11. Income Taxes

Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that are expected to be in effect when these differences reverse. Deferred tax expense (benefit) is generally the result of changes in the assets or liabilities for deferred taxes.

The following summarizes pretax income (loss) (in millions):

	Year Ended December 31,

	2012			2011		2010
U.S.	$	580.1		$	273.5	$	462.6
International		(60.6	)		0.5		14.0

Total	$	519.5		$	274.0	$	476.6

Provision for income taxes (benefits) consists of the following components (in millions):

	Year Ended December 31,

	2012			2011			2010
Current
Federal	$	167.9		$	69.6		$	99.0
State and local		25.7			10.4			23.4
International		12.9			9.4			10.3

Total current		206.5			89.4			132.7

Deferred
Federal		(3.2	)		11.0			32.5
State and local		(4.7	)		0.4			(0.4	)
International		(3.1	)		(5.0	)		(5.7	)

Total deferred		(11.0	)		6.4			26.4

Total provision for income taxes	$	195.5		$	95.8		$	159.1

Differences between the Company's effective income tax rate and the U.S. federal income tax statutory rate are as follows (in millions):

	Year Ended December 31,

	2012			2011			2010
Provision for income taxes using the statutory rate in effect	$	181.8		$	95.9		$	166.7
Tax effect of:
State and local income taxes, net		6.6			7.0			13.9
International income taxes, net		26.1			2.7			(2.2	)
Earnings of U.S. unconsolidated affiliates		(2.9	)		(2.8	)		(4.1	)
Valuation allowance		3.0			1.8			0.4
Tax credits		(20.3	)		(10.5	)		(10.0	)
Uncertain tax positions		15.0			7.7			1.5
Dividend received deduction		(3.0	)		(2.2	)		(8.2	)
Domestic production activities deduction		(9.7	)		(6.9	)
Other		(1.1	)		3.1			1.1

Total provision for income taxes	$	195.5		$	95.8		$	159.1

Effective tax rate		37.6	%		35.0	%		33.4	%
Statutory federal tax rate		35.0	%		35.0	%		35.0	%

The federal and state deferred tax assets (liabilities) recorded on the Consolidated Balance Sheet are as follows (in millions):

	December 31,

	2012			2011
Liabilities:
Deferred cancellation of debt income	$	(93.0	)	$	(95.7	)
Investments in available for sale securities		(173.4	)		(196.7	)
Unconsolidated affiliates and investments		(12.2	)		(11.5	)
Accumulated depreciation and amortization		(34.8	)		(40.5	)
Book accruals and prepaid expenses		(2.6	)		(6.8	)
Debenture original issue discount		(19.3	)		(16.7	)
Other					(7.6	)

Total deferred tax liabilities		(335.3	)		(375.5	)

Assets:
Deferred compensation and other employee benefits		46.3			47.2
Net operating loss		16.9			20.9
Other		1.9			1.9

Total deferred tax assets		65.1			70.0

Valuation allowance		(14.6	)		(12.6	)

Net deferred tax liability	$	(284.8	)	$	(318.1	)

The Company has approximately $4.5 million of federal net operating losses as of December 31, 2012 as a result of previous business combinations. These net operating losses expire in 2025 and are available to reduce future income taxes. Since these net operating losses were generated by an entity prior to its acquisition by DST, their utilization is subject to certain limitations imposed by the Internal Revenue Code. The Company does not anticipate that such limitations will prohibit the utilization of the federal net operating loss carryforwards prior to their expiration. The Company has approximately $26.2 million of state net operating losses as of December 31, 2012 as a result of previous business combinations. These net operating losses begin to expire in 2022.

The Company has approximately $58.0 million of net operating loss carryforwards as of December 31, 2012 in international jurisdictions. These carryforwards do not expire but may be limited in their ability to offset only certain income. A net benefit of approximately $7.7 million of these net operating losses will be recorded in additional paid-in capital in the Consolidated Balance Sheet upon realization. Authoritative accounting guidance requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the realizability of certain international net deferred tax assets, the Company also anticipates that limitations may result in the benefit of these amounts not being realized and has established corresponding valuation allowances as of December 31, 2012 and 2011 of $14.6 million and $12.6 million, respectively. A $2.3 million valuation allowance previously established on deferred income tax assets of Output U.K. was released during 2010. The release resulted from the acquisition of dsicmm Group. Output U.K. was the beneficiary of this income tax benefit, and accordingly, DST's share of the benefit was 70.5% or $1.6 million. The remaining portion of the income tax benefit (29.5% or $700,000) was attributed to the non-controlling interest.

