NOTE 4. INCOME TAXES

Income before income taxes consisted of the following components:

	Year ended December 31,

	2013		2012		2011
	(in thousands)
Domestic	$	389,459	$	372,669	$	206,971
Foreign		18,010		7,615		633


Total income before income taxes	$	407,469	$	380,284	$	207,604

Income tax expense (benefit) for all periods consisted of the following components:

	Year ended December 31,

	2013			2012			2011
	(in thousands)
Current:
Federal	$	120,137		$	117,332		$	63,130
State		15,433			21,099			13,371
Foreign		8,656			5,022			4,091


		144,226			143,453			80,592
Deferred:
Federal		(363	)		(2,238	)		(3,310	)
State		(955	)		(1,222	)		(1,351	)
Foreign		(460	)		95			(660	)


		(1,778	)		(3,365	)		(5,321	)


Income tax expense	$	142,448		$	140,088		$	75,271

The following table summarizes the differences between the Company's effective tax rate for financial reporting purposes and the federal statutory tax rate:

	Year ended December 31,

	2013			2012			2011
Percent of pretax earnings:
Statutory federal tax rate		35.0	%		35.0	%		35.0	%
Increase (reduction) resulting from:
State income tax, net of federal tax benefit		3.1	%		3.2	%		3.0	%
Other permanent differences		0.1	%		0.6	%		2.0	%
International operations, net of foreign tax credits		0.0	%		(0.1	)%		(1.6	)%
Federal tax credits and income deductions		(2.1	)%		(2.1	)%		(2.4	)%
Tax impact of uncertain tax positions and other		(1.1	)%		0.2	%		0.3	%


Effective income tax rate		35.0	%		36.8	%		36.3	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company's deferred tax assets and liabilities consisted of the following:

	December 31,

	2013									2012
	Assets			Liabilities			Net			Assets			Liabilities			Net
	(in thousands)
Deferred tax:
Current assets (liabilities):
Operating reserves	$	3,345		$	—		$	3,345		$	4,507		$	—		$	4,507
Deferred revenue		2,871			—			2,871			2,377			—			2,377
Prepaid expenses		—			(5,699	)		(5,699	)		—			(3,901	)		(3,901	)
Accrued worker compensation		2,562			—			2,562			2,436			—			2,436
Other		3,790			(3,051	)		739			3,028			(3,182	)		(154	)


Total current	$	12,568		$	(8,750	)	$	3,818		$	12,348		$	(7,083	)	$	5,265
Non-current assets (liabilities):
Intangibles	$	—		$	(324,606	)	$	(324,606	)	$	—		$	(318,429	)	$	(318,429	)
Fixed assets		17,410			—			17,410			14,809			—			14,809
Stock compensation		3,111			—			3,111			2,711			—			2,711
Net operating loss carryforwards		6,763			—			6,763			7,020			—			7,020
Long-term rent liabilities		9,766			—			9,766			8,141			—			8,141
Other		5,744			—			5,744			4,310			—			4,310
Valuation allowance		(565	)		—			(565	)		(1,765	)		—			(1,765	)


Total non-current	$	42,229		$	(324,606	)	$	(282,377	)	$	35,226		$	(318,429	)	$	(283,203	)


Total net deferred taxes	$	54,797		$	(333,356	)	$	(278,559	)	$	47,574		$	(325,512	)	$	(277,938	)

As of December 31, 2013 and 2012, the Company had deferred tax assets relating to state net operating losses ("NOLs") in the amount of $5.3 million and $5.9 million, respectively. As of December 31, 2012, a valuation allowance was provided for certain NOLs, as the Company currently believes that these NOLs, with lives ranging from five to twenty years, may not have been realizable prior to their expiration. During 2013, 2012 and 2011, the Company recorded a valuation allowance adjustment of $1.2 million, $1.2 million and $1.5 million, respectively, which impacted income tax expense. These valuation allowance adjustments reflect a change in circumstances, including a tax law change, which caused a change in judgment about the realizability of certain deferred tax assets, related to state NOLs.

The Company does not have any material undistributed earnings of international subsidiaries, at December 31, 2013 and 2012, as these subsidiaries are either considered to be branches for United States tax purposes, to have incurred cumulative NOLs, or to have only minimal undistributed earnings.

In addition, at December 31, 2013 and 2012, the Company had a liability of $10.8 million and $12.9 million, respectively, for unrecognized tax benefits. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. Accrued interest and penalties were $4.2 million and $5.7 million as of December 31, 2013 and 2012, respectively.

As of December 31, 2013, the Company is not aware 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 12 months.

Holdings files a consolidated federal tax return and various consolidated and separate tax returns as prescribed by the tax laws of the state, local and international jurisdictions in which it and its subsidiaries operate. The Company's 2010 and 2011 federal income tax returns have been examined by the Internal Revenue Service. The Company has various state and local jurisdiction tax years open to examination (earliest open period 2005), and the Company also has certain state and local jurisdictions currently under audit. As of December 31, 2013, the Company believes that it is appropriately reserved for any potential federal and state income tax exposures.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	December 31,

	2013			2012			2011
	(in thousands)
Balance of unrecognized tax benefits at beginning of period	$	12,882		$	10,574		$	8,720
Additions for tax positions taken during current period		873			1,215			1,104
Additions for tax positions taken during prior periods		1,965			4,220			750
Reductions for tax positions taken during prior periods		(4,068	)		(1,439	)		—
Settlements		(804	)		(1,688	)		—


Balance of unrecognized tax benefits at end of period	$	10,848		$	12,882		$	10,574

At December 31, 2013, the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $10.8 million. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its unrecognized tax benefits reflect the most likely outcome. The Company adjusts these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash. Favorable resolution would be recognized as a reduction to its effective income tax rate in the period of resolution.