Income Taxes

For financial reporting purposes, income before income taxes includes the following components (in thousands):



	Successor						Predecessor
	Year Ended December 31, 2012		Year Ended December 31, 2011		Period From October 1, 2010 Through December 31, 2010		Period from July 1, 2010 Through September 30, 2010		Year Ended June 30, 2010
U.S. income	$	732,430	$	610,351	$	127,779	$	89,246	$	354,848
Non-U.S. income (loss)	11,786		11,467		1,487		1,390		(1,409		)
Income before income taxes	$	744,216	$	621,818	$	129,266	$	90,636	$	353,439

The income tax provision consists of the following (in thousands):



	Successor									Predecessor
	Year Ended December 31, 2012			Year Ended December 31, 2011			Period From October 1, 2010 Through December 31, 2010			Period from July 1, 2010 Through September 30, 2010			Year Ended June 30, 2010
Current:
U.S. federal	$	255,006		$	156,247		$	20,111		$	38,307		$	150,519
U.S. state and local	22,890			28,266			19,673			764			8,510
Non-U.S.	568			1,542			(6,518		)	(187		)	(1,569		)
Total current	278,464			186,055			33,266			38,884			157,460
Deferred:
U.S. federal	(4,561		)	51,317			30,522			(2,230		)	(28,589		)
U.S. state and local	5,191			(1,544		)	(14,986		)	2,609			4,938
Non-U.S.	1,996			463			5,831			73			(916		)
Total deferred	2,626			50,236			21,367			452			(24,567		)
Total income tax provision	$	281,090		$	236,291		$	54,633		$	39,336		$	132,893

Our effective income tax rate on income before income taxes differs from the U.S. statutory rate as follows:



	Successor						Predecessor
	Year Ended December 31, 2012		Year Ended December 31, 2011		Period From October 1, 2010 Through December 31, 2010		Period From July 1, 2010 Through September 30, 2010		Year Ended June 30, 2010
U.S. statutory tax rate	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%
State and other income taxes	1.2		1.3		1.2		0.9		0.9
Uncertain tax positions	1.2		1.1		1.7		1.6		1.1
Non-deductible acquisition expenses			0.1		4.6		4.5
Other	0.4		0.5		(0.2	)	1.4		0.6
	37.8	%	38.0	%	42.3	%	43.4	%	37.6	%

Deferred Income Tax Assets and Liabilities

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands):



	Successor
	December 31, 2012		December 31, 2011
Deferred tax assets:
Purchase accounting adjustment – fair value	$	30,267	$	97,384
Basis difference in loan portfolio	110,669
Income tax benefits from uncertain tax positions	40,167		37,882
Net operating loss carryforward – Canada	21,146		4,609
Net operating loss carryforward – states	2,389		1,676
Borrowing costs	10,178		9,502
Purchase accounting premium – payables	4,569		16,468
Other	35,483		15,053
Total deferred tax assets before valuation allowance	254,868		182,574
Less: valuation allowance			(1,222		)
Total net deferred tax assets	254,868		181,352
Deferred tax liabilities:
Depreciable assets	71,043		10,689
Fee income	31,099		28,883
Capitalized direct loan origination costs	16,566		9,668
Intangible assets	12,559		6,938
Deferred gain on debt repurchase	7,791		9,303
Basis difference in loan portfolio			3,045
Other	8,735		4,142
Total deferred tax liabilities	147,793		72,668
Net deferred tax asset	$	107,075	$	108,684

We have state net operating loss (“NOL”) carryforwards resulting in a deferred tax asset of $2.4 million. The NOLs have carryforward periods ranging from 5 years to 20 years. Any specific NOL carryforwards that remain unused will expire between 2013 and 2032.

We have Canadian NOL carryforwards resulting in a deferred tax asset of $21.1 million. The NOLs have a carryforward period of 20 years. Any specific NOL carryforwards that remain unused will expire between 2029 and 2032.

Valuation Allowance

As a part of our financial reporting process, we must assess the likelihood that our deferred tax assets can be recovered. Unless recovery is more likely than not, the income tax provision must be increased by recording a valuation allowance.

In evaluating the need for a valuation allowance, all available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Future realization of the deferred tax assets depends in part on the existence of sufficient taxable income within the carryback and carryforward period available under the tax law. Other criteria which are considered in evaluating the need for a valuation allowance include the existence of deferred tax liabilities that can be used to realize deferred tax assets.

Based upon our review of all positive and negative evidence in existence at December 31, 2012, management believes it is more likely than not that all deferred tax assets will be fully realized. Accordingly, no valuation allowance has been provided on deferred tax assets.