Prior to 1993, the Company generally did not provide deferred income taxes for unremitted earnings of certain investees accounted for under the equity method because those earnings have been and will continue to be reinvested indefinitely. Beginning in 1993, pursuant to the provisions of the authoritative accounting guidance related to income taxes, the Company began providing deferred taxes for unremitted earnings of U.S. unconsolidated affiliates net of the 80% dividends received deduction provided for under current tax law. Through December 31, 2012, the cumulative amount of such unremitted earnings was $210.2 million. These amounts would become taxable to the Company if distributed by the affiliates as dividends, in which case the Company would be entitled to the dividends received deduction for 80% of the dividends; alternatively, these earnings could be realized by the sale of the affiliates' stock, which would give rise to tax at federal capital gains rates and state ordinary income tax rates, to the extent the stock sale proceeds exceeded the Company's tax basis. Deferred taxes provided on unremitted earnings through December 31, 2012 and 2011 were $14.7 million and $14.0 million, respectively.

As of December 31, 2012, accumulated undistributed earnings of foreign subsidiaries (excluding India) were $90.3 million. During 2011, the Company's ongoing evaluation of its ability to redeploy foreign cash sources resulted in the Company making a distribution from and reversing its permanently reinvested assertion with respect to its India subsidiary. As a result, the Company recorded approximately $0.1 million and $0.6 million of related income tax liability, net of credits, on the India unremitted earnings in 2012 and 2011, respectively. The Company intends to indefinitely reinvest the earnings in the businesses of its other foreign subsidiaries. As a consequence, no federal or state income taxes or foreign withholding taxes have been provided for amounts which would become payable, if any, on the distribution of such earnings. In the event of such a distribution, the Company may be able to offset, at least in part, the U.S. federal income tax consequences of such a distribution with foreign income tax credits which would become creditable as a result of such a distribution. It is not practicable for the Company to determine the income tax it would incur, if any, if such earnings were distributed.

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

	Year Ended December 31,

	2012			2011			2010
Balance at beginning of year	$	93.5		$	75.0		$	78.5
Additions based on tax positions related to the current year		15.9			7.3			5.4
Additions for tax positions of prior years		18.3			14.4			3.1
Reductions for tax positions of prior years		(24.3	)		(2.2	)		(11.1	)
Settlements					(0.4	)		(0.1	)
Statute expirations		(2.2	)		(0.6	)		(0.8	)

Balance at end of year	$	101.2		$	93.5		$	75.0

Included in the Company's net unrecognized tax benefit at December 31, 2012, 2011 and 2010 are $63.0 million, $49.9 million and $44.0 million, respectively, of tax positions which, if recognized, would affect the effective tax rate. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income taxes, which is consistent with the recognition of these items in prior reporting periods. As of December 31, 2012, the Company had $13.3 million of interest and penalties accrued associated with unrecognized tax benefits. The liability for interest and penalties increased $1.9 million during the year ended December 31, 2012 to $13.3 million. The liability for interest and penalties increased $1.8 million during the year ended December 31, 2011.

It is expected that the amount of unrecognized tax benefits will change during the next year; however, the Company does not expect the change to have a significant impact on its results of operations or financial position.

The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. An IRS examination for the tax years ended December 31, 2006 and 2007 was completed in March 2011. An IRS examination for the tax years ended December 31, 2008 and 2009 began during 2011. As of December 31, 2012, the IRS has not proposed any significant adjustments which would be material to the Company's financial statements. Various state, local, and foreign income tax returns are also under examination by taxing authorities. The Company does not believe that the outcome of any examination will have a material impact on its financial statements.

The Company filed federal income tax refund claims for research and experimentation credits for the tax years 2002 through 2009. During 2012, the Company and the IRS reached a resolution in regards to 2002 through 2005 refund claims. As a result, the Company recorded an income tax benefit of $16.0 million. This income tax benefit relates to the resolved claim years and certain post-audit periods that are still subject to examination.

The Company filed federal income tax refund claims for the tax years 2005 through 2009 related to its domestic manufacturing deduction under Internal Revenue Code Section 199 based on technical developments and interpretations that have occurred since filing the original returns. During 2012, the Company and the IRS reached a resolution in regards to the 2005 refund claim. As a result, the Company recorded an income tax benefit of $2.3 million. The claims for 2006 through 2009 are estimated to exceed $10 million, and the IRS is conducting a full examination of these claims. Due to ongoing uncertainty related to the realization of any tax benefit associated with these refund claims, the Company has not yet recorded any significant income tax benefit in the accompanying financial statements related to these refund claims and has fully reserved the benefit upon filing the claims. To the extent refunds are received, the Company will reduce income tax expense when realized.