INCOME TAXES

The provision (benefit) for income taxes consisted of the following (in thousands):



	Years ended December 31,
	2012		2011		2010
Current provision:
Federal	$	200,766	$	199,986	$	350,451
State	18,279		21,105		28,216
Deferred provision/(benefit):
Federal	62,643		86,483		(117,600		)
State	15,784		7,422		(13,149		)
Income tax expense	$	297,472	$	314,996	$	247,918

The Company’s effective tax rate differs from the federal statutory rate of 35% as a result of the following:



	Years ended December 31,
	2012		2011		2010
Statutory federal tax rate	35.00	%	35.00	%	35.00	%
Effect of:
State income taxes, net of federal benefit	3.08	%	2.64	%	1.56	%
Tax exempt investment income	(1.35	)%	(0.97	)%	(1.34	)%
Remuneration disallowed	1.35	%	0.51	%	0.55	%
Other	(0.16	)%	(0.47	)%	0.34	%
Effective tax rate	37.92	%	36.71	%	36.11	%

The effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are presented below (in thousands):



	December 31,
	2012			2011
Deferred tax assets:
Net operating loss carryforward	$	37,203		$	50,913
Deferred compensation	42,990			82,747
Deferred revenue	9,750			8,540
Medical liabilities	61,631			55,442
Accounts receivable	1,039			1,499
Other accrued liabilities	44,160			96,429
Unrealized capital losses	153			1,415
Other assets	12,361			14,435
Gross deferred tax assets	209,287			311,420
Less valuation allowance	(2,335		)	(4,168		)
Deferred tax asset	$	206,952		$	307,252
Deferred tax liabilities:
Unrealized gain on securities	$	(41,746	)	$	(36,226	)
Other liabilities	(4,798		)	(11,119		)
Depreciation	(10,127		)	(12,119		)
Intangibles	(169,243		)	(179,802		)
Internally developed software	(30,553		)	(28,744		)
Tax liability of limited partnership investment	(5,332		)	(11,719		)
Gross deferred tax liabilities	(261,799		)	(279,729		)
Net deferred tax (liability) asset ⁽¹⁾	$	(54,847	)	$	27,523


⁽¹⁾	Includes $132.5 million and $181.8 million classified as other current assets at December 31, 2012 and 2011, respectively, and $187.3 million and $154.2 million classified as other long-term liabilities at December 31, 2012 and 2011, respectively.

At December 31, 2012, the Company had approximately $93.5 million of federal and $224.7 million of state tax net operating loss carryforwards. The Federal net operating losses were primarily acquired through various acquisitions and are subject to limitation under Internal Revenue Code Section 382. The net operating loss carryforwards can be used to reduce future taxable income and expire over varying periods through the year 2032. A valuation allowance of approximately $2.3 million and $4.2 million has been recorded as of December 31, 2012 and 2011, respectively, for certain net operating loss deferred tax assets as the Company believes it is not more-likely-than-not that these deferred tax assets will be realized before expiration of the net operating losses.

A reconciliation of the total amounts of unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010 is as follows (in thousands):



	2012			2011			2010
Gross unrecognized tax benefits - beginning balance	$	85,432		$	136,255		$	129,084
Gross increases to tax positions taken in the current period	53,308			46,949			100,426
Gross increases to tax positions taken in prior periods	3,568			2,985			7,128
Gross decreases to tax positions taken in prior periods	(49,413		)	(92,390		)	(94,712		)
Decrease due to settlements with tax authorities	(1,722		)	—			—
Decreases due to a lapse of statute of limitations	(3,674		)	(8,367		)	(5,671		)
Gross unrecognized tax benefits - ending balance	$	87,499		$	85,432		$	136,255

The total amount of unrecognized tax benefits, as of December 31, 2012 and 2011 that, if recognized, would affect the effective tax rate was $34.4 million and $38.2 million, respectively. Further the Company is unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

Penalties and tax-related interest expense are reported as a component of income tax expense. As of December 31, 2012 and 2011, the total amount of income tax-related accrued interest and penalties, net of related tax benefit, recognized in the statement of financial position was $9.3 million and $10.4 million, respectively.

For the years ended December 31, 2012, 2011 and 2010, the total amount of income tax-related accrued interest and penalties, net of related tax benefit, recognized in the statement of operations was $2.8 million, $3.3 million and $4.0 million, respectively.

The Company is regularly audited by federal, state and local tax authorities, and from time to time these audits result in proposed assessments. Tax years 2009-2011 remain open to examination by these tax jurisdictions. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.

During the year ended December 31, 2012, the Company settled certain income tax examinations with various state and local tax authorities. Tax assessed as a result of these examinations was not material.