Income Taxes

Income tax provision applicable to continuing operations consists of the following:



	Year ended December 31,
(in thousands)	2014		2013		2012
Current:
Federal	$	32,600	$	11,812	$	23,816
State and local	5,677		225		3,492
Foreign	1,409		1,400		757
	$	39,686	$	13,437	$	28,065

Deferred:
Federal	$	19,741	$	35,147	$	14,808
State and local	1,830		4,321		1,982
Foreign	244		906		(287		)
	$	21,815	$	40,374	$	16,503

Total:
Federal	$	52,341	$	46,959	$	38,624
State and local	7,507		4,546		5,474
Foreign	1,653		2,306		470
	$	61,501	$	53,811	$	44,568

Income before income taxes from continuing operations consists of the following:



	Year ended December 31,
(in thousands)	2014		2013		2012
U.S. income	$	174,262	$	141,673	$	119,325
Foreign	9,884		7,840		808
	$	184,146	$	149,513	$	120,133

A reconciliation from the statutory U.S. federal tax rate to the effective tax rate follows:



	Year ended December 31,
	2014		2013		2012
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in rate resulting from:
Effect of qualified domestic production deduction	(1.4	)	(0.4	)	(0.8	)
Effect of Patient Protection and Affordable Care Act	—		0.9		(0.6	)
Effect of noncontrolling interest	(2.5	)	(1.3	)	1.1
State and local income taxes, net of related federal taxes	2.7		2.0		3.0
Other, net	(0.4	)	(0.2	)	(0.6	)
Effective tax rate	33.4	%	36.0	%	37.1	%

Income taxes paid, net of refunds received, in 2014, 2013 and 2012 were $36.8 million, $5.3 million and $36.3 million, respectively.

Significant components of the Company's deferred tax liabilities and assets are as follows:



	December 31,
(in thousands)	2014			2013
Deferred tax liabilities:
Property, plant and equipment and Rail Group assets leased to others	$	(133,869	)	$	(110,472	)
Prepaid employee benefits	(18,453		)	(17,725		)
Investments	(36,045		)	(29,749		)
Other	(5,388		)	(5,426		)
	(193,755		)	(163,372		)
Deferred tax assets:
Employee benefits	52,107			36,593
Accounts and notes receivable	1,784			1,890
Inventory	9,964			6,605
Net operating loss carryforwards	1,155			631
Other	148			2,594
Total deferred tax assets	65,158			48,313
Valuation allowance	(232		)	(92		)
	64,926			48,221
Net deferred tax liabilities	$	(128,829	)	$	(115,151	)

On December 31, 2014, the Company had $12.1 million in state net operating loss carryforwards that expire from 2017 to 2023. A deferred tax asset of $0.5 million has been recorded with respect to state net operating loss carryforwards with no valuation allowance. On December 31, 2013 the Company had recorded a $0.5 million deferred tax asset and a valuation allowance of $0.1 million was established with respect to state net operating loss carryforwards.

On December 31, 2014, the Company had $24.8 million in municipal net operating loss carryforwards that expire from 2016 to 2020. A deferred tax asset of $0.2 million has been recorded with respect to municipal net operating loss carryforwards with a $0.2 million valuation allowance.

On December 31, 2014, the Company had $1.6 million in cumulative Canadian net operating losses that expire from 2031 to 2035. A deferred tax asset of $0.4 million has been recorded with respect to Canadian net operating loss carryforwards. No valuation allowance has been established because based on all available evidence, the Company concluded it is more likely than not that it will realize the deferred tax asset. On December 31, 2013, the Company had recorded a deferred tax asset, and no valuation allowance, of $0.1 million with respect to Canadian net operating loss carryforwards.

On December 31, 2014, the Company had no U.S. foreign tax credit carryforwards as it is expected to utilize all credits generated in the reporting period. On December 31, 2013, the Company had recorded a $0.5 million deferred tax asset related to U.S. foreign credit carryforwards and no valuation allowance.

The Company's 2013 income tax provision includes deferred tax expense of $1.4 million due to a correction of other comprehensive income related to the portion of the Company's retiree health care plan liability and the Medicare Part D subsidy. The correction related to the years 2009 through 2012 and was recorded during the first quarter of 2013. The impact of this error on amounts previously reported was determined to be immaterial to the Consolidated Financial Statements. As a result of the correction of the error, deferred income tax expense for the twelve months ended December 31, 2013 increased and accumulated other comprehensive loss decreased by $1.4 million.

The Company accounts for utilization of windfall tax benefits based on tax law ordering and considered only the direct effects of stock-based compensation for purposes of measuring the windfall at settlement of an award. During 2014, there was no cash resulting from the exercise of awards and the tax benefit the Company realized from the exercise of awards was $3.3 million. For 2013, there was no cash resulting from the exercise of awards and the tax benefit the Company realized from the exercise of awards was $1.3 million.

The Company or one of its subsidiaries files income tax returns in the U.S., various foreign jurisdictions and various state and local jurisdictions. The Company is no longer subject to examinations by foreign jurisdictions for years before 2009 and is no longer subject to examinations by U.S. tax authorities for years before 2011. During 2014, the Internal Revenue Service commenced an examination of the Company’s U.S. income tax returns for years 2011 and 2012. As of December 31, 2014, the Service has not proposed any adjustments to the Company’s 2011 or 2012 federal income tax returns. The Company is no longer subject to examination by state tax authorities in most states for tax years before 2011.

A reconciliation of the January 1, 2012 to December 31, 2014 amount of unrecognized tax benefits is as follows:



(in thousands)
Balance at January 1, 2012	$	635
Additions based on tax positions related to the current year	97
Additions based on tax positions related to prior years	415
Reductions as a result of a lapse in statute of limitations	(101		)
Balance at December 31, 2012	1,046

Additions based on tax positions related to the current year	114
Reductions based on tax positions related to prior years	(45		)
Reductions as a result of a lapse in statute of limitations	(5		)
Balance at December 31, 2013	1,110

Additions based on tax positions related to the current year	125
Additions based on tax positions related to prior years	384
Reductions as a result of a lapse in statute of limitations	(132		)
Balance at December 31, 2014	$	1,487

The unrecognized tax benefits at December 31, 2014 are associated with positions taken on state income tax returns, and would decrease the Company’s effective tax rate if recognized. The Company does not anticipate any significant changes during 2015 in the amount of unrecognized tax benefits.

The Company has elected to classify interest and penalties as interest expense and penalty expense, respectively, rather than as income tax expense. The Company has $0.4 million accrued for the payment of interest and penalties at December 31, 2014. The net interest and penalties expense for 2014 is $0.2 million, due to increased uncertain tax positions. The Company had $0.2 million accrued for the payment of interest and penalties at December 31, 2013. The net interest and penalties expense for 2013 was $0.1 million.