The federal income tax expense (benefit) on continuing operations (in millions) was as follows:

		For the Years Ended December 31,
		2011		2010		2009
Current		$	16	$	(138)	$	(751)
Deferred			281		421		645
	Federal income tax expense (benefit)	$	297	$	283	$	(106)

A reconciliation of the effective tax rate differences (in millions) was as follows:

			For the Years Ended December 31,
			2011			2010			2009
Tax rate times pre-tax income			$	210		$	432		$	(182)
Effect of:
	Tax-preferred investment income			(122)			(105)			(92)
	Tax credits			(42)			(42)			(46)
	Goodwill			261			-			238
	Prior year tax return adjustment			(28)			(12)			(60)
	Other items			18			10			36
		Federal income tax expense (benefit)	$	297		$	283		$	(106)
Effective tax rate				50	%		23	%		20	%

Included in tax-preferred investment income was a separate account dividends-received deduction benefit of $112 million, $94 million and $77 million for the years ended December 31, 2011, 2010 and 2009, respectively, exclusive of any prior years' tax return adjustment.

		As of December 31,
		2011		2010
Current		$	(241)	$	(182)
Deferred			(2,432)		(1,221)
	Total federal income tax asset (liability)	$	(2,673)	$	(1,403)

Significant components of our deferred tax assets and liabilities (in millions) were as follows:

			As of December 31,
			2011		2010
Deferred Tax Assets
Future contract benefits and other contract holder funds			$	909	$	1,400
Deferred gain on business sold through reinsurance				122		160
Reinsurance related embedded derivative asset				59		22
Investments				489		401
Compensation and benefit plans				304		272
Net operating loss				23		-
Net capital loss				59		97
Tax credits				208		105
VIE				98		77
Other				202		108
	Total deferred tax assets			2,473		2,642
Deferred Tax Liabilities
DAC				1,823		1,977
VOBA				370		483
Net unrealized gain on AFS securities				2,259		1,014
Net unrealized gain on trading securities				131		90
Intangibles				160		165
Other				162		134
	Total deferred tax liabilities			4,905		3,863
		Net deferred tax asset (liability)	$	(2,432)	$	(1,221)

Although realization is not assured, management believes as of December 31, 2011 and 2010, it is more likely than not that the deferred tax assets, including our capital loss deferred tax asset, will be realized.

As of December 31, 2011, LNC had net capital loss carryforwards of $93 million and $77 million which will expire in 2014 and 2015, respectively. LNC believes that it is more likely than not that the capital losses will be fully utilized within the allowable carryforward period.

As of December 31, 2011, LNC had net operating loss carryforwards of $66 million which will expire in 2031. LNC believes that it is more likely than not that the operating losses will be fully utilized within the allowable carryforward period.

As of December 31, 2011 and 2010, $234 million and $223 million of our unrecognized tax benefits presented below, if recognized, would have affected our income tax expense and our effective tax rate. We anticipate a change to our unrecognized tax benefits during 2012 in the range of zero to $131 million. A reconciliation of the unrecognized tax benefits (in millions) was as follows:

			For the
			Years Ended
			December 31,
			2011		2010
Balance as of beginning-of-year			$	318	$	336
	Increases for prior year tax positions			2		2
	Decreases for prior year tax positions			(10)		(7)
	Increases for current year tax positions			12		9
	Decreases for current year tax positions			(6)		(8)
	Decreases for settlements with taxing authorities			-		(10)
	Decreases for lapse of statute of limitations			-		(4)
		Balance as of end-of-year	$	316	$	318

We recognize interest and penalties accrued, if any, related to unrecognized tax benefits as a component of tax expense. For the years ended December 31, 2011, 2010 and 2009, we recognized interest and penalty expense related to uncertain tax positions of $10 million, $7 million and $12 million, respectively. We had accrued interest and penalty expense related to the unrecognized tax benefits of $103 million and $93 million as of December 31, 2011 and 2010, respectively.

In the normal course of business, we are subject to examination by taxing authorities throughout the U.S. and the U.K. At any given time, we may be under examination by state, local or non-U.S. income tax authorities. During the second quarter of 2010, the IRS completed its examination for tax years 2005 and 2006 resulting in a proposed assessment. Also, during the second quarter of 2010, the IRS completed its examination of tax year 2006 for the former Jefferson-Pilot Corporation (“JP”) and its subsidiaries. We believe a portion of the assessments is inconsistent with the existing law and are protesting it through the established IRS appeals process. We do not anticipate that any adjustments that might result from such audits would be material to our consolidated results of operations or financial condition. We are currently under audit by the IRS for years 2007 and 2008. The JP subsidiaries acquired in the April 2006 merger are subject to a separate IRS examination cycle. For the former JP subsidiaries, JP Life Insurance Company and JP Financial Insurance Company, the IRS is examining the tax years ended April 1, 2007, and July 1, 2007, respectively.