NOTE 5. INCOME TAXES

Income taxes consisted of the following:

	Fiscal Year Ended March 31,
	2011			2010		2009
Current
United States	$	18,052		$	12,246	$	19,622
State and local		2,290			3,357		4,178
Foreign		59,051			56,925		20,308
		79,393			72,528		44,108
Deferred
United States		(43	)		4,134		17,066
State and local		(226	)		247		123
Foreign		(775	)		9,374		3,291
		(1,044	)		13,755		20,480
Total	$	78,349		$	86,283	$	64,588

Foreign taxes include U.S. tax expense on earnings of foreign subsidiaries.

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

	Fiscal Year Ended March 31,
	2011			2010			2009

Statutory tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal benefit		0.6			0.9			1.4
Impact of permanently reinvested earnings		—			—			0.4
Change in classification of permanently reinvested earnings