Uncertain Tax Positions

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits are as follows (in thousands):



	Successor									Predecessor
	Year Ended December 31, 2012			Year Ended December 31, 2011			Period From October 1, 2010 Through December 31, 2010			Period From July 1, 2010 Through September 30, 2010		Year Ended June 30, 2010
	Year Ended December 31, 2012			Year Ended December 31, 2011			Period From October 1, 2010 Through December 31, 2010			Period From July 1, 2010 Through September 30, 2010		Year Ended June 30, 2010
Gross unrecognized tax benefits at beginning of period	$	48,056		$	127,642		$	139,068		$	42,502	$	34,971
Increase in tax positions for prior years	978			471			131					3,186
Decrease in tax positions for prior years	(1,934		)	(91,195		)	(12,012		)			(4,901		)
Increase in tax positions for current year	9,522			11,381			455			174		12,907
Lapse of statute of limitations	(286		)	(243		)						(218		)
Settlements	(2,946		)									(3,443		)
Gross unrecognized tax benefits at end of period	$	53,390		$	48,056		$	127,642		$	42,676	$	42,502

At December 31, 2012, 2011, 2010, September 30, 2010 and June 30, 2010, the amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate is $28.1 million, $26.5 million, $21.4 million, $18.5 million and $17.6 million, respectively.

The fair value of liabilities associated with uncertain tax positions as of October 1, 2010 was based upon a change in settlement strategy as a result of the Merger.

At December 31, 2012, we believe that it is reasonably possible that the balance of the gross unrecognized tax benefits could decrease by $0.02 million to $9.4 million in the next twelve months due to settlements or the expiration of statutes of limitations. We continually evaluate expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.

We recognize accrued interest and penalties associated with uncertain tax positions as a component of the income tax provision. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.

The changes regarding interest and penalties associated with uncertain tax positions are as follows (in thousands):



	Successor							Predecessor
	Year Ended December 31, 2012		Year Ended December 31, 2011		Period From October 1, 2010 Through December 31, 2010			Period From July 1, 2010 Through September 30, 2010		Year Ended June 30, 2010
	Year Ended December 31, 2012		Year Ended December 31, 2011		Period From October 1, 2010 Through December 31, 2010			Period From July 1, 2010 Through September 30, 2010		Year Ended June 30, 2010
Accrued Interest
Balance at beginning of period	$	21,379	$	18,947	$	16,030		$	12,097	$	10,312
Changes	3,244		2,432		2,917			966		1,785
Balance at end of period	$	24,623	$	21,379	$	18,947		$	13,063	$	12,097
Accrued Penalties
Balance at beginning of period	$	9,965	$	9,063	$	9,102		$	8,474	$	7,887
Changes	2,014		902		(39		)	199		587
Balance at end of period	$	11,979	$	9,965	$	9,063		$	8,673	$	8,474

Other Matters

Since October 1, 2010, we have been included in GM's consolidated U.S. federal income tax returns. These tax years are subject to examination by the Internal Revenue Service ("IRS"). Similarly, we also file unitary, combined or consolidated state and local tax returns with GM in certain jurisdictions. We continue to file separate returns in those state, local and foreign taxing jurisdictions where filing a separate return is mandated. Prior to October 1, 2010, we filed income tax returns with the U.S. federal government and with various state, local and foreign jurisdictions. Our federal income tax returns for fiscal 2006 through 2010 are under audit by the IRS. With few exceptions, we are no longer subject to state and local, or non-U.S. income tax examinations by tax authorities prior to fiscal 2005. Certain of our state tax returns are currently under examination in various state tax jurisdictions.

For taxable income recognized by us in any period beginning on or after October 1, 2010, we are obligated to pay GM for our share of the consolidated federal and state tax liabilities. Likewise, GM is obligated to reimburse us for the tax effects of net operating losses to the extent such losses could be carried back as if we had filed separate income tax returns. Amounts owed to GM for income taxes are accrued and recorded as a related party payable. Under our tax sharing arrangement with GM, payments for the tax years 2010 through 2013 are deferred for three years from their original due date. The total amount of deferral cannot exceed $650 million. Any difference between the amounts paid under our tax sharing arrangement with GM and our separate return basis used for financial reporting purposes is reported in our consolidated financial statements as additional paid-in capital. As of December 31, 2012, a cumulative difference of $0.8 million between the amounts to be paid under our tax sharing arrangement with GM and our separate return basis used for financial reporting purposes was reported in our consolidated financial statements through additional paid-in capital. As of December 31, 2012, we have recorded related party taxes payable to GM in the amount of $558.6 million, representing the tax effects of income earned subsequent to the Merger.