Note 6. Income Taxes

Total income taxes for the years ended December 31, 2013, 2012 and 2011 were allocated as follows:

	2013			2012			2011
	(in thousands)
Income tax expense on continuing operations	$	19,878		$	12,008		$	10,667
Income tax benefit on discontinued operations		-			(196	)		(359	)
Shareholders’ equity, for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes		(101	)		(106	)		(5	)
Other comprehensive income for changes in cash flow hedge		2,315			(574	)
	$	22,092		$	11,132		$	10,303

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,
	2013		2012		2011
	(in thousands)
Current expense (benefit)
Federal taxes	$	3,404	$	3,741	$	(8,539	)
State taxes		2,305		1,868		3,233
Total current provision (benefit)		5,709		5,609		(5,306	)
Deferred expense (benefit)		08	$	10,667
Federal taxes		12,317		5,618		15,749
State taxes		1,852		781		224
Total deferred provision		14,169		6,399		15,973
Income tax expense on continuing operations	$	19,878	$	12,008	$	10,667

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, 2013, 2012 and 2011:

		Years Ended December 31,
		2013			2012		2011
	(in thousands)
Computed “expected” tax expense (35%)		$	17,312		$	10,014	$	8,472
State income taxes, net of federal tax effect			2,702			1,722		2,247
Other, net			(136	)		272		(52	)
Income tax expense on continuing operations		$	19,878		$	12,008	$	10,667

The effective 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 tax rates. Furthermore, the Company completed 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, 2013 and 2012:

	2013			2012
	(in thousands)
Deferred tax assets:
Lease obligations	$	2,139		$	1,374
Deferred activation charges		107			105
Allowance for doubtful accounts		370			441
Inventory reserves		259			244
State net operating loss carry-forwards, net of federal tax		650			782
Accrued pension costs		1,018			879
Loss on investments, net		-			438
Accrued compensation costs		1,140			996
Asset retirement obligations		2,601			2,356
Intangible assets		7,757			7,966
Goodwill		2,660			4,091
Deferred revenues		1,873			1,401
Other, net		-			549
Total gross deferred tax assets		20,574			21,622
Less valuation allowance		(591	)		(538	)
Net deferred tax assets		19,983			21,084

Deferred tax liabilities:
Plant and equipment	$	84,772			72,747
Franchise rights		5,942			4,211
Section 481a deferred revenues		493			737
Deferred financing costs		128			453
Prepaid insurance		241			-
Gain on investments, net		115			-
Other, net		1,876			-
Total gross deferred tax liabilities		93,567			78,148
Net deferred tax liabilities	$	73,584		$	57,064

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. The Company has a deferred tax asset of $650 thousand related to various state net operating losses, and carries this asset at $59 thousand, net of the valuation allowance of $591 thousand.

As of December 31, 2013 and 2012, 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 2010 are no longer subject to examination. The Company is under audit in the state of Maryland for the 2009, 2010 and 2011 tax years, and 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, 2013.