14. Income Taxes

The Company's provision for income taxes from continuing operations for 2012 and 2011 consisted of the following:

	Year Ended December 31,

	2012		2011
	(Dollars in thousands)
U.S. state current income tax expense	$	593	$	158
Foreign current income tax expense		317		3,164
Foreign deferred income tax expense		64		380

Total	$	974	$	3,702

The following table reconciles the Company's provision for income taxes to the expected income tax expense at the U.S. federal statutory income tax rate (computed by applying the U.S. federal income tax rate of 35% to earnings before income taxes and non-controlling interest):

	Year Ended December 31,

	2012			2011
	(Dollars in thousands)
Computed expected tax based on federal statutory rate	$	5,112		$	9,936
Increase (decrease) in taxes resulting from:
Expired capital loss carryforward		—			17,701
Change in valuation allowance		(4,611	)		(22,316	)
Inclusion of income attributable to noncontrolling
interest in an 80%-owned subsidiary		94			220
Change in tax credit carryforwards		(501	)		(4,955	)
Other		(94	)		(586	)
U.S. state and foreign income tax		974			3,702

	$	974		$	3,702

The following table displays the significant components of our U.S. deferred tax assets, deferred tax liabilities, and valuation allowance as of December 31, 2012 and 2011:

	December 31,

	2012			2011
	(Dollars in thousands)
Deferred tax assets (liabilities):
Basis difference in Acquisition Partnership investments	$	17,509		$	19,533
Intangibles, principally due to differences in amortization		264			283
Basis difference in property and equipment		143			128
Foreign non-repatriated earnings		1,215			(4,151	)
Federal net operating loss carryforwards		2,725			11,749
Tax credit carryforwards		5,456			4,955
Other		640			67

Total deferred tax assets, net		27,952			32,564
Valuation allowance		(27,952	)		(32,564	)

Net deferred tax assets	$	—		$	—

At December 31, 2012 and 2011, the Company had deferred foreign tax liabilities of zero and $0.1 million, respectively, included in "Other liabilities" in its consolidated balance sheets. These deferred tax liabilities were attributable primarily to our consolidated foreign operations, and unrealized holding gains from investment securities held by a consolidated foreign subsidiary.

The Company recognizes deferred tax assets and liabilities in both the U.S. and non-U.S. jurisdictions based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss and tax credit carryforwards. Deferred tax assets and liabilities 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 effect on deferred tax assets and liabilities of a change in tax rates, if any, would be recognized in earnings in the period that includes the enactment date. We reduce the carrying amounts of deferred tax assets through a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically by the Company based on the more-likely-than-not realization threshold criterion. In this assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other factors, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, excess of appreciated asset value over the tax basis of net assets, impact of gains or charges from one-time events, the duration of statutory carryforward periods, the Company's experience with utilizing available operating loss and tax credit carryforwards, and tax planning strategies. In making such assessments, significant weight is given to evidence that can be objectively verified. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws between our projected operating performance, our actual results and other factors.

For purposes of evaluating the need for a deferred tax valuation allowance, significant weight is given to evidence that can be objectively verified. At December 31, 2012 and 2011, the Company established a full valuation allowance for its U.S. deferred tax assets due to the lack of sufficient objective evidence regarding the realization of these assets in the foreseeable future. Regardless of the deferred tax valuation allowance established at December 31, 2012, the Company continues to retain net operating loss carryforwards for federal income tax purposes of approximately $7.8 million available to offset future federal taxable income, if any, through the year 2027. To the extent that the Company generates taxable income in the future to utilize the tax benefits of the related deferred tax assets, subject to certain potential limitations, it may be able to reduce its effective tax rate by reducing the valuation allowance. The Company's net operating loss carryforwards of $7.8 million expire in various years from 2020 through 2027.

The Company accounts for income tax uncertainty using the "more-likely-than-not" criteria incorporated in the FASB's authoritative guidance on accounting for uncertainty in income taxes. Accordingly, we account for uncertain tax positions using a two-step approach whereby we recognize an income tax benefit if, based on the technical merits of a tax position, it is more likely than not (a probability of greater than 50%) that the tax position would be sustained upon examination by the taxing authority. We then recognize a tax benefit equal to the largest amount of tax benefit that is greater than 50% likely to be realized upon settlement with the taxing authority, considering all information available at the reporting date. Once a financial statement benefit for a tax position is recorded, we adjust it only when there is more information available or when an event occurs necessitating a change. The difference between the benefit recognized for a position in accordance with this accounting model and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit. The Company did not have any unrecognized tax benefits at December 31, 2012 or at December 31, 2011. The Company records interest and penalties related to income tax uncertainties in the provision for income taxes.

FirstCity currently files tax returns in approximately 39 U.S. states, and one of its consolidated subsidiaries is currently being examined in one state for the year 2004. Tax year 1997 and subsequent years are open to U.S. federal examination, and tax year 2008 and subsequent years are open to U.S. state examination.