5.	INCOME TAXES

The components of earnings before income taxes for our domestic and foreign operations were as follows:


	Year Ended December 31,
(in thousands of U.S. dollars)	2011		2010		2009
United States	$	174,357	$	626,755	$	106,237
Foreign		5,387		5,900		4,706

Earnings before income taxes	$	179,744	$	632,655	$	110,943

Income taxes have been charged to earnings as follows:


	Year Ended December 31,
(in thousands of U.S. dollars)	2011			2010			2009
Current:
Federal	$	64,328		$	228,683		$	43,839
Foreign		1,554			1,825			1,122
State		10,553			35,028			10,175

Total current taxes		76,435			265,536			55,136


Deferred:
Federal		(6,834	)		(19,647	)		(7,009	)
Foreign		223			1,743			410
State		(3,510	)		(382	)		(4,362	)

Total deferred taxes		(10,121	)		(18,286	)		(10,961	)

Income tax expense	$	66,314		$	247,250		$	44,175

Undistributed earnings of foreign subsidiaries that are deemed to be permanently reinvested amounted to $30.5 million and $25.0 million at December 31, 2011 and December, 31 2010, respectively. As such, we have not provided U.S. income taxes on these reinvested earnings.

The actual income tax expense differs from expected amounts computed by applying the U.S. federal income tax rate to earnings before income taxes as follows:


	Year Ended December 31,
(in thousands of U.S. dollars)	2011			2010			2009
Expected income tax expense at statutory rate	$	62,910		$	221,429		$	38,830

Increase (decrease) in taxes resulting from:
Domestic production activities		(2,450	)		(2,625	)		(1,050	)
Valuation allowance		—			—			27
State and local income taxes, net of federal benefit		4,766			22,275			3,759
Tax credits		(128	)		(140	)		(109	)
Tax exempt interest income		—			(2	)		(81	)
Other items, net		1,216			6,313			2,799

Income tax expense	$	66,314		$	247,250		$	44,175

Significant components of our deferred tax assets and liabilities are as follows:


	December 31,
(in thousands of U.S. dollars)	2011			2010
Long-term deferred income tax assets (liabilities):
Intangibles	$	(80,372	)	$	(85,538	)
Depreciation on plant and equipment		(33,037	)		(36,826	)
Deferred compensation		20,008			17,537
Cancellation of indebtedness income		(3,830	)		(3,858	)
Loss and tax credit carryforwards		7,316			5,957
Stock compensation		4,552			3,510
Partnership losses		2,603			2,849
Investment impairments		5,202			5,663
Foreign		315			285
Acquisition costs		13,634			13,778
Interest rate swaps		2,083			1,752
Allowance for uncollectible accounts		1,288			1,397
Other reserves		8,958			10,334

Long-term deferred income tax liabilities		(51,280	)		(63,160	)
Valuation allowance		(16,124	)		(15,604	)

Net long-term deferred income tax liabilities	$	(67,404	)	$	(78,764	)


Current deferred income tax assets (liabilities):
Inventory	$	622		$	894
Accrued expense		5,141			5,501
Allowance for uncollectible accounts		7,972			9,306
Other reserves		(203	)		(794	)
Prepaid expense		(3,465	)		(4,487	)
Intangibles		(4,976	)		(3,560	)

Current deferred income tax assets:		5,091			6,860
Valuation allowance		(1,731	)		(2,278	)

Net current deferred income tax assets	$	3,360		$	4,582

Our net current deferred income tax assets of $3.4 million and $4.6 million as of December 31, 2011 and 2010, respectively, are recorded in Prepaid expenses and other in the consolidated balance sheets.

Our net deferred tax assets and liabilities are summarized as follows:


	December 31,
(in thousands of U.S. dollars)	2011			2010
Total deferred tax assets	$	76,193		$	76,432
Total deferred tax liabilities		(140,237	)		(150,614	)

Net deferred income tax liabilities	$	(64,044	)	$	(74,182	)

For financial statement purposes, the tax benefits of net operating/capital loss and tax credit carryforwards are recognized as deferred tax assets and are subject to appropriate valuation allowances when we determine that the likelihood of recovering the deferred tax asset falls below the “more likely than not” threshold. We evaluate our net operating loss and credit carryforwards on an ongoing basis. The following table summarizes the expiration periods and corresponding valuation allowances for the deferred tax assets related to net operating/capital loss and tax credit carryforwards:


(in millions of U.S. dollars)	2012 – 2016			2017 – 2026		Indefinite			Total
Gross deferred tax asset	$	0.5		$	0.8	$	6.0		$	7.3
Valuation allowance		(0.5	)		—		(4.1	)		(4.6	)

Net deferred tax asset	$	—		$	0.8	$	1.9		$	2.7

An additional valuation allowance of $13.3 million exists for capitalized costs associated with the ADVO acquisition.

We recognize tax benefits only for tax positions that are more-likely-than-not to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefit of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, the company cannot recognize any benefit for the tax position. In addition, the tax position must continue to meet the more-likely-than-not threshold in each reporting period after initial recognition in order to support continued recognition of a benefit.

A reconciliation of the beginning and ending balances for the total amounts of gross unrecognized tax benefits is as follows:


(in thousands of U.S. dollars)	2011			2010
Gross unrecognized tax benefits—January 1,	$	12,536		$	11,124
Gross increases in tax positions for prior years		404			3,383
Gross decreases in tax positions for prior years		(1,728	)		(189	)
Gross increases in tax positions for current year		38			367
Gross decreases in tax positions for current year		(15	)		—
Settlements		(444	)		(899	)
Lapse of statute of limitations		(1,182	)		(1,250	)

Gross unrecognized tax benefits—December 31,	$	9,609		$	12,536

A portion of our unrecognized tax benefits would, if recognized, reduce our effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which only the timing of the benefit is uncertain. As of December 31, 2011 and 2010, the amounts of gross unrecognized tax benefits that would reduce our effective income tax rate were $9.1 million and $11.2 million, respectively.

We file tax returns in various federal, state, and local jurisdictions. In many cases, our liabilities for unrecognized tax benefits relate to tax years that remain open for examination by a jurisdiction’s taxing authority. The following table summarizes open tax years by major jurisdiction:


Jurisdiction		Open Tax Years
United States		9/2005 – 3/2/2007, 2008 – 2011
California		3/2/2007, 2007 – 2011
Connecticut		2008 – 2011
Illinois		2008 – 2011
Kansas		2008 – 2011
Massachusetts		2008 – 2011
Michigan		2008 – 2011
North Carolina		2008 – 2011
Pennsylvania		2007 – 2011
Texas		3/2/2007, 2007 – 2011

As of December 31, 2011, we anticipate events may occur over the next twelve months that could have an effect on the liabilities for unrecognized tax benefits. These events could result in a decrease in our liability for unrecognized tax benefits of up to $9.1 million. Other events may occur over the next twelve months that could impact our unrecognized tax benefits; however, it is not possible to reasonably estimate the expected change for these events.

Our policy for recording interest and penalties associated with liabilities for unrecognized tax benefits is to record these items as part of income tax expense, which is consistent with prior periods. We recorded $0.8 million in gross interest for the year ended December 31, 2011. Gross interest of $2.4 million and penalties of $0.1 million were accrued as of December 31, 2011, and gross interest of $2.1 million and penalties of $0.1 million were accrued as of December 31, 2010.