16 INCOME TAXES

Income from continuing operations before income taxes and income taxes are as follows:


(In Thousands)		2011			2010			2009
Income from continuing operations
before income taxes:
Domestic	$	30,594		$	30,723		$	2,098
Foreign		9,298			10,060			15,212
Total	$	39,892		$	40,783		$	17,310
Current income taxes:
Federal	$	3,344		$	14,431		$	7,624
State		657			1,414			(335	)
Foreign		4,500			4,308			4,399
Total		8,501			20,153			11,688
Deferred income taxes:
Federal		3,243			(6,225	)		6,088
State		(211	)		(771	)		831
Foreign		(885	)		599			56
Total		2,147			(6,397	)		6,975
Total income taxes	$	10,648		$	13,756		$	18,663

Income from continuing operations before income taxes for domestic operations in 2009 varies from that for 2011 and 2010 primarily due to the 2009 goodwill impairment charge of $30.6 million in Aluminum Extrusions.

The significant differences between the U.S. federal statutory rate and the effective income tax rate for continuing operations are as follows:


	Percent of Income Before Income
	Taxes for Continuing Operations
	2011		2010		2009
Income tax expense at federal statutory rate	35.0		35.0		35.0
Non-deductible acquisition expenses	3.4		-		-
Unremitted earnings from foreign operations	1.7		1.3		8.1
State taxes, net of federal income tax benefit	1.7		.9		2.2
Valuation allowance for foreign operating
loss carry-forwards	1.4		1.3		(1.0	)
Valuation allowance for capital loss
carry-forwards	.8		.5		12.2
Non-deductible expenses	.8		.3		-
Reversal of income tax contingency accruals
and tax settlements	.3		.6		(.9	)
Remitted earnings from foreign operations	-		-		3.0
Write-off of tax receivable from indemnification	-		1.8		-
Goodwill impairment charge	-		-		61.8
Domestic Production Activities Deduction	-		(1.1	)	-
Changes in estimates related to prior year tax provision	(.1	)	(4.1	)	(.6	)
Foreign rate differences	(.7	)	(1.8	)	(6.5	)
Research and development tax credit	(.9	)	(.8	)	(2.1	)
Tax incentive	(1.8	)	-		-
Deduction for divestiture of subsidiary stock	(14.9	)	-		-
Other	-		(.2	)	(3.4	)
Effective income tax rate	26.7		33.7		107.8

The Brazilian federal statutory income tax rate is a composite of 34.0% (25.0% of income tax and 9.0% of social contribution on income). Terphane's manufacturing facility in Brazil is the beneficiary of certain income tax incentives that allow for a reduction in the statutory Brazilian federal income tax rate levied on the operating profit of its products. These incentives produce a current effective tax rate of 15.25% for Terphane Ltda. (6.25% of income tax and 9.0% social contribution on income). The current incentives will expire at the end of 2014, but we anticipate that we will qualify for additional incentives that will extend beyond 2014. The benefit from the tax incentives in 2011 was $0.7 million (2 cents per share).

Deferred tax liabilities and deferred tax assets at December 31, 2011 and 2010, are as follows:


(In Thousands)		2011		2010
Deferred tax liabilities:
Amortization of goodwill	$	48,407	$	26,151
Depreciation		40,739		26,238
Foreign currency translation gain adjustment		8,638		10,068
Derivative financial instruments		-		174
Other		-		362
Total deferred tax liabilities		97,784		62,993
Deferred tax assets:
Pensions		21,169		3,014
Employee benefits		9,899		10,428
Excess capital losses and book/tax basis differences
on investments		5,514		4,405
Asset write-offs, divestitures and environmental accruals		3,177		4,512
Inventory		2,439		1,973
Tax benefit on state and foreign NOL and credit
carryforwards		1,898		4,112
Allowance for doubtful accounts and sales returns		919		1,298
Timing adjustment for unrecognized tax benefits on
uncertain tax positions, including portion relating to
interest and penalties		360		279
Derivative financial instruments		249
Other		968		-
Deferred tax assets before valuation allowance		46,592		30,021
Less: Valuation allowance		12,427		11,983
Total deferred tax assets		34,165		18,038
Net deferred tax liability	$	63,619	$	44,955
Included in the balance sheet:
Noncurrent deferred tax liabilities in excess of assets	$	70,754	$	51,879
Current deferred tax assets in excess of liabilities		7,135		6,924
Net deferred tax liability	$	63,619	$	44,955

