Income Taxes

Deferred income taxes are determined based upon the differences between the financial reporting and tax basis of the Company’s assets and liabilities. Deferred taxes are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits in income tax expense. The Company had recorded a valuation allowance of $0.4 million at September 30, 2012 and $1.1 million December 31, 2011 related to the Company’s deferred tax asset associated specifically with unrealized losses on auction rate securities. This valuation allowance was recorded as the Company does not have historical capital gains nor does it expect to generate capital gains sufficient to utilize the entire deferred tax asset generated by the fair value adjustment. As the fair value adjustment was recorded through accumulated other comprehensive loss, the associated valuation allowance was also recorded through accumulated other comprehensive loss. The above mentioned allowance did not impact the consolidated statement of comprehensive income for the three and nine months ended September 30, 2012 and 2011. The Company has not recorded a valuation allowance against any other deferred tax assets. In management’s opinion, it is more likely than not that the Company will be able to utilize these deferred tax assets in future periods as a result of the Company’s history of profitability, taxable income, and reversal of deferred tax liabilities.

At September 30, 2012 and December 31, 2011, the Company had a total of $15.0 million and $16.1 million in gross unrecognized tax benefits, respectively. Of this amount, $9.6 million and $10.3 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate as of September 30, 2012 and December 31, 2011. Unrecognized tax benefits were a net increase of $0.4 million and $0.3 million during the three months ended September 30, 2012 and September 30, 2011. Unrecognized tax benefits were a net decrease of $1.1 million and $2.5 million during the nine months ended September 30, 2012 and 2011, due mainly to the expiration of certain statutes of limitation net of additions. The increases during the quarterly periods had the effect of increasing the effective state tax rate and the decreases during the nine month periods had the effect of reducing the effective state tax rate during the respective periods.

The total net amount of accrued interest and penalties for such unrecognized tax benefits was $6.9 million and $8.0 million at September 30, 2012 and December 31, 2011 and is included in income taxes payable on the consolidated balance sheet. Net interest and penalties included in income tax expense for the three months ended September 30, 2012 and September 30, 2011 was an expense of approximately $0.2 million and $0.2 million, respectively. Net interest and penalties included in income tax expense for the nine months ended September 30, 2012 and 2011 was a benefit of approximately $1.1 million and $1.4 million, respectively. Income tax expense is increased each period for the accrual of interest on outstanding positions and penalties when the uncertain tax position is initially recorded. Income tax expense is reduced in periods by the amount of accrued interest and penalties associated with reversed uncertain tax positions due to lapse of applicable statute of limitations, when applicable. Income tax expense was increased during the three month periods ended September 30, 2012 and 2011 due to additions for interest and penalty accruals with no reversals during the same period. Income tax expense was reduced during the nine month periods ended September 30, 2012 and 2011 directly related to reversals of interest and penalties due to lapse of applicable statute of limitations, net of additions for interest and penalty accruals during the same period. These unrecognized tax benefits relate to risks associated with state income tax filing positions for the Company’s corporate subsidiaries.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	(in thousands)
Balance at December 31, 2011	$	16,062
Additions based on tax positions related to current year	720
Additions for tax positions of prior years	698
Reductions for tax positions of prior years	(102		)
Reductions due to lapse of applicable statute of limitations	(2,426		)
Settlements	—
Balance at September 30, 2012	$	14,952

A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. These changes could result from the expiration of the statute of limitations, examinations or other unforeseen circumstances. As of September 30, 2012, the Company is under examinations by four state agencies. The Company does not have any outstanding litigation related to tax matters. At this time, management’s best estimate of the reasonably possible change in the amount of gross unrecognized tax benefits to be a decrease of approximately $0.6 million to $1.6 million during the next twelve months mainly due to the expiration of certain statute of limitations. The federal statute of limitations remains open for the years 2009 and forward. Tax years 2002 and forward are subject to audit by state tax authorities depending on the tax code and administrative practice of each state.