Income Taxes

The provision or benefit for income taxes includes U.S. federal income taxes (determined on a consolidated return basis), foreign income taxes, and state income taxes.

Income from continuing operations before income taxes for the years ended December 31 was composed of the following components:



	2012		2011		2010
	(In thousands)
United States	$	210,830	$	196,788	$	169,544
Foreign	34,853		28,848		49,915
	$	245,683	$	225,636	$	219,459

Income tax provision (benefit) for the years ended December 31 consisted of the following:



	2012			2011		2010
	(In thousands)
Current:
United States	$	3,752		$	1,267	$	1,752
Foreign	8,776			5,844		12,326
State	6,036			5,781		1,446
Total current income taxes	18,564			12,892		15,524
Deferred:
United States	$	62,227		$	57,845	$	64,814
Foreign	(102		)	279		185
State	10,859			8,388		11,935
Total deferred income taxes	72,984			66,512		76,934
Total income taxes	$	91,548		$	79,404	$	92,458

We made income tax payments of $23.1 million, $13.1 million, and $29.3 million in 2012, 2011, and 2010, respectively, and received refunds of $1.5 million, $8.5 million, and $8.3 million. The Internal Revenue Service approved our application for a change in accounting method in December 2010. As a result, we overpaid our estimated 2010 Federal and state income taxes. The overpayment of our estimated Federal income tax is included in our 2011 refunds; however, we elected to apply the overpayment of our 2010 state income tax to our 2011 estimated income tax payments which lowered our 2011 cash tax payments.

The differences between the U.S. federal statutory income tax rate and our effective tax rate for the years ended December 31 were as follows:



	2012			2011			2010
	(In thousands)
Computed tax provision at the applicable federal statutory income tax rate	$	85,988		$	78,973		$	76,811
State and local taxes, net of federal income tax benefits	10,998			9,895			8,775
Dividends received deduction and tax exempt interest	(525		)	(644		)	(1,168		)
Foreign jurisdiction differences	(3,491		)	(4,789		)	(3,101		)
Permanent differences associated with dispositions	602			(6,329		)	7,192
Changes in uncertain tax positions	(479		)	1,584			1,138
Other	(1,545		)	714			2,811
Provision for income taxes	$	91,548		$	79,404		$	92,458
Total effective tax rate	37.3		%	35.2		%	42.1		%

The 2012 consolidated effective tax rate was 37.3%, compared to 35.2% and 42.1% in 2011 and 2010, respectively. We reached a partial settlement with the Internal Revenue Service ("IRS") in connection with its audit of our affiliate's, SCI Funeral and Cemetery Purchasing Cooperative, 2003 - 2005 federal income tax returns. As a result, the Company made a $6.6 million tax payment which reduced our tax expense by $3.1 million for adjustments to our "unrecognized tax benefits" - that is, the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements. Our 2012 effective tax rate includes the benefit associated with the closure of that tax audit.

We sold our Puerto Rican subsidiary in the third quarter of 2011. Our outside tax basis in the business was significantly higher than our book basis. Consequently, we recognized a tax loss that was significantly higher than the book loss on the sale which is permanent in nature. The lower effective tax rate for the year ended December 31, 2011 is primarily due to that sale.

Our 2010 effective tax rate was negatively impacted by permanent book and tax basis differences related to North American asset divestitures. During 2010 we recognized U.S. tax on post-acquisition integration of certain Keystone entities into SCI’s structure. Our overall foreign tax expense increased in 2010 due to an increase in foreign earnings. This increase was partially offset by a decrease in foreign statutory rates. In 2010 our state tax expense was impacted by permanent items affecting our overall effective rate as well as an increase in state statutory tax rates.