Except as noted below, we believe that it is more likely than not that future taxable income will exceed future tax deductible amounts thereby resulting in the realization of deferred tax assets. A valuation allowance of $1.3 million and $3.0 million at December 31, 2011 and 2010, respectively, is provided against the tax benefit on state and foreign net operating loss carryforwards for possible future tax benefits on domestic state and foreign operating losses generated by certain foreign and domestic subsidiaries that may not be recoverable in the carry-forward period. In addition, the valuation allowance for excess capital losses from investments and other related items was increased from $7.4 million at December 31, 2010 to $9.3 million at December 31, 2011 due to changes in the relative amounts of capital gains and losses generated during the year. The amount of the deferred tax asset considered realizable, however, could be adjusted in the near term if estimates of the fair value of certain investments during the carryforward period change. The valuation allowance for asset impairments in foreign jurisdictions where we believe it is more likely than not that the deferred tax asset will not be realized increased from $1.6 million in 2010 to $1.8 million in 2011.

A reconciliation of our unrecognized uncertain tax positions since January 1, 2009, is shown below:


		Years Ended December 31,
(In Thousands)		2011			2010			2009
Balance at beginning of period	$	1,065		$	996		$	2,553
Increase (decrease) due to tax
positions taken in:
Current period		185			184			68
Prior period		10			493			208
Increase (decrease) due to settlements
with taxing authorities		-			(375	)		(1,543	)
Reductions due to lapse of statute
of limitations		(235	)		(233	)		(290	)
Balance at end of period	$	1,025		$	1,065		$	996

Additional information related to our unrecognized uncertain tax positions since January 1, 2009 is summarized below:


					Years Ended December 31,
(In Thousands)		2011			2010			2009
Gross unrecognized tax benefits on uncertain tax
positions (reflected in current income tax and other
noncurrent liability accounts in the balance sheet)	$	1,025		$	1,065		$	996
Deferred income tax assets related to unrecognized
tax benefits on uncertain tax positions (reflected in
deferred income tax accounts in the balance sheet)		(219	)		(234	)		(348	)
Net unrecognized tax benefits on uncertain tax
positions, which would impact the effective tax rate if
recognized		806			831			648
Interest and penalties accrued on deductions taken
relating to uncertain tax positions (approximately $200,
$(400) and $(800)reflected in income tax expense in the
income statement in 2011, 2010 and 2009, respectively,
with the balance shown in current income tax and other
noncurrent liability accounts in the balance sheet)		373			125			537
Related deferred income tax assets recognized on
interest and penalties		(141	)		(46	)		(195	)
Interest and penalties accrued on uncertain tax
positions net of related deferred income tax benefits,
which would impact the effective tax rate if
recognized		232			79			342
Total net unrecognized tax benefits on uncertain tax
positions reflected in the balance sheet, which would
impact the effective tax rate if recognized	$	1,038		$	910		$	990

We claimed an ordinary loss on the write-off of our investment in our aluminum extrusions operations in Canada, which was sold in February 2008, on our 2008 consolidated tax return (included in discontinued operations in the consolidated statement of income in 2007). The IRS has recently challenged the ordinary nature of such deduction, asserting that the deduction should be re-characterized as capital in nature. We plan to vigorously defend our position related to this matter and believe that we will prevail but there can be no assurance of such a result. If the Company were not to prevail in final, non-appealable determinations, it is possible that the matter would result in additional tax payments of up to $12 million, plus any interest and penalties.

In the second quarter of 2009, we settled several disputed issues raised by the IRS during its examination of our U.S. income tax returns for 2001-2003, the most significant of which regards the recognition of our captive insurance subsidiary as an insurance company for U.S. income tax purposes. The settlement with the IRS for the disputed issues cost us approximately $1.0 million, which is lower than the previous estimate of $1.3 million and was applied against the balance of unrecognized tax benefits.

Tredegar and its subsidiaries file income tax returns in the U.S., various states and jurisdictions outside the U.S. Generally, except for refund claims and amended returns, Tredegar is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2006. With few exceptions, Tredegar and its subsidiaries are no longer subject to state or non-U.S. income tax examinations by tax authorities for years before 2008. We believe that it is reasonably possible that approximately $0.1 million of the balance of unrecognized state tax positions may be recognized within the next twelve months as a result of a lapse of the statute of limitations.