Income Taxes

The gross liability for unrecognized tax benefits at September 30, 2013 and December 31, 2012 was $12,731 and $11,553, respectively, exclusive of interest and penalties, of which $10,608 and $9,965 would affect the effective tax rate if the Company were to recognize the tax benefit.

The Company classifies interest and penalties on unrecognized tax benefits as income tax expense. As of September 30, 2013 and December 31, 2012, the combined amount of accrued interest and penalties related to tax positions taken on tax returns was $957 and $770, respectively.



	September 30, 2013		December 31, 2012
Gross liability for unrecognized tax benefits, exclusive of interest and penalties	$	12,731	$	11,553
Interest and penalties on unrecognized benefits	957		770
Total gross uncertain tax positions	$	13,688	$	12,323
Amount included in Current liabilities	$	4,985	$	5,291
Amount included in Other long-term liabilities	8,703		7,032
	$	13,688	$	12,323

The Company’s effective tax rates were 28.5 percent and 39.0 percent for the three months ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013 and 2012, the Company's tax rates were 33.3 percent and 37.6 percent, respectively. The third quarter 2013 tax rate was benefited by Pennsylvania tax law changes enacted on July 18, 2013 which become effective on January 1, 2014. The most significant changes affecting the Company’s tax rate were an increase in the annual utilization cap of the net operating loss deduction and the state apportionment of sales of services. The bill adopts a market-based approach for the sales apportionment factor that requires a company’s sales be recognized, for tax purposes, in the state the client benefits from such services. Under the current method, the sales apportionment factor is recognized in the state where the cost was incurred to perform those services. This change significantly reduced the apportionment to Pennsylvania which resulted in a reduction in the Company’s deferred tax liability. Accounting rules require the effect of changes to tax laws be recognized in the period in which the change occurred. The 2012 third quarter tax rate includes the U.S. deferred taxes on the undistributed earnings of SEI AK. As a result of the sale of SEI AK, the Company no longer considered the undistributed earnings of the subsidiary to be indefinitely reinvested and, therefore, accrued U.S deferred taxes on the cumulative undistributed earnings. This increase of taxes was partially offset by state tax planning occurring in the third quarter.

The 2013 tax rate was benefited by the reinstatement of the research and development tax credit. On January 2, 2013, President Barack Obama signed into law the American Taxpayer Relief Act of 2012 (the Act), which reinstated the research and development credit retroactively from January 1, 2012 through December 31, 2013. The accounting rules require the determination of current and deferred taxes be based upon the provisions of the enacted tax law as of the balance sheet date. Since the Act was not signed into law until January 2, 2013, the effect was not reflected in the tax provision for 2012. The effect of the 2012 research and development tax credit was therefore reflected in the 2013 tax rate. The 2013 tax rate was also benefited by the approval by Joint Tax Committee on certain refund requests. These benefits were partially offset by additional foreign taxes caused by the sale of SEI AK (See Note 13).

The Company files income tax returns in the United States on a consolidated basis and in many U.S. state and foreign jurisdictions. The Company is subject to examination of income tax returns by the Internal Revenue Service (IRS) and other domestic and foreign tax authorities. The Company is no longer subject to U.S. federal income tax examination for years before 2010 and is no longer subject to state, local or foreign income tax examinations by authorities for years before 2006.

The Company estimates it will recognize $4,985 of unrecognized tax benefits within the next twelve months due to the expiration of the statute of limitations and resolution of income tax audits. These unrecognized tax benefits are related to tax positions taken on certain federal, state, and foreign tax returns. However, the timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues under examination could be resolved in the next twelve months, based upon the current facts and circumstances, the Company cannot reasonably estimate the timing of such resolution or total range of potential changes as it relates to the current unrecognized tax benefits that are recorded as part of the Company’s financial statements.