During 2010, the Internal Revenue Service approved three requests for tax accounting method changes relating to the recognition of trust earnings accumulated in cemetery and funeral trusts, revenue from preneed sales of cemetery merchandise, and revenue from non-trusted customer payments for preneed funeral contracts. The effective date for these tax accounting method changes is for the fiscal year ended December 31, 2010. In accordance with § 481(a) of the U.S. Internal Revenue Code this adjustment recalculates the income previously recognized to determine what should have been recognized under the new tax accounting method. The cumulative impact of these accounting method changes resulted in an adjustment under § 481(a) for 2010 of $190.3 million that represents a decrease in 2010 taxable income, a decrease in a previously recognized deferred tax asset related to deferred revenue, and an increase in our deferred tax asset related to our net operating loss carryover. Although these changes had no tax impact on the overall effective tax rate, there was a savings in cash taxes including a refund of our 2010 Federal estimated tax payments of $7.1 million which was received in 2011.

Deferred taxes are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates. The tax effects of temporary differences and carry-forwards that give rise to significant portions of deferred tax assets and liabilities as of December 31 consisted of the following:



	2012			2011
	(In thousands)
Inventories and cemetery property, principally due to purchase accounting adjustments	$	(354,162	)	$	(352,323	)
Property and equipment, principally due to differences in depreciation methods and purchase accounting adjustments	(195,066		)	(194,875		)
Intangibles	(77,092		)	(74,278		)
Payables, principally due to sales of cemetery interment rights and related products	(40,374		)	(32,949		)
Deferred tax liabilities	(666,694		)	(654,425		)
Loss and tax credit carry-forwards	141,739			215,285
Deferred revenue on preneed funeral and cemetery contracts, principally due to earnings from trust funds	94,731			92,640
Accrued liabilities	6,267			11,308
Other	63,845			44,506
Deferred tax assets	306,582			363,739
Less: Valuation allowance	(67,732		)	(63,681		)
Net deferred income tax liability	$	(427,844	)	$	(354,367	)

Deferred tax assets and Deferred income tax liabilities consisted of the following as of December 31 (in thousands):



	2012			2011
Current deferred tax assets	$	42,864		$	44,316
Non-current deferred tax assets	490			6,932
Non-current deferred tax liabilities	(471,198		)	(405,615		)
Net deferred income tax liability	$	(427,844	)	$	(354,367	)

In addition to the loss and tax credit carry-forward amounts reflected as deferred tax assets in the table above, we have taken certain tax deductions related to the exercised employee stock options and vested restricted shares that are in excess of the stock-based compensation amounts recorded in our consolidated financial statements (“windfall tax benefits”). Pursuant to the Stock Compensation Topic under the ASC, such windfall tax benefits are not recognized in our consolidated financial statements unless they reduce income taxes payable. As of December 31, 2012 and 2011 we have windfall tax benefits of $29.1 million and $13.0 million, respectively, which when realized will be recorded as a reduction to current taxes payable and a credit to Capital in excess of par value in our consolidated financial statements.

During the fourth quarter of 2010, the Company underwent a restructuring of its Canadian subsidiaries. The restructuring triggered a U.S. dividend of $6.9 million for which U.S. federal taxes have been provided for the year ended December 31, 2010. The dividend was less than 2010 earnings and other prior year earnings required to be permanently reinvested. At December 31, 2012 and 2011, U.S. income taxes had not been provided on $263.1 million and $93.0 million, respectively, of the remaining undistributed earnings of our Canadian subsidiaries. We intend to permanently reinvest these undistributed foreign earnings in those businesses outside the United States. It is not practicable to determine the amount of federal income taxes, if any, that might become due if such earnings are repatriated.

