11. The effective tax rate for the first quarter of 2012 was 34.8% compared to 31.0% in first quarter of 2011. The significant differences between the U.S. federal statutory rate and the effective income tax rate for continuing operations for the three months ended March 31, 2012 and 2011 are as follows:


	Percent of Income
	Before Income Taxes
	for Continuing Operations
Three Months Ended March 31	2012		2011
Income tax expense at federal statutory rate	35.0		35.0
Valuation allowance for capital loss carry-forwards	7.8		(1.2	)
Unremitted earnings from foreign operations	1.7		1.4
State taxes, net of federal income tax benefit	.9		1.4
Non-deductible expenses	.3		.6
Income tax contingency accruals/reversals	-		.9
Valuation allowance for foreign operating loss carry-forwards	-		(.6	)
Research and development tax credit	-		(.6	)
Domestic Production Activity Deduction	-		(1.1	)
Foreign rate differences	(2.1	)	(4.8	)
Foreign tax incentive	(8.7	)	-
Other	(.1	)	-
Effective income tax rate for continuing operations	34.8		31.0

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.

Income taxes for the first quarter of 2012 include the recognition of an additional valuation allowance of $0.9 million related to expected limitations on the utilization of assumed capital losses on certain investments recognized in previous years. Income taxes for the first quarter of 2011 include the partial reversal of a valuation allowance of $0.1 million related to expected limitations on the utilization of assumed capital losses on certain investments recognized in previous years.

We claimed an ordinary loss on the write-off of our investment in our aluminum extrusions operations in Canada (sold in February 2008) on our 2008 consolidated tax return (included in discontinued operations in the consolidated statement of income in 2007). The Internal Revenue Service ("IRS") has 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 we 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.

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 2008.