax liabilities	(448,824		)	(387,169		)
Net deferred income tax liability	$	(428,918	)	$	(334,638	)

In addition to the loss and tax credit carry-forward amounts reflected as deferred tax assets in the table above, we have taken certain tax deductions related to the exercised employee stock options and vested restricted shares that are in excess of the stock-based compensation amounts recorded in our consolidated financial statements (“windfall tax benefits”). Such windfall tax benefits are not recognized in our consolidated financial statements unless they reduce income taxes payable. As of December 31, 2014 and 2013 we have windfall tax benefits of $2.7 million and $36.3 million, respectively, which when realized will be recorded as a reduction to current taxes payable and a credit to Capital in excess of par value in our consolidated financial statements.

At December 31, 2014 and 2013, U.S. income taxes had not been provided on $259.4 million and $241.5 million, respectively, of the remaining undistributed earnings of our Canadian subsidiaries. We intend to permanently reinvest these undistributed foreign earnings in those businesses outside the United States. It is not practicable to determine the amount of federal income taxes, if any, that might become due if such earnings are repatriated.

The following table summarizes the activity related to our gross unrecognized tax benefits from January 1, 2012 to December 31, 2014 (in thousands):



	Federal, State and Foreign Tax
	(In thousands)
Balance at December 31, 2011	$	197,223
Reductions to tax positions related to the current year	(2,100		)
Reductions to tax positions related to prior years	(10,224		)
Balance at December 31, 2012	$	184,899
Additions to tax positions related to the current year	3,019
Additions to tax positions related to the acquisition of Stewart, offset to goodwill	1,556
Reductions to tax positions related to prior years	(8,800		)
Statute expirations	(2,844		)
Balance at December 31, 2013	$	177,830
Additions to tax positions related to the current year	8,721
Additions to tax positions related to prior years	10,085
Reductions to tax positions related to the current year	(1,075		)
Reductions to tax positions related to prior years	(2,325		)
Reductions to tax positions related to the acquisition of Stewart, offset to goodwill	(1,556		)
Balance at December 31, 2014	$	191,680

Our total unrecognized tax benefits that, if recognized, would affect our effective tax rates were $77.3 million, $37.1 million, and $34.9 million as of December 31, 2014, 2013, and 2012, respectively.

During 2014, we recorded an increase of $13.8 million in our liability for unrecognized tax benefits, of which $7.7 million was a net increase to U.S. tax positions taken in the current year, and $7.8 million was a net increase to U.S. tax positions taken in prior years. In addition, we recorded a $1.6 million decrease to U.S. positions related to acquired entities taken in prior years, offset to goodwill.

Consistent with our historical financial reporting, we include potential accrued interest and penalties related to unrecognized tax benefits within our income tax provision account. We have accrued $47.6 million, $44.5 million, and $41.6 million for the payment of interest, net of tax benefits, and penalties as of December 31, 2014, 2013, and 2012, respectively. We recognized an increase of interest and penalties of $3.1 million and $3.0 million for the years ended December 31, 2014, and 2013, respectively. We recognized a decrease of interest and penalties of $0.2 million for the year ended December 31, 2012. To the extent interest and penalties are not assessed with respect to uncertain tax positions or the uncertainty of deductions in the future, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

We file income tax returns, including tax returns for our subsidiaries, with federal, state, local, and foreign jurisdictions. Our tax returns are subject to routine compliance review by the taxing authorities in the jurisdictions in which we file tax returns in the ordinary course of business. We consider the United States to be our most significant tax jurisdiction; however, the taxing authority in Canada is auditing various tax returns. While we have effectively concluded our 2003 - 2005 tax years with respect to our affiliate SCI Funeral and Cemetery Purchasing Cooperative, SCI and subsidiaries' tax years 1999 through 2005 remain under review at the IRS Appeals level. SCI and subsidiaries are under audit for 2006-2007 as a result of carry back claims. Furthermore, SCI and its affiliates are under audit by various state and foreign jurisdictions for years 2010 through 2012. It is reasonably possible that changes to our global unrecognized tax benefits could be significant; however, due to the uncertainty regarding the timing of completion of audits and possible outcomes, a current estimate of the range of increases or decreases that may occur within the next twelve months cannot be made.

Various subsidiaries have foreign, federal, and state carry-forwards in the aggregate of $3.3 billion with expiration dates through 2031. Such loss carry-forwards will expire as follows:



	Federal		State		Foreign		Total
			(In thousands)
2015	$	—	$	80,429	$	—	$	80,429
2016	—		158,616		—		158,616
2017	—		243,893		—		243,893
2018	—		105,303		—		105,303
Thereafter	9,736		2,728,094		470		2,738,300
Total	$	9,736	$	3,316,335	$	470	$	3,326,541

In addition to the above loss carry-forwards, we have $59.1 million of foreign losses that have an indefinite expiration.

A valuation allowance has been established because more-likely-than-not uncertainties exist with respect to our future realization of certain loss carry-forwards. The valuation allowance is primarily attributable to state net operating losses and reflects our expectation that the net operating losses in certain jurisdictions will expire before we generate sufficient taxable income to utilize the losses. In 2014, we recorded a net $21.5 million increase in state valuation allowance related to state estimated net operating losses expected to expire unutilized. We recorded a $2.1 million decrease in international valuation allowances due to fluctuations in the exchange rate between the Euro and the US dollar.

At December 31, 2014, our loss and tax credit carry-forward deferred tax assets and related valuation allowances by jurisdiction are as follows:



	Federal		State		Foreign		Total
			(In thousands)
Loss and tax credit carry-forwards	$	3,587	$	155,956	$	21,549	$	181,092
Valuation allowance	$	—	$	116,923	$	17,278	$	134,201

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(1)	Presented net of Federal benefit

Our federal loss and tax credit carryforwards exclude windfall tax benefits, suspended net operating losses and credit carryforwards which, when realized, will reduce current income taxes payable by an additional $2.7 million.