Income Taxes

The components of the provision for income taxes from continuing operations are as follows:



	Year Ended December 31,
	2012			2011			2010
	(in millions)
Current:
Federal	$	(5.7	)	$	20.8		$	(33.8	)
State	7.0			5.5			(2.4		)
Foreign	6.4			5.4			5.0
Total current	7.7			31.7			(31.2		)
Deferred:
Federal	126.6			62.2			65.4
State	3.2			1.3			3.5
Foreign	(3.5		)	(3.0		)	(0.4		)
Total deferred	126.3			60.5			68.5
Provision	$	134.0		$	92.2		$	37.3

Amounts previously reported have been adjusted to exclude discontinued operations resulting from the expected sale of the Company's ready-mix concrete operations. See Note 2 Acquisitions and Divestitures.

Deferred income taxes represent the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred tax liabilities and assets are as follows:



	December 31,
	2012			2011
	(in millions)
Deferred tax liabilities:
Depreciation, depletion, and amortization	$	887.6		$	740.8
Derivatives	12.4			14.5
Convertible debt	96.5			88.4
Total deferred tax liabilities	996.5			843.7
Deferred tax assets:
Workers compensation, pensions, and other benefits	52.4			47.8
Warranties and reserves	15.6			14.4
Equity items	81.5			72.8
Tax loss carryforwards and credits	249.7			234.9
Inventory	17.9			11.1
Accrued liabilities and other	3.9			4.7
Total deferred tax assets	421.0			385.7
Net deferred tax liabilities before valuation allowance	575.5			458.0
Valuation allowance	19.7			19.3
Net deferred tax liabilities before reserve for uncertain tax positions	595.2			477.3
Deferred tax assets included in reserve for uncertain tax positions	(39.4		)	(42.6		)
Adjusted net deferred tax liabilities	$	555.8		$	434.7

At December 31, 2012, the Company, excluding TRIP Holdings, had $103.3 million of Federal consolidated net operating loss carryforwards and tax-effected $5.4 million of state loss carryforwards. The Company has $42.2 million of foreign tax credit carryforwards which will expire between 2014 and 2022. The Federal net operating loss carryforwards are due to expire between 2028 and 2031. We have established a valuation allowance for Federal, state, and foreign tax operating losses and credits which may not be realizable. We believe that it is more likely than not that we will be able to generate sufficient future taxable income to utilize the remaining deferred tax assets.

TRIP Holdings had $439.7 million in Federal tax loss carryforwards at December 31, 2012 which are due to expire between 2027 and 2032. We expect TRIP Holdings to begin utilizing their tax loss carryforwards beginning in 2020. Because TRIP Holdings files a separate tax return from the Company, its tax loss carryforwards can only be used by TRIP Holdings and cannot be used to offset future taxable income of the Company.

The provision for income taxes results in effective tax rates that differ from the statutory rates. The following is a reconciliation between the statutory U.S. Federal income tax rate and the Company’s effective income tax rate on income from continuing operations:



	Year Ended December 31,
	2012		2011		2010
Statutory rate	35.0	%	35.0	%	35.0	%
State taxes	2.0		2.1		3.4
Tax settlements	(0.6	)	—		4.8
Changes in tax reserves	(1.4	)	0.4		(10.7	)
Other, net	(0.3	)	1.1		2.5
Effective rate	34.7	%	38.6	%	35.0	%

On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. We believe the impact of this law will not be material to Trinity.

Income from continuing operations before income taxes for the years ended December 31, 2012, 2011, and 2010 was $376.3 million, $225.9 million, and $103.4 million, respectively, for U.S. operations, and $9.6 million, $13.1 million, and $3.3 million, respectively, for foreign operations. The Company has provided U.S. deferred income taxes on the un-repatriated earnings of its foreign operations.

During the year ended December 31, 2012, we settled our audit with the Internal Revenue Service (“IRS”) for the 2004-2005 tax years. As a result of closing this audit, we recognized a $3.5 million tax benefit, primarily related to favorable claims filed and approved by the IRS in the final audit settlement.

During the year ended December 31, 2012, we recognized a tax benefit of $4.4 million due to the release of net tax reserves primarily as a result of certain state tax issues where the statute of limitations had lapsed.

