15. Income Taxes

The Company and its domestic subsidiaries file a consolidated federal income tax return. Tax liabilities and benefits realized by the consolidated group are allocated as generated by the respective entities.

The Internal Revenue Service ("IRS") is currently examining the Company's 2009 and 2010 federal income tax returns. The IRS has completed its examinations of the Company's federal income tax returns for 2005-2006 and 2007-2008 and the cases are under consideration at the IRS Appeals Office. The Company's tax years prior to 2005 have been examined by the IRS and the statute of limitations has expired on those years. Any adjustments that may result from IRS examinations of tax returns are not expected to have a material effect on the results of operations, cash flows or financial position of the Company.

The reconciliation of the change in the amount of unrecognized tax benefits for the years ended December 31 is as follows:

($ in millions)	2012		2011		2010

Balance — beginning of year	$	25	$	25	$	22
Increase for tax positions taken in a prior year		—		—		1
Decrease for tax positions taken in a prior year		—		—		—
Increase for tax positions taken in the current year		—		—		2
Decrease for tax positions taken in the current year		—		—		—
(Decrease) increase for settlements		—		—		—
Reductions due to lapse of statute of limitations		—		—		—

Balance — end of year	$	25	$	25	$	25

The Company believes it is reasonably possible that the liability balance will be reduced by $25 million within the next twelve months upon the resolution of an outstanding issue resulting from the 2005-2006 and 2007-2008 IRS examinations. Because of the impact of deferred tax accounting, recognition of previously unrecognized tax benefits is not expected to impact the Company's effective tax rate.

The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense. The Company did not record interest income or expense relating to unrecognized tax benefits in income tax expense in 2012, 2011 or 2010. As of December 31, 2012 and 2011, there was no interest accrued with respect to unrecognized tax benefits. No amounts have been accrued for penalties.

The components of the deferred income tax assets and liabilities as of December 31 are as follows:

($ in millions)	2012			2011

Deferred assets
Unearned premium reserves	$	666		$	656
Difference in tax bases of invested assets		353			564
Discount on loss reserves		280			315
Pension		278			255
Other postretirement benefits		218			188
Accrued compensation		212			213
Alternative minimum tax credit carryforward		165			255
Net operating loss carryforwards		64			203
Life and annuity reserves		—			10
Other assets		55			84

Total deferred assets		2,291			2,743
Valuation allowance		—			(67	)

Net deferred assets		2,291			2,676
Deferred liabilities
Unrealized net capital gains		(1,527	)		(757	)
DAC		(917	)		(897	)
Life and annuity reserves		(130	)		—
Other intangible assets		(107	)		(142	)
Other liabilities		(207	)		(158	)

Total deferred liabilities		(2,888	)		(1,954	)

Net deferred (liability) asset	$	(597	)	$	722

Although realization is not assured, management believes it is more likely than not that the deferred tax assets, net of valuation allowance, will be realized based on the Company's assessment that the deductions ultimately recognized for tax purposes will be fully utilized. The valuation allowance for deferred tax assets decreased by $67 million in 2012. The decrease was the result of a tax election made to waive the portion of Answer Financial's net operating loss carryforwards that were previously offset by a valuation allowance. The purpose of this tax election was to preserve Allstate's tax basis in Answer Financial.

As of December 31, 2012, the Company has net operating loss carryforwards of $182 million which will expire at the end of 2014 through 2029. In addition, the Company has an alternative minimum tax credit carryforward of $165 million which will be available to offset future tax liabilities indefinitely.

The components of income tax expense for the years ended December 31 are as follows:

($ in millions)	2012		2011		2010

Current	$	295	$	14	$	133
Deferred		705		158		56

Total income tax expense	$	1,000	$	172	$	189

The Company paid income taxes of $280 million and $32 million in 2012 and 2011, respectively, and received refunds of $8 million in 2010. The Company had a current income tax receivable of $157 million as of both December 31, 2012 and 2011.

A reconciliation of the statutory federal income tax rate to the effective income tax rate on income from operations for the years ended December 31 is as follows:



Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
Tax-exempt income	(3.0	)	(13.6	)	(16.1	)
Tax credits	(1.4	)	(2.1	)	(0.5	)
Dividends received deduction	(0.5	)	(1.8	)	(1.5	)
Adjustment to prior year tax liabilities	(0.1	)	(0.8	)	(0.2	)
Other	0.3		1.2		0.5

Effective income tax rate	30.3	%	17.9	%	17.2	%