Note I — Income Taxes

A reconciliation of the federal statutory rate of 35% to actual follows:



	Year Ended December 31,
	2012		2011		2010
Tax at statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	1.5	%	1.9	%	2.9	%
Effect of foreign operations, net of foreign tax credits	(0.2	)%	0.3	%	0.5	%
Other, net	(0.2	)%	(1.4	)%	(0.9	)%
Total	36.1	%	35.8	%	37.5	%

The components of income tax expense are as follows:



	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Current expense
Federal	$	86,839		$	4,154		$	749
State	10,428			6,547			8,656
Foreign	3,100			3,762			4,220
Total current	100,367			14,463			13,625
Deferred expense
Federal	7,538			76,936			85,866
State	(4,006		)	1,145			3,624
Foreign	(142		)	(631		)	—
Total deferred	3,390			77,450			89,490
Total	$	103,757		$	91,913		$	103,115

Deferred tax assets (liabilities) consist of the following:



	December 31,
	2012			2011
	(In thousands)
Deferred tax assets
Federal net operating loss carryforwards	$	7,873		$	63,057
State net operating loss carryforwards	14,711			16,506
Foreign net operating loss carryforwards	—			2,989
Accrued liabilities	49,426			48,928
Other assets including credits	1,402			65
Foreign tax credit carryforwards	6,771			4,434
	80,183			135,979
Valuation allowance	(319		)	(930		)
Deferred tax liabilities
Rental merchandise	(252,464		)	(327,222		)
Property assets	(32,815		)	(25,508		)
Intangible assets	(97,695		)	(80,030		)
	(382,974		)	(432,760		)
Net deferred taxes	$	(303,110	)	$	(297,711	)

At December 31, 2012, we had approximately $22.5 million of federal net operating loss (“NOL”) carryforwards available to offset future taxable income expiring between 2020 and 2023 and approximately $303.9 million of state NOL carryforwards expiring between 2013 and 2030. All of the federal NOL and 10% of the total remaining state NOL carryforward represents acquired NOLs. Utilization of these NOL's is subject to applicable annual limitations for U.S. federal and state tax purposes, including section 382 of the Internal Revenue Code of 1986, as amended. In addition, at December 31, 2012, we also had approximately $6.8 million in foreign tax credit (“FTC”) carryforwards expiring between 2020 and 2022. We establish a valuation allowance to the extent we consider it more likely than not that the deferred tax assets attributable to our state NOLs or FTCs will not be recovered.

We are subject to federal, state, local and foreign income taxes. Along with our U.S. subsidiaries, we file a U.S. federal consolidated income tax return. With few exceptions, we are no longer subject to U.S. federal, state, foreign and local income tax examinations by tax authorities for years before 2008. The appeals process with the Internal Revenue Service (IRS) Office of Appeals for the years 2001 through 2007 has been completed. We reached agreement on all issues except one issue with respect to the 2003 tax year, an issue which occurs in 2004 through 2007 taxable years as well. We believe the position and supporting case law applied by the IRS to this matter are incorrectly applied to our situation and that our fact pattern is distinguishable from the IRS' position. We intend to vigorously defend our position on the issue. This matter was heard by the United States Tax Court at trial during November 2011, and a decision is expected during 2013. Currently, we are also under examination in various states. We do not anticipate that adjustments, if any, regarding the 2003 through 2007 disputed issue or state examinations will result in a material change to our consolidated statement of earnings, financial condition, statement of cash flows or earnings per share.

A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:



	(In thousands)
Balance at January 1, 2011	$	6,675
Additions based on tax positions related to current year	800
Additions for tax positions of prior years	2,650
Reductions for tax positions of prior years	(152		)
Settlements	(317		)
Balance at January 1, 2012	9,656
Additions for tax positions of prior years	1,411
Reductions for tax positions of prior years	(489		)
Settlements	(411		)
Balance at December 31, 2012	$	10,167

Included in the balance of unrecognized tax benefits at December 31, 2012 is $7.2 million, net of federal benefit, which, if ultimately recognized, will affect our annual effective tax rate.

As of December 31, 2012, we have accrued approximately $1.4 million for the payment of interest and recorded interest expense of approximately $107,000 for the year then ended, which are excluded from the reconciliation of unrecognized tax benefits presented above.