Note 4 - Income Taxes

Income tax expense for the three months ended March 31, 2013, and 2012, differs from the amounts that would be provided by applying the statutory United States federal income tax rate to income before income taxes as a result of the estimated effect of percentage depletion, the effect of state income taxes, uncertain tax positions, valuation allowance adjustments, and other permanent differences. The quarterly rate can also be impacted by the proportional effects of forecasted net income as of each period end.

The provision for income taxes consists of the following:



	For the Three Months Ended March 31,
	2013			2012
	(in thousands)
Current portion of income tax expense:
Federal	$	—		$	—
State	102			393
Deferred portion of income tax expense	10,280			15,288
Total income tax expense	$	10,382		$	15,681
Effective tax rate	38.3		%	37.3		%

On a year-to-date basis, a change in the Company’s effective tax rate between reported periods will generally reflect differences in its estimated highest marginal state tax rate due to changes in the composition of income from Company activities among various state tax jurisdictions. Cumulative effects of state rate changes are reflected in the period legislation is enacted. The 2013 increase in the effective rate from 2012 primarily reflects changes in the mix of the highest marginal state tax rates, the effects of valuation allowance adjustments, the state tax rate effect on year-to-date net income from divestitures, drilling activities, and changes in the effects of other permanent differences.

The Company and its subsidiaries file federal income tax returns and various state income tax returns. With certain exceptions, the Company is no longer subject to United States federal or state income tax examinations by these tax authorities for years before 2007. Federal tax law allowing for the calculation of a R&D credit was enacted in 2013 but the Company has not yet commissioned a study to calculate the credit for the 2012 or 2013 tax years, so the table above excludes any impact of a credit which would be allowed under the new law. The Internal Revenue Service (“IRS”) initiated an audit in the first quarter of 2012 related to R&D tax credits claimed by the Company for the 2007 and 2010 tax years. This audit was still ongoing at March 31, 2013. On April 23, 2013, the IRS issued a Notice of Proposed Adjustment disallowing all R&D tax credits claimed for open tax years during the audit period. The Company intends to contest the report’s conclusions and maintains it is entitled to the claimed credits.