The IRS field work for our 2006-2008 audit cycle has concluded and all issues, except for transfer pricing, have been agreed to and tentatively settled. The transfer pricing issue has been appealed and we are working with both the U.S. and Mexican taxing authorities to coordinate taxation. As we do not control the timing of when our issues will be settled, we cannot determine when the 2006-2008 cycle will close and all issues formally settled and thus when the statute of limitations for years after 2005 will close. In addition, we are currently under IRS audit for the 2009- 2011 tax years.

We have various subsidiaries in Mexico that file separate tax returns and thus are subject to examination by taxing authorities at different times. The 2003 tax year of one of our Mexican subsidiaries is still under review and its statute of limitations remains open through June 2014. Another Mexican subsidiary’s statute of limitations for the 2005 tax year remains open through July 2013. The remaining entities are open for their 2006 tax years and forward.

Our two Swiss subsidiaries, one of which is a holding company and the other of which is dormant, have been audited by the taxing authorities through 2008 and 2009. The statute of limitations in Switzerland is generally five years from the end of the tax year, but can be extended up to 15 years in certain cases if the audit has commenced during the original five year period. We also currently have sales offices in Europe and Canada that are subject to various statutes of limitations with regard to their tax status. Generally, states’ statutes of limitations in the U.S. are open from 2003 forward due to the use of tax loss carryforwards in certain jurisdictions.

The change in unrecognized tax benefits for the years ended December 31, 2012, 2011, and 2010 was as follows:



	Year Ended December 31,
	2012			2011			2010
	(in millions)
Beginning balance	$	52.5		$	36.8		$	40.1
Additions for tax positions related to the current year	4.1			3.8			3.3
Additions for tax positions of prior years	—			16.4			9.3
Reductions for tax positions of prior years	(1.1		)	(0.1		)	(5.6		)
Settlements	(3.4		)	(3.5		)	(9.5		)
Expiration of statute of limitations	(3.4		)	(0.9		)	(0.8		)
Ending balance	$	48.7		$	52.5		$	36.8

Additions for tax positions related to the current year for 2012 were amounts provided for tax positions that will be taken for Federal and state income tax purposes when we file those tax returns. Additions for tax positions related to the current year for 2011 and 2010 were amounts provided for tax positions previously taken in foreign jurisdictions and tax positions taken for Federal and state income tax purposes as well as deferred tax liabilities that have been reclassified to uncertain tax positions.

Additions for tax positions of prior years for 2011 and 2010 were primarily due to Federal tax positions taken on prior year returns that were proposed by the IRS but not previously reserved. Since these items are primarily timing differences, we will be allowed a future tax deduction. During 2011, we recorded a corresponding deferred tax asset for the future tax reduction related to these adjustments.

The reduction in tax positions of prior years was primarily related to new guidance issued in March 2012 by the IRS regarding the capitalization of fixed assets as well as state taxes.

Settlements during 2012 primarily related to the settlement of our 2004-2005 IRS audit as well as the related impact on state tax returns. Settlements during 2011 primarily related to an audit of a separate tax return of our Swiss subsidiary. Settlements during 2010 related to a settlement of a Mexico tax issue and a settlement of the 1998-2002 IRS audit.

The expiration of statute of limitations primarily relate to state taxes where the statute has closed.

The total amount of unrecognized tax benefits including interest and penalties at December 31, 2012 and 2011, that would affect the Company’s overall effective tax rate if recognized was $13.2 million and $19.4 million, respectively. Unrecognized tax benefits subject to a lapse in the statute of limitations by December 31, 2013 total $1.0 million. Further, there is a reasonable possibility that the unrecognized Federal tax benefits will decrease by December 31, 2013 due to settlements with taxing authorities. Amounts expected to settle by December 31, 2013 total $28.7 million.

Trinity accounts for interest expense and penalties related to income tax issues as income tax expense. Accordingly, interest expense and penalties associated with an uncertain tax position are included in the income tax provision. The total amount of accrued interest and penalties as of December 31, 2012 and 2011 was $10.3 million and $13.3 million, respectively. Income tax expense for the year ended December 31, 2012, included a decrease in income tax expense of $3.0 million in interest expense and penalties related to uncertain tax positions. Income tax expense for the year ended December 31, 2011, included an increase in income tax expense of $2.1 million in interest expense and penalties related to uncertain tax positions.