Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. U.S. income taxes have not been provided on the undistributed earnings of foreign subsidiaries and affiliates that GATX intends to permanently reinvest in foreign operations. The cumulative amount of such earnings was $551.4 million at December 31, 2012. The ultimate tax cost of these earnings is dependent on tax laws in effect and other circumstances at the time of distribution.

Significant components of GATX’s deferred tax liabilities and assets as of December 31 were (in millions):



	2012			2011
Deferred Tax Liabilities
Book/tax basis difference due to depreciation	$	806.7		$	756.2
Leveraged leases	—			62.7
Investments in affiliated companies	81.6			82.4
Lease accounting (other than leveraged)	12.6			13.7
Other	3.1			2.9
Total deferred tax liabilities	904.0			917.9
Deferred Tax Assets
Alternative minimum tax credit	5.2			8.9
Federal net operating loss	—			38.1
Foreign tax credit	7.3			13.9
Valuation on foreign tax credit	(7.3		)	(13.9		)
State net operating loss	26.6			31.1
Valuation on state net operating loss	(12.8		)	(15.8		)
Foreign net operating loss	9.5			7.3
Accruals not currently deductible for tax purposes	19.1			21.8
Allowance for losses	6.6			5.4
Pension and post-retirement benefits	48.6			40.7
Other	18.2			14.5
Total deferred tax assets	121.0			152.0
Net deferred tax liabilities	$	783.0		$	765.9

At December 31, 2012, GATX had fully utilized its U.S. federal tax net operating loss carryforward of $108.8 million, and its alternative minimum tax credit, which has an unlimited carryforward period, was reduced to $5.2 million.

At December 31, 2012, GATX had foreign tax credits of $7.3 million that are scheduled to expire beginning in 2015. A $7.3 million valuation allowance has been recorded as the Company believes it is more likely than not that it will be unable to utilize these credits. GATX also had state net operating losses of $26.6 million, net of federal benefit, that are scheduled to expire at various times beginning in 2013. A $12.8 million valuation allowance has been recorded as the Company believes it is more likely than not that it will be unable to utilize all of these losses. Additionally, GATX has a foreign net operating loss of $9.5 million that has an unlimited carryforward period. Utilization of future tax credits and net operating losses will be dependent on a number of variables, including the amount of taxable income, foreign source income attributes and state apportionment factors.

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



	2012			2011
Beginning balance	$	20.8		$	42.7
Reductions due to expiration of the applicable statute of limitations	(16.1		)	—
Reductions due to settlement of audit issues	—			(21.9		)
Ending balance	$	4.7		$	20.8

At December 31, 2012, GATX’s gross liability for unrecognized tax benefits was $4.7 million of which $3.2 million, if recognized, would favorably impact income tax expense. Subject to the completion of certain audits, the Company believes it is reasonably possible that, within the next 12 months, unrecognized tax benefits of $0.4 million may be recognized. During the year ended December 31, 2012, upon expiration of the applicable statute of limitations, GATX released a gross unrecognized tax benefit of $16.1 million (net tax expense impact of $15.5 million). During the year ended December 31, 2011, the Company settled several open audit years resulting in the release of gross unrecognized tax benefits totaling $21.9 million (net tax expense impact of $4.8 million). The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. No amounts have been accrued for penalties. To the extent interest is not assessed or otherwise reduced with respect to uncertain tax positions, any required adjustment will be recorded as a reduction of income tax expense.

GATX files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction, as well as various state and foreign jurisdictions. All federal examinations with respect to GATX’s U.S. tax returns for years prior to 2009 have been closed. The Company and its subsidiaries are undergoing audits in various state and foreign jurisdictions.

The components of income before income taxes, excluding domestic and foreign joint ventures, for the years ending December 31 consisted of (in millions):



	2012		2011		2010
Domestic	$	80.5	$	39.5	$	5.1
Foreign	63.3		68.1		54.2
	$	143.8	$	107.6	$	59.3

GATX and its U.S. subsidiaries file a consolidated federal income tax return. Income taxes, excluding domestic and foreign joint ventures, for the years ending December 31 consisted of (in millions):



	2012			2011		2010
Current
Domestic:
Federal	$	(8.8	)	$	0.7	$	(0.2	)
State and local	2.5			0.8		0.8
	(6.3		)	1.5		0.6
Foreign	8.0			5.0		5.0
	1.7			6.5		5.6
Deferred
Domestic:
Federal	16.0			8.9		(3.1		)
State and local	(3.1		)	0.5		0.3
	12.9			9.4		(2.8		)
Foreign	11.5			13.3		4.2
	24.4			22.7		1.4
Income taxes	$	26.1		$	29.2	$	7.0

The reasons for the difference between GATX’s effective income tax rate and the federal statutory income tax rate for the years ending December 31 were (in millions):



	2012			2011			2010
Income taxes at federal statutory rate	$	50.4		$	37.7		$	20.8
Adjust for effect of:
Foreign tax credits	(13.7		)	(0.1		)	—
Foreign earnings taxed at lower rates	(4.1		)	(6.7		)	(2.7		)
Tax effect of foreign dividends	6.3			—			—
Expiration of the applicable statute of limitations	(15.5		)	—			—
Settlement of audit issues	—			(4.8		)	(9.5		)
Corporate owned life insurance	(0.3		)	(0.2		)	(2.4		)
State income taxes	1.9			1.1			0.1
Other	1.1			2.2			0.7
Income taxes	$	26.1		$	29.2		$	7.0
Effective income tax rate	18.2		%	27.1		%	11.8		%

The 2012 effective income tax rate was impacted by the utilization of foreign tax credits offset by incremental income and withholding taxes on foreign dividends. Additionally, 2012 included a $15.5 million benefit that was recognized upon the expiration of the applicable statute of limitations. In each of 2011 and 2010, the effective income tax rate was impacted by the resolution of various foreign, federal, and state tax audit issues. The adjustment for foreign earnings reflects the impact of lower tax rates on income earned at GATX's foreign subsidiaries.

State income taxes are provided on domestic pre-tax income or loss. The effect of state income tax on the overall income tax rate is impacted by the amount of domestic income subject to state taxes relative to total worldwide income.