9.	Income Taxes

The provision for (benefit from) income taxes consists of the following:


	Year Ended December 31,
	2012		2011		2010
Current
Federal	$	(109)	$	-	$	-
State		(16)		(3)		2
Foreign		7		36		36

Current income tax provision		(118)		33		38


Deferred
Federal		93		36		(7)
State		20		10		8
Foreign		15		(14)		(21)

Deferred income tax benefit		128		32		(20)

Provision for income taxes	$	10	$	65	$	18

Pretax income (loss) for domestic and foreign operations consists of the following:


	Year Ended December 31,
	2012		2011		2010
United States	$	233	$	74	$	(17)
Foreign ^(a)		67		(38)		89

Pretax income	$	300	$	36	$	72

^(a)

2011 includes $128 million of transaction-related costs.

Current and non-current deferred income tax assets and liabilities are comprised of the following:


	As of December 31,
	2012		2011
Current deferred income tax assets:
Accrued liabilities and deferred income	$	179	$	175
Provision for doubtful accounts		10		9
Acquisition and integration-related liabilities		8		8
Convertible note hedge		3		7
Valuation allowance ^(a)		(22)		(45)

Current deferred income tax assets		178		154


Current deferred income tax liabilities:
Accrued liabilities and deferred income		6		8
Prepaid expenses		26		26

Current deferred income tax liabilities		32		34

Current net deferred income tax assets	$	146	$	120


Non-current deferred income tax assets:
Net tax loss carryforwards ^(b)	$	1,454	$	358
Accrued liabilities and deferred income		151		155
Depreciation and amortization		54		74
Tax credits		62		62
Convertible note hedge		2		13
Acquisition and integration-related liabilities		16		18
Other		36		39
Valuation allowance ^(a)		(276)		(228)

Non-current deferred income tax assets		1,499		491


Non-current deferred income tax liabilities:
Depreciation and amortization		42		43
Other		3		4

Non-current deferred income tax liabilities		45		47

Non-current net deferred income tax assets	$	1,454	$	444

^(a)

The valuation allowance of $298 million at December 31, 2012 relates to tax loss carryforwards, foreign tax credits and certain state deferred tax assets of $227 million, $53 million and $18 million, respectively. The valuation allowance will be reduced when and if the Company determines it is more likely than not that the related deferred income tax assets will be realized. The valuation allowance of $273 million at December 31, 2011 relates to tax loss carryforwards, foreign tax credits and certain state deferred tax assets of $195 million, $53 million and $25 million, respectively. The valuation allowance will be reduced when and if the Company determines it is more likely than not that the related deferred income tax assets will be realized.

^(b)

The increase in net tax loss carryforwards is primarily due to an increase in U.S. federal net operating losses as a result of accelerated tax depreciation on vehicles.

Deferred income tax assets and liabilities related to vehicle programs are comprised of the following:


	As of December 31,
	2012		2011
Deferred income tax assets:
Depreciation and amortization	$	49	$	35
Unrealized hedge loss		-		8

		49		43

Deferred income tax liabilities:
Depreciation and amortization		2,212		1,025

		2,212		1,025


Net deferred income tax liabilities under vehicle programs	$	2,163	$	982

At December 31, 2012, the Company had U.S. federal net operating loss carryforwards of approximately $3.3 billion, most of which expire in 2031. Currently, the Company does not record valuation allowances on the majority of its U.S. federal tax loss carryforwards as there are adequate deferred tax liabilities that could be realized within the carryforward period. At December 31, 2012, the Company had foreign net operating loss carryforwards of approximately $305 million with an indefinite utilization period. No provision has been made for U.S. federal deferred income taxes on approximately $683 million of accumulated and undistributed earnings of foreign subsidiaries at December 31, 2012, since it is the present intention of management to reinvest the undistributed earnings indefinitely in those foreign operations. The determination of the amount of unrecognized U.S. federal deferred income tax liability for unremitted earnings is not practicable. In 2011, the Company recorded tax adjustments related to prior periods that reduced the Company’s non-current deferred income tax assets by approximately $230 million, deferred income tax liabilities under vehicle programs by approximately $330 million, increased income taxes payable by approximately $65 million and increased additional paid-in capital by $30 million. There was no material impact to the Company’s net income as a result of these adjustments.

