AMERISOURCEBERGEN CORP | 2013 | FY |

Note 4. Income Taxes

       The following illustrates domestic and foreign income from continuing operations before income taxes (in thousands):

The income tax provision is as follows (in thousands):

A reconciliation of the statutory U.S. federal income tax rate to the effective income tax rate is as follows:

In March 2013, the Company issued Warrants in connection with various agreements and arrangements with Walgreens and Alliance Boots. See Note 7 for further details. As of the date of issuance, the Warrants were valued at $242.4 million, which approximates the amount that will be deductible for tax purposes. The fair value of the Warrants as of September 30, 2013 was $572.0 million. The excess of the fair value as of September 30, 2013 over the initial value of $242.4 million is not tax deductible. As a result, the Company's current effective income tax rate is higher than its historic rate. This increase in the income tax rate is reflected in Warrants in the above effective income tax rate reconciliation.

Deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts. Significant components of the Company's deferred tax liabilities (assets) are as follows (in thousands):

The following tax carryforward information is presented as of September 30, 2013. The Company had $14.5 million of potential tax benefits from federal net operating loss carryforwards expiring in 8 to 18 years, $59.8 million of potential tax benefits from state net operating loss carryforwards expiring in 1 to 20 years and $6.4 million of potential tax benefits from foreign net operating loss carryforwards, which have varying expiration dates. Included in the state net operating loss carryforwards is $9.3 million of potential tax benefits that if realized would be an increase to additional paid-in-capital. The Company had $297.8 million of potential tax benefits from capital loss carryforwards expiring in 1 to 5 years. The Company had $5.9 million of foreign tax credit carryforwards expiring in 5 to 10 years. The Company had $1.4 million of state tax credit carryforwards.

In connection with the acquisition of World Courier, the Company acquired net operating loss carryforwards totaling approximately $78 million. The Company agreed with the sellers of World Courier to reimburse them for the Company's utilization of all U.S. net operating loss carryforwards and certain foreign net operating loss carryforwards that existed as of the acquisition date and will be realized by the Company through 2017. As such, the Company recorded a deferred tax asset, net of valuation allowance, for the net operating losses expected to be realized and an offsetting liability for the amount to be repaid to the sellers as part of the purchase price allocation for World Courier.

In fiscal 2013, the Company increased the valuation allowance on deferred tax assets by $73.4 million primarily due to the addition of capital loss carryforwards resulting from the sale of ABCC. In fiscal 2012, the Company increased the valuation allowance on deferred tax assets by $4.3 million primarily due to the addition of certain foreign net operating loss carryforwards.

In fiscal 2013, 2012, and 2011, tax benefits of $41.2 million, $25.7 million, and $39.7  million, respectively, related to the exercise of employee stock options and lapse of restricted shares, were recorded as additional paid-in capital.

Income tax payments, net of refunds, were $313.7 million, $302.1 million and $214.6 million in the fiscal years ended September 30, 2013, 2012 and 2011, respectively.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years before 2009.

As of September 30, 2013 and 2012, the Company had unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in the Company's financial statements, of $55.4 million and $43.3 million, respectively, ($39.1 million and $30.1 million, net of federal benefit, respectively). If recognized, these tax benefits would reduce income tax expense and the effective tax rate. As of September 30, 2013 and 2012, included in these amounts are $9.1 million and $6.3 million of interest and penalties, respectively, which the Company records in income tax expense.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, in fiscal 2013, 2012, and 2011 is as follows (in thousands):

During the next 12 months, it is reasonably possible that state tax audit resolutions and the expiration of statutes of limitations could result in a reduction of unrecognized tax benefits by approximately $8.2 million.

Cumulative undistributed earnings of international subsidiaries were $125.6 million at September 30, 2013. No deferred Federal income taxes were provided for the undistributed earnings as they are permanently reinvested in the Company's international operations. It is not practicable to estimate the amount of U.S. tax that would result upon the eventual repatriation of such earnings.

us-gaap:IncomeTaxDisclosureTextBlock