7. Income Taxes

Income Tax Expense

The components of income tax expense (benefit) for the following years ended December 31 were as follows (in thousands):

	2011			2012		2013

Income taxes currently payable:
Federal	$	51,195		$	18,345	$	37,691
State		5,534			2,187		3,445


		56,729			20,532		41,136


Deferred income taxes (benefits):
Federal		8,644			14,922		(1,726	)
State		(336	)		2,384		514


		8,308			17,306		(1,212	)


Total income tax expense	$	65,037		$	37,838	$	39,924

Total income tax expense for the years ended December 31 was different from the amount computed using the statutory federal income tax rate of 35 percent for the following reasons (in thousands):

	2011			2012			2013

Income tax expense at federal statutory rate	$	68,458		$	67,107		$	57,815
State income taxes, net of federal income tax benefit		7,013			6,812			4,412
Tax contingencies reversed due to statute closings		(12,521	)		(37,093	)		(25,299	)
Other-net		2,087			1,012			2,996


Total income tax expense	$	65,037		$	37,838		$	39,924

Deferred Income Taxes

The significant components of deferred tax assets and liabilities at December 31 were as follows (in thousands):

	2012			2013

Deferred tax assets:
Operating loss carryforwards	$	10,116		$	8,604
Share-based compensation		16,225			15,926
Other accrued compensation		3,891			7,619
Community reinvestment reserves		6,276			550
Claims reserves		7,244			8,005
Deferred Revenue		2,408			6,708
Other non-deductible accrued liabilities		8,082			13,018
Indirect tax benefits		5,897			4,804
Other deferred tax assets		1,282			987


Total deferred tax assets		61,421			66,221
Valuation allowance		(3,130	)		(3,102	)


Deferred tax assets after valuation allowance		58,291			63,119


Deferred tax liabilities:
Depreciation		(44,728	)		(43,417	)
Amortization of goodwill and intangible assets		(15,782	)		(20,615	)
Other deferred tax liabilities		(169	)		(3,603	)


Total deferred tax liabilities		(60,679	)		(67,635	)


Net deferred tax assets (liabilities)	$	(2,388	)	$	(4,516	)

The Company has federal NOLs as of December 31, 2013 of $3.6 million available to reduce future federal taxable income. These NOLs, if not used, will expire in 2017 through 2019 and are subject to examination and adjustment by the IRS. Utilization of these NOLs is also subject to certain timing limitations, although the Company does not believe these limitations will restrict its ability to use any federal NOLs before they expire. The Company has state NOLs as of December 31, 2013 of $152.3 million available to reduce future state taxable income at certain subsidiaries. Most of these NOLs, if not used, will expire in 2017 through 2022 and are subject to examination and adjustment by the respective state tax authorities.

The Company's valuation allowances against deferred tax assets were $3.1 million as of December 31, 2012 and 2013, mostly relating to uncertainties regarding the eventual realization of certain state net operating loss carryforwards ("NOLs"). Determination of the amount of deferred tax assets considered realizable requires significant judgment and estimation regarding the forecasts of future taxable income which are consistent with the plans and estimates the Company uses to manage the underlying businesses. Although consideration is also given to potential tax planning strategies which might be available to improve the realization of deferred tax assets, none were identified which were both prudent and reasonable. The Company believes taxable income expected to be generated in the future will be sufficient to support realization of the Company's deferred tax assets, as reduced by valuation allowances. This determination is based upon its consistent overall earnings history and future earnings expectations. Other than deferred tax benefits attributable to operating loss carryforwards, there are no time constraints within which the Company's deferred tax assets must be realized. Changes in these estimates in the future could materially affect the Company's financial condition and results of operations. Reversals of valuation allowances are recorded as reductions to income tax expense in the period they occur.

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):

	2011			2012			2013

Balance as of beginning of period	$	111,594		$	99,230		$	56,601
Additions for current year tax positions		3,240			1,904			2,367
Additions for tax positions of prior years		948			403			214
Reductions for tax positions of prior years		(1,492	)		(1,618	)		(396	)
Reductions due to lapses of applicable statutes of limitation		(15,011	)		(43,297	)		(28,606	)
Reductions due to settlements with taxing authorities		(49	)		(21	)		(4	)


Balance as of end of period	$	99,230		$	56,601		$	30,176

If these unrecognized tax benefits had been realized as of December 31, 2012 and 2013, $45.1 million and $23.3 million, respectively, would have reduced income tax expense.

The Company continually performs a comprehensive review of its tax positions and accrues amounts for tax contingencies related to uncertain tax positions. Based upon these reviews, the status of ongoing tax audits, and the expiration of applicable statutes of limitations, accruals are adjusted as necessary. The tax benefit from an uncertain tax position is recognized when it is more likely than not that, based on technical merit, the position will be sustained upon examination, including resolution of any related appeals or litigation processes.

The Company also adjusts these liabilities for unrecognized tax benefits when its judgment changes as a result of the evaluation of new information not previously available. However, the ultimate resolution of a disputed tax position following an examination by a taxing authority could result in a payment that is materially different from that accrued by the Company. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined. However, reversals of unrecognized tax benefits related to deductions for stock compensation in excess of the related book expense are recorded as increases in additional paid-in capital. To the extent reversals of unrecognized tax benefits cannot be specifically traced to these excess deductions due to complexities in the tax law, the Company records the tax benefit for such reversals to additional paid-in capital on a pro-rata basis.

The statutes of limitations regarding the assessment of federal and certain state and local income taxes for 2009 expired during 2013. As a result, $28.6 million of unrecognized tax benefits recorded as of December 31, 2012 were reversed in the current year as a result of statute expirations, of which $23.2 million is reflected as a reduction to income tax expense, $3.9 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $2.1 million of accrued interest was reversed in 2013 and reflected as a reduction to income tax expense due to the closing of statutes of limitations on tax assessments.

The statutes of limitations regarding the assessment of federal and certain state and local income taxes for 2008 expired during 2012. As a result, $43.3 million of unrecognized tax benefits recorded as of December 31, 2011 were reversed in 2012 as a result of statute expirations, of which $35.7 million is reflected as a reduction to income tax expense, $6.2 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $1.4 million of accrued interest and $0.8 million of unrecognized state tax benefits were reversed in 2012 and reflected as reductions to income tax expense due to the closing of statutes of limitations on tax assessments and changes in tax return elections, respectively.

With few exceptions, the Company is no longer subject to income tax assessments by tax authorities for years ended prior to 2010. Further, it is reasonably possible the statutes of limitations regarding the assessment of federal and most state and local income taxes for 2010 could expire during 2014. The Company anticipates that up to $19.5 million of unrecognized tax benefits recorded as of December 31, 2013 could be reversed during 2014 as a result of statute expirations, of which $16.0 million would be reflected as a reduction to income tax expense, $2.6 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. All such reversals would be reflected as discrete adjustments during the quarter in which the respective statute expiration occurs, primarily in the third quarter.

As of December 31, 2012 and 2013, the Company had accrued approximately $2.7 million and $1.5 million, respectively, for the potential payment of interest and penalties (net of indirect benefits). The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. During the years ended December 31, 2011, 2012 and 2013, the Company recorded approximately $(0.9) million, $(0.1) million and $(1.2) million in interest and penalties.