The following table summarizes the activity related to our gross unrecognized tax benefits from January 1, 2010 to December 31, 2012 (in thousands):



	Federal, State and Foreign Tax
	(In thousands)
Balance at December 31, 2009	$	144,444
Additions to tax positions related to the current year	10,215
Additions to tax positions related to prior years	110
Statute expirations	(2,004		)
Balance at December 31, 2010	$	152,765
Additions to tax positions related to the current year	4,971
Additions to tax positions related to prior years	60
Statute expirations	(1,484		)
Balance at December 31, 2011	$	156,312
Reductions to tax positions related to the current year	(2,100		)
Reductions to tax positions related to prior years	(10,224		)
Balance at December 31, 2012	$	143,988

Our total unrecognized tax benefits that, if recognized, would affect our effective tax rates were $34.9 million, $37.8 million, and $39.3 million as of December 31, 2012, 2011, and 2010, respectively.

During 2012, in accordance with the Income Tax Topic under the ASC, we recorded a decrease of $12.3 million in our liability for unrecognized tax benefits, of which $2.1 million was a decrease to U.S. tax positions taken in the current year and $10.2 million was a decrease related to U.S. tax positions taken in prior years.

Consistent with our historical financial reporting, we include potential accrued interest and penalties related to unrecognized tax benefits within our income tax provision account. We have accrued $41.6 million, $41.8 million, and $38.8 million for the payment of interest, net of tax benefits, and penalties as of December 31, 2012, 2011, and 2010, respectively. We recognized a decrease of interest and penalties of $0.2 million for the year ended December 31, 2012, and an increase of interest and penalties of $3.0 million, and $3.6 million for the years ended December 31, 2011, and 2010, respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions or the uncertainty of deductions in the future, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

We file income tax returns, including tax returns for our subsidiaries, with federal, state, local, and foreign jurisdictions. Our tax returns are subject to routine compliance review by the taxing authorities in the jurisdictions in which we file tax returns in the ordinary course of business. We consider the United States to be our most significant tax jurisdiction; however, the taxing authorities in Canada and Spain are auditing various tax returns. Current audits are occurring in the United States and various state and foreign locations covering open tax years through 2010. The Internal Revenue Service is in various stages of auditing tax years 1999 through 2005 and has notified us that the 2008 through 2010 federal returns have been selected for audit. It is reasonably possible that changes to our global unrecognized tax benefits could be significant; however, due to the uncertainty regarding the timing of completion of audits and possible outcomes, a current estimate of the range of increases or decreases that may occur within the next twelve months cannot be made.

Various subsidiaries have foreign, federal, and state carry-forwards in the aggregate of $2.7 billion with expiration dates through 2031. Such loss carry-forwards will expire as follows:



	Federal		State		Foreign		Total
			(In thousands)
2013	$	8,363	$	5,423	$	—	$	13,786
2014	13,318		31,969		—		45,287
2015	3,388		302,239		—		305,627
2016	9,593		58,721		—		68,314
Thereafter	26,538		2,255,983		2		2,282,523
Total	$	61,200	$	2,654,335	$	2	$	2,715,537

In addition to the above loss carry-forwards, we have $65.2 million of foreign losses that have an indefinite expiration.

A valuation allowance has been established because more-likely-than-not uncertainties exist with respect to our future realization of certain loss carry-forwards. The valuation allowance is primarily attributable to state net operating losses and reflects our expectation that the net operating losses in certain jurisdictions will expire before we generate sufficient taxable income to utilize the losses. In 2012, we recorded a net $4.3 million increase in state valuation allowances due to an increase in net operating losses which is primarily attributable to state net operating losses and reflects our expectation that the net operating losses in certain jurisdictions will expire before we generate sufficient taxable income to utilize the losses.

At December 31, 2012, our loss and tax credit carry-forward deferred tax assets and related valuation allowances by jurisdiction are as follows:



	Federal		State (1)		Foreign		Total
			(In thousands)
Loss and tax credit carry-forwards	$	27,316	$	91,775	$	22,648	$	141,739
Valuation allowance	$	3,707	$	45,654	$	18,371	$	67,732

_________________________________


(1)	Presented net of Federal benefit

Our federal loss and tax credit carryforwards exclude windfall tax benefits, suspended net operating losses and credit carryforwards which, when realized, will reduce current income taxes payable by an additional $25.3 million.