The reconciliation between the U.S. federal income tax statutory rate and the Company’s effective income tax rate is as follows:


	Year Ended December 31,
	2012		2011		2010
U.S. federal statutory rate		35.0%		35.0%		35.0%
Adjustments to reconcile to the effective rate:
State and local income taxes, net of federal tax benefits		4.9		4.2		(7.0)
Changes in valuation allowances		0.9		(1.3)		15.1
Taxes on foreign operations at rates different than statutory U.S. federal rates ^(a)		-		(13.2)		(22.0)
Resolution of prior years’ examination issues		(42.5)		-		-
Non-deductible transaction-related costs		0.3		146.5		-
Other non-deductible expenses		5.3		10.1		5.4
Other		(0.6)		(0.7)		(1.5)

		3.3%		180.6%		25.0%

^(a)

In 2010, the Company realized a benefit relating to additional tax depreciation within the Company’s operations in Australia.

The following is a tabular reconciliation of the gross amount of unrecognized tax benefits for the year:


	2012		2011		2010
Balance at January 1	$	186	$	40	$	603
Additions based on tax positions related to the current year		4		-		-
Additions for tax positions for prior years		5		143		9
Additions associated with the acquisition of Avis Europe		-		34		-
Reductions for tax positions for prior years		(140)		(3)		(443)
Settlements		(1)		-		(129)
Statute of limitations		-		(28)		-

Balance at December 31	$	54	$	186	$	40

In 2012, the Company recorded a reduction in its unrecognized tax benefits primarily due to an effective settlement of $128 million for pre-Separation taxes. The Company does not anticipate that total unrecognized tax benefits will change significantly in 2013.

At December 31, 2011, the Company recharacterized $128 million of deferred income tax liabilities under vehicle programs for tax positions for prior years as unrecognized tax benefits. Substantially all of the gross amount of the unrecognized tax benefits at December 31, 2012, 2011 and 2010, if recognized, would affect the Company’s provision for, or benefit from, income taxes. As of December 31, 2012, the Company’s unrecognized tax benefits were offset by tax loss carryforwards in the amount of $14 million.

The following table presents unrecognized tax benefits reflected as of December 31:


	As of December 31,
	2012		2011
Unrecognized tax benefit in non-current income taxes payable ^(a)	$	39	$	169
Accrued interest payable on potential tax liabilities ^(b)		22		21

^(a)

Pursuant to the agreements governing the Separation entered into in connection with the Separation (as defined below), the Company is entitled to indemnification for non-Avis Budget Car Rental tax contingencies for taxable periods prior to and including the Separation. As of December 31, 2012, $15 million of unrecognized tax benefits are non-Avis Budget Car Rental tax contingencies.

^(b)

The Company recognizes potential interest related to unrecognized tax benefits within interest expense related to corporate debt, net on the accompanying Consolidated Statements of Operations. Penalties incurred during the twelve months ended December 31, 2012, 2011 and 2010, were not significant and were recognized as a component of income taxes.

In 2010, the Company reached a settlement with the Internal Revenue Service (“IRS”) with respect to its examination of the Company’s taxable years 2003 through 2006, the year in which the Company was separated (the “Separation”) into four independent companies. The Company was entitled to indemnification for most pre-Separation tax matters from the Company’s former Realogy Corporation (“Realogy”) and Wyndham Worldwide Corporation (“Wyndham”) subsidiaries, and therefore amounts due to the IRS at the conclusion of the audit did not have a material impact on the Company’s financial position. The Company made payments to the IRS and state tax authorities of $144 million, including interest, in conjunction with the conclusion of the audit, all of which were funded by Realogy and Wyndham. The Company was also reimbursed $89 million by Wyndham for the use of certain of the Company’s tax attributes in connection with the conclusion of the IRS audit. As a result of the conclusion of the audit, the Company reduced income taxes payable and related receivables from Realogy and Wyndham by approximately $295 million, which items offset within income from discontinued operations. In addition, in connection with the conclusion of the IRS audit, a reallocation of certain deferred taxes with our former subsidiaries resulted in a $16 million decrease to stockholders’ equity.