INCOME TAXES

The income tax provision consists of the following:



	For the Year Ended December 31,
	2011			2010			2009
Current:
Federal	$	1		$	—		$	(1	)
State	5			(3		)	1
Foreign	8			5			8
	14			2			8
Deferred:
Federal	28			112			(45		)
State	(10		)	19			(13		)
	18			131			(58		)
Income tax expense (benefit)	$	32		$	133		$	(50	)

Pre-tax income (loss) for domestic and foreign operations consisted of the following:



	For the Year Ended December 31,
	2011			2010		2009
Domestic	$	(422	)	$	30	$	(334	)
Foreign	13			6		24
Pre-tax income (loss)	$	(409	)	$	36	$	(310	)

Current and non-current deferred income tax assets and liabilities, as of December 31, are comprised of the following:



	2011			2010
Current deferred income tax assets:
Accrued liabilities and deferred income	$	84		$	78
Provision for doubtful accounts	23			27
Liability for unrecognized tax benefits	3			—
Cash flow hedges	3			—
	113			105
Less: valuation allowance	(30		)	(11		)
Current deferred income tax assets	83			94
Current deferred income tax liabilities:
Prepaid expenses	17			18
Current deferred income tax liabilities	17			18
Current net deferred income tax asset	$	66		$	76



Non-current deferred income tax assets:
Net operating loss carryforwards	$	846		$	663
Alternative minimum tax credit carryforward	2			2
Foreign tax credit carryforwards	3			3
State tax credit carryforwards	1			1
Accrued liabilities and deferred income	26			32
Capital loss carryforward	32			32
Investment in joint venture	3			3
Minimum pension obligation	22			14
Cash flow hedges	4			7
Provision for doubtful accounts	6			7
Liability for unrecognized tax benefits	11			9
Other	5			4
	961			777
Less: valuation allowance	(308		)	(107		)
Non-current deferred income tax assets	653			670
Less:
Non-current deferred income tax liabilities:
Depreciation and amortization	1,543			1,553
Non-current net deferred income tax liability	$	(890	)	$	(883	)

As of December 31, 2011, the Company had gross federal and state net operating loss carryforwards of $2,068 million. The federal net operating loss carryforwards expire between 2025 and 2031 and the state net operating loss carryforwards expire between 2012 and 2031.

Management has determined that, based upon all available evidence, it is more likely than not that certain deferred tax assets will not be utilized in the foreseeable future and, as such, has recorded a corresponding valuation allowance. In assessing the valuation allowance at December 31, 2011 and 2010, the Company determined that a full valuation allowance was required on the net definite-lived deferred tax asset balance. The Company’s valuation allowance was $338 million and $118 million at December 31, 2011 and 2010, respectively.

The Company’s effective income tax rate differs from the U.S. federal statutory rate as follows:



	For the Year Ended December 31,
	2011		2010		2009
Federal statutory rate	35	%	35	%	35	%
State and local income taxes, net of federal tax benefits	1		(6	)	6
Net impact of IRS settlement	—		303		—
Foreign rate differential	(2	)	14		—
Permanent differences	1		—		—
Net change in valuation allowance	(43	)	23		(23	)
Other	—		—		(2	)
	(8	%)	369	%	16	%

The 2011 change in valuation allowance reflects a full valuation allowance on tax benefits generated from current period operations and the impact of indefinite-lived intangible assets.

The majority of the rate differential for the year ended December 31, 2010 reflects the impact of our former parent company's IRS examination settlement. The settlement resulted in nontaxable book income related to the reversal of a portion of our legacy reserves as well as a reduction of certain deferred tax assets. The net tax impact of the IRS settlement reflects the federal and state tax impact of the reduction of deferred tax assets, net of valuation allowance ($109 million). The 2010 change in valuation allowance reflects the balance of the federal and state tax impact of current operations (loss for tax purposes) offset by a tax provision for the increase in deferred tax liabilities associated with indefinite-lived intangible assets.

The 2009 change in valuation allowance reflects a reduction to the previously recorded valuation allowance, partially offset by a full valuation allowance on tax benefits generated from current period operations and the impact of indefinite-lived intangible assets.

The Company is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities whereby the outcome of the audits is uncertain. The Company believes there is appropriate support for positions taken on its tax returns. The liabilities that have been recorded represent the best estimates of the probable loss on certain positions and are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. However, the outcome of tax audits are inherently uncertain.

Tax Sharing Agreement

Under the Tax Sharing Agreement with Cendant, Wyndham Worldwide and Travelport, the Company is generally responsible for 62.5% of payments made to settle claims with respect to tax periods ending on or prior to December 31, 2006 that relate to income taxes imposed on Cendant and certain of its subsidiaries, the operations (or former operations) of which were determined by Cendant not to relate specifically to the respective businesses of Realogy, Wyndham Worldwide, Avis Budget or Travelport. On July 15, 2010, Cendant and the IRS agreed to settle the previously disclosed IRS examination of Cendant’s taxable years 2003 through 2006. Pursuant to the IRS settlement, Tax Sharing Agreement and a letter agreement executed with Wyndham, Realogy in 2010 paid $58 million, including interest, to reimburse Cendant for a portion of the amount payable by Cendant to the IRS and Wyndham for certain tax credits used under the IRS settlement. With respect to any remaining residual legacy Cendant tax liabilities which remain after the IRS settlement, the Company and its former parent believe there is appropriate support for the positions taken on Cendant’s tax returns. However, tax audits and any related litigation, including disputes or litigation on the allocation of tax liabilities between parties under the Tax Sharing Agreement, could result in outcomes for the Company that are different from those reflected in the Company’s historical financial statements.

Accounting for Uncertainty in Income Taxes

The Company utilizes the FASB guidance for accounting for uncertainty in income taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company reflects changes in its liability for unrecognized tax benefits as income tax expense in the Consolidated Statements of Operations. As of December 31, 2011, the Company’s gross liability for unrecognized tax benefits was $42 million, of which $31 million would affect the Company’s effective tax rate, if recognized. The Company does not expect that its unrecognized tax benefits will significantly change over the next 12 months.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in interest expense and operating expenses, respectively. The Company recognized interest expense of $5 million and penalties of $1 million for the year ended December 31, 2011, a reduction of interest expense of $1 million for the year ended December 31, 2010 and interest expense of $2 million for the year ended December 31, 2009.

The rollforward of unrecognized tax benefits are summarized in the table below:



Unrecognized tax benefits—January 1, 2009	$	25
Gross decreases—tax positions in prior periods	2
Gross increases—current period tax positions	3
Unrecognized tax benefits—December 31, 2009	$	30
Gross increases—tax positions in prior periods	7
Reduction due to lapse of statute of limitations	(3		)
Unrecognized tax benefits—December 31, 2010	$	34
Gross increases—tax positions in prior periods	8
Gross increases—tax positions in current period	5
Reduction due to lapse of statute of limitations	(5		)
Unrecognized tax benefits—December 31, 2011	$	42