Note 6. Income Taxes

Total income taxes for the years ended December 31, 2012, 2011 and 2010 were allocated as follows:

	2012			2011			2010
	(in thousands)
Income tax expense on continuing operations	$	12,008		$	10,667		$	13,393
Income tax benefit on discontinued operations		(196	)		(359	)		(480	)
Shareholders' equity, for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes		(106	)		(5	)		(70	)
Other comprehensive income for changes in unrecognized actuarial losses on pensions		-			-			1,549
Other comprehensive income for changes in cash flow hedge		(574	)
	$	11,132		$	10,303		$	14,392

The Company and its subsidiaries file income tax returns in several jurisdictions. The provision for the federal and state income taxes attributable to income from continuing operations consists of the following components:

	Years Ended December 31,
	2012		2011			2010
	(in thousands)
Current expense (benefit)
Federal taxes	$	3,741	$	(8,539	)	$	6,240
State taxes		1,868		3,233			2,535
Total current provision (benefit)		5,609		(5,306	)		8,775
Deferred expense (benefit)
Federal taxes		5,618		15,749			3,991
State taxes		781		224			627
Total deferred provision		6,399		15,973			4,618
Income tax expense on continuing operations	$	12,008	$	10,667		$	13,393

A reconciliation of income taxes determined by applying the federal and state tax rates to income from continuing operations is as follows for the years ended December 31, 2012, 2011 and 2010:

	Years Ended December 31,
		2012		2011			2010
	(in thousands)
Computed "expected" tax expense (35%)		$	10,014	$	8,472		$	11,258
State income taxes, net of federal tax effect			1,722		2,247			2,055
Other, net			272		(52	)		80
Income tax expense on continuing operations		$	12,008	$	10,667		$	13,393

The effective tax rates vary among the years presented primarily due to state income taxes. Changes in the mix of income and/or losses among the company's subsidiaries, which file separate state returns for various states, result in variations in the effective rates. The Company executed a legal entity restructuring during the year ended December 31, 2012 that reduced the effective tax rate from the prior year.

Net deferred tax assets and liabilities consist of the following at December 31, 2012 and 2011:

		2012			2011
		(in thousands)
Deferred tax assets:
Lease obligations	$	1,374		$	1,168
Deferred activation charges		105			64
Allowance for doubtful accounts		441			320
Inventory reserves		244			80

State net operating loss carry-forwards, net of federal tax		782			590
Accrued pension costs		879			902
Loss on investments, net		438			783
Accrued compensation costs		996			697
Asset retirement obligations		2,356			3,131
Intangible assets		7,966			6,309
Goodwill		4,091			198
Deferred revenues		1,401			-
Other, net		549			256
Total gross deferred tax assets		21,622			14,498
Less valuation allowance		(538	)		(518	)
Net deferred tax assets		21,084			13,980

Deferred tax liabilities:
Plant and equipment	$	72,747			62,719
Franchise rights		4,211			2,381
Section 481a deferred revenues		737			-
Deferred financing costs		453			-
Deferred activation charges		-			53
Total gross deferred tax liabilities		78,148			65,153
Net deferred tax liabilities	$	57,064		$	$51,173

In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generating future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes it more likely than not that the state net operating loss carry-forwards from its Converged Services segment will not be realized. Due to losses in Shentel Converged Services, the valuation allowance has been increased by $20 thousand during 2012, bringing the total valuation allowance to $538 thousand at December 31, 2012. The Company has a deferred tax asset of $782 thousand related to various state net operating losses, $244 thousand net of the valuation allowance.

As of December 31, 2012 and 2011, the Company had no unrecognized tax benefits. It is the Company's policy to record interest and penalties related to unrecognized tax benefits in income before taxes.

The Company files U.S. federal income tax returns and various state and local income tax returns. With few exceptions, years prior to 2009 are no longer subject to examination. The Company is under audit in the state of Maryland for the 2007, 2008 and 2009 tax years. The Company is under audit in the state of Pennsylvania for the 2009 tax year. No other state or federal income tax audits were in process as of December 31, 2012.