INCOME TAXES:

Included in the Company's income from continuing operations before income taxes and income from equity investment for the twelve months ended December 31, 2012 was a $50.1 million mark-to-market expense associated with a contingent forward sale contract, which is a non-deductible expense for income tax purposes. See Note 10, Derivative Financial Instruments, for further details on the contingent forward sale contract. As a result, the Company's provision for income taxes was $46.4 million and $38.5 million for the twelve months ended December 31, 2012 and 2011, respectively, which represents 34.8% and 24.4%, respectively, of income from continuing operations other than the mark-to-market expense. The increase in the effective income tax rate for the twelve months ended December 31, 2012 was primarily attributable to the expiration of the United States Short Line Tax Credit on December 31, 2011.

The components of income from continuing operations before taxes and income from equity investment for the years ended December 31, 2012, 2011 and 2010 were as follows (dollars in thousands):



	2012		2011		2010
United States	$	5,716	$	98,050	$	89,132
Foreign	77,680		59,974		19,701
Total	$	83,396	$	158,024	$	108,833

The Company files a consolidated United States federal income tax return that includes all of its United States subsidiaries. Each of the Company’s foreign subsidiaries files appropriate income tax returns in its respective country. No provision is made for the United States income taxes applicable to the undistributed earnings of controlled foreign subsidiaries as it is the intention of management to fully utilize those earnings in the operations of foreign subsidiaries. If the earnings were to be distributed in the future, those distributions may be subject to United States income taxes (appropriately reduced by available foreign tax credits) and withholding taxes payable to various foreign countries, however, the amount of the tax and credits is not practically determinable. The amount of undistributed earnings of the Company’s controlled foreign subsidiaries as of December 31, 2012 was $251.4 million.

The components of the provision for income taxes on continuing operations for the years ended December 31, 2012, 2011 and 2010 were as follows (dollars in thousands):



	2012		2011		2010
United States:
Current
Federal	$	3,582	$	5,652	$	5,105
State	3,752		3,686		2,728
Deferred
Federal	17,382		12,578		14,037
State	906		1,535		2,759
	25,622		23,451		24,629
Foreign:
Current	9,907		6,488		8,967
Deferred	10,873		8,592		(3,432		)
	20,780		15,080		5,535
Total	$	46,402	$	38,531	$	30,164

The provision for income taxes differs from that which would be computed by applying the statutory United States federal income tax rate to income before taxes. The following is a summary of the effective tax rate reconciliation for the years ended December 31, 2012, 2011 and 2010:



	2012		2011		2010
Tax provision at statutory rate	35.0	%	35.0	%	35.0	%
Effect of acquisitions/divestitures	24.8	%	(3.1	)%	—	%
Effect of foreign operations	(7.7	)%	(2.9	)%	(1.2	)%
State income taxes, net of federal income tax benefit	3.8	%	2.3	%	3.1	%
Benefit of track maintenance credit	—	%	(6.5	)%	(9.3	)%
Other, net	(0.3	)%	(0.4	)%	0.1	%
Effective income tax rate	55.6	%	24.4	%	27.7	%

The United States track maintenance credit is an income tax credit for Class II and Class III railroads to reduce their federal income tax based on qualified railroad track maintenance expenditures (the Short Line Tax Credit). Qualified expenditures include amounts incurred for maintaining track, including roadbed, bridges and related track structures owned or leased by a Class II or Class III railroad. The credit is equal to 50% of the qualified expenditures, subject to an annual limitation of $3,500 multiplied by the number of miles of railroad track owned or leased by the Class II or Class III railroad as of the end of their tax year. The Short Line Tax Credit was in existence from 2005 through 2011 and was extended for years 2012 and 2013 on January 2, 2013. See Note 24, Subsequent Events, for further information on the extension of the Short Line Tax Credit.

