K. INCOME TAXES

The provision for income taxes is composed of the following:

	(In thousands)
	Years ended December 31,
	2011			2010			2009
Current income tax expense (benefit)
Federal	$	--		$	(104	)	$	(210	)
State		--			--			--
	$	--		$	(104	)	$	(210	)

Deferred income tax expense (benefit)
Federal	$	(3,316	)	$	(1,543	)	$	(1,794	)
State		(195	)		(91	)		(275	)
	$	(3,511	)	$	(1,634	)	$	(2,069	)

The effective income tax rate differs from the U.S. Federal Statutory income tax rate due to the following:

	(In thousands)
	Years ended December 31,
	2011			2010			2009

Federal statutory income tax rate	$	(2,828	)	$	(853	)	$	(3,555	)
State income taxes, net of federal benefit		(166	)		(50	)		(209	)
Incentive stock options		246			258			404
percent depletion carryover		(807	)		(1,067	)		(128	)
Other		44			(26	)		1,209
	$	(3,511	)	$	(1,738	)	$	(2,279	)

The components of deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows:

	(In thousands)
	December 31,			December 31,			December 31,
	2011			2010			2009

Deferred tax assets:
Net operating loss	$	2,547		$	1,857		$	2,078
Derivative instruments		215			621			--
Asset retirement obligation		184			109			40
Stock based compensation		288			287			629
Deferred compensation		357			372			534
Alternative minimum tax credit		706			706			810
Contribution carryover		28			27			19
Equity investments		37			362			--
Percentage depletion carryover		1,924			1,198			128
	$	6,286		$	5,539		$	4,238

Deferred tax liabilities:
Property and equipment	$	(7,385	)	$	(10,149	)	$	(10,700	)
Marketable securities		(44	)		(361	)		--
	$	(7,429	)	$	(10,510	)	$	(10,700	)

Net deferred tax assets (liabilities)	$	(1,143	)	$	(4,971	)	$	(6,462	)
Less: Valuation Allowance		--			--			--
Deferred tax liability	$	(1,143	)	$	(4,971	)	$	(6,462	)

During the year ended December 31, 2011, deferred tax assets increased $747,000 and deferred tax liabilities decreased by $3.1 million. The change in net deferred tax liabilities was a decrease of $3.8 million compared to the previous year. This decrease is comprised of a deferred tax benefit of $3.5 million and a reduction to other comprehensive income of $316,000 resulting from the future tax impact of unrealized gain on marketable securities.

USE has net operating loss carryovers as of December 31, 2011 of $8.8 million for federal income tax purposes and $6.2 million for financial reporting purposed. The difference of $2.6 million relates to tax deductions for compensation expense for financial reporting purposed for which the benefit will not be recognized until the related deductions reduce taxes payable. The net operating loss carryovers may be carried back two years and forward twenty years from the year the net operating loss was generated. The net operating losses may be used to offset taxable income through 2031. In addition, USE has alternative minimum tax credit carry-forwards of $706,000 which are available to offset future federal income taxes over an indefinite period.

The statute of limitations is closed for the tax years through 2006. USE agreed to extend the statute of limitations for the 2007 tax year until July 2012.

USE adopted the applicable provisions of ASC 740 to recognize, measure, and disclose uncertain tax positions in the financial statements. Under ASC 740, tax positions must meet a “more-likely-than-not” recognition threshold to be recognized. During the year ended December 31, 2011, no adjustments were recognized for uncertain tax positions. USE recognizes interest and penalties related to uncertain tax positions in income tax expense (benefit). No interest or penalties related to uncertain tax positions have been accrued.