Note 10 – Income Tax

The provision for income taxes is different from the amount computed by applying U.S. statutory rates to consolidated losses before taxes. The significant reason for these differences is as follows (dollars in thousands):



		Three Months Ended September 30,				Nine Months Ended September 30,
		2013		2012		2013		2012
Expected tax provision	$	1,090	$	56	$	3,139	$	714
Increase (decrease) in tax expense resulting from:
Change in valuation allowance, other		(1,099)		(757)		(3,033)		(920)
Foreign tax provision		88		36		1,129		121
Foreign withholding tax provision		262		227		798		867
Tax effect of foreign tax rates on current income		9		--		(106)		(90)
State and local tax provision		150		98		387		369
Tax/audit litigation settlement		251		240		826		723
Actual tax provision	$	751	$	(100)	$	3,140	$	1,784

Pursuant to FASB ASC 740-10 – Income Taxes (“FASB ASC 740-10”), a provision should be made for the tax effect of earnings of foreign subsidiaries that are not permanently invested outside the United States. Our intent is that earnings of our foreign subsidiaries are not permanently invested outside the United States. Current earnings were available for distribution in the Reading Australia and Reading New Zealand consolidated group of subsidiaries as of September 30, 2013. We have provided $0.4 million in withholding tax expense in relation to those earnings. We believe the U.S. tax impact of a dividend from our Australian and New Zealand subsidiaries, net of loss carry forward and potential foreign tax credits, would not have a material effect on the tax provision as of September 30, 2013.

Deferred income taxes reflect the “temporary differences” between the financial statement carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, adjusted by the relevant tax rate. In accordance with FASB ASC 740-10, we record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax planning strategies, and recent financial performance. FASB ASC 740-10 presumes that a valuation allowance is required when there is substantial negative evidence about realization of deferred tax assets, such as a pattern of losses in recent years, coupled with facts that suggest such losses may continue.

We have accrued $21.7 million in total tax liabilities as of September 30, 2013, of which $13.7 million has been classified as taxes payable – current and $8.0 million have been classified as taxes payable – long-term. As part of current tax liabilities, we have accrued $3.5 million in connection with the negotiated Tax Court judgment, dated January 6, 2011, implementing our agreement with the IRS as to the final disposition of the 1996 tax litigation matter. We believe that the $21.7 million represents an adequate provision for our income and other tax exposures, including income tax contingencies related to foreign withholding taxes.

In accordance with FASB ASC 740-10-25 – Income Taxes - Uncertain Tax Positions (“FASB ASC 740-10-25”), we record interest and penalties related to income tax matters as part of income tax expense.

The following table is a summary of the activity related to unrecognized tax benefits, excluding interest and penalties, for the periods ending September 30, 2013 and December 31, 2012, and December 31, 2011 (dollars in thousands):



		Nine Months Ended September 30, 2013		Year Ended December 31, 2012		Year Ended December 31, 2011
Unrecognized tax benefits – gross beginning balance	$	2,171	$	1,974	$	8,058
Gross increases – prior period tax provisions		193		197		--
Gross increases – current period tax positions		--		--		151
Settlements		--		--		(6,235)
Unrecognized tax benefits – gross ending balance	$	2,364	$	2,171	$	1,974

For the three months ended September 30, 2013, we recorded a change of approximately $0.1 million to our gross unrecognized tax benefits. The net tax balance is approximately $2.4 million, of which $1.3 million would impact the effective rate if recognized.

It is difficult to predict the timing and resolution of uncertain tax positions. Based upon the Company’s assessment of many factors, including past experience and judgments about future events, we estimate that within the next 12 months the reserve for uncertain tax positions will increase within a range of $0.9 million to $1.8 million. The reasons for such changes include but are not limited to tax positions expected to be taken during the next twelve months, reevaluation of current uncertain tax positions, expiring statutes of limitations, and interest related to the “Tax Audit/Litigation” settlement which occurred January 6, 2011.

Our company and subsidiaries are subject to U.S. federal income tax, income tax in U.S. states and possessions, and income tax in Australia and New Zealand. Generally, changes to our U.S. federal and most state income tax returns for the calendar year 2008 and earlier are barred by statutes of limitations. Our income tax returns of Australia filed since inception in 1995 are generally open for examination because of operating losses. The income tax returns filed in New Zealand for calendar year 2009 and afterward generally remain open for examination as of September 30, 2013.