Deferred income taxes reflect the effect of temporary differences between the book and tax basis of assets and liabilities as well as available income tax credit and capital and net operating loss carryforwards. The components of net deferred income taxes as of December 31, 2012 and 2011 were as follows (dollars in thousands):



	2012			2011
Deferred tax assets:
Accruals and reserves not deducted for tax purposes until paid	$	15,824		$	4,290
Net operating loss carryforwards	52,863			1,306
Capital loss carryforward	—			5,251
Interest rate swaps	7			2,547
Nonshareholder contributions	4,799			1,622
Deferred compensation	2,175			2,473
Postretirement benefits	2,328			801
Share-based compensation	11,328			4,358
Foreign tax credit	1,964			1,964
Track maintenance credit	129,486			38,238
Alternative minimum tax credit	1,356			—
Other	451			87
	222,581			62,937
Valuation allowance	(8,613		)	(5,251		)
Deferred tax liabilities:
Property basis difference	(1,003,990		)	(321,365		)
Other	(1,843		)	(1,299		)
Net deferred tax liabilities	$	(791,865	)	$	(264,978	)

In the accompanying consolidated balance sheets, these deferred benefits and deferred obligations are classified as current or non-current based on the classification of the related asset or liability for financial reporting. A deferred tax obligation or benefit that is not related to an asset or liability for financial reporting, including deferred tax assets related to tax credit and loss carryforwards, are classified according to the expected reversal date of the temporary difference as of the end of the year.

The Company utilized $8.9 million and $5.4 million of state net operating loss carryforwards from its United States operations in the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012, the Company had United States net operating loss carryforwards in various state jurisdictions that totaled approximately $362.5 million. Some of our net operating loss carryforwards are subject to Section 382 limitations of the Internal Revenue Code (Section 382). Section 382 imposes limitations on a corporation's ability to utilize its net operating losses if it experiences an "ownership change." In general terms, an ownership change results from transactions increasing the ownership of certain existing stockholders or new stockholders in the stock of a corporation by more than 50% during a three year testing period. Any unused annual limitation may be carried over to later years, and the amount of the limitation may, under certain circumstances, be increased to reflect both recognized and deemed recognized "built-in gains" that occur during the sixty-month period after the ownership change. The state net operating losses exist in different states and expire between 2013 and 2031.

As of December 31, 2012, the Company had no United States capital loss carryforwards as these losses expired in 2012. The Company did maintain a valuation allowance on the capital loss carryforward.

The Company maintains a valuation allowance on net operating losses in states for which, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. It is management's belief that it is more likely than not that a portion of the deferred tax assets will not be realized. The Company has established a valuation allowance of $8.6 million at December 31, 2012 related to state net operating losses acquired with RailAmerica.

A reconciliation of the beginning and ending amount of the Company's valuation allowance is as follows (dollars in thousands):



	2012
Balance at beginning of year	$	5,251
Expiration of capital loss carryforwards	(5,251		)
Increase for RailAmerica net operating losses	8,613
Balance at end of year	$	8,613

As of December 31, 2012 and 2011, the Company had track maintenance credit carryforwards of $129.5 million and $38.2 million, respectively. These tax credit carryforwards will expire between 2025 and 2032.

A reconciliation of the beginning and ending amount of the Company’s liability for uncertain tax positions is as follows (dollars in thousands):



	2012			2011		2010
Balance at beginning of year	$	—		$	—	$	146
Increase for acquired subsidiary	3,370			—		—
Increase for tax positions related to the current year	—			—		—
Settlements and lapse of statutes of limitations	—			—		(146		)
Reductions for tax positions of prior years	(215		)	—		—
Balance at end of year	$	3,155		$	—	$	—

The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes.

As of December 31, 2012, the following tax years remain open to examination by the major taxing jurisdictions to which the Company is subject:



	Open Tax Years
Jurisdiction	From		To
United States	2001	-	2012
Australia	2010	-	2012
Canada	2008	-	2012
Mexico	2007	-	2012
Netherlands	2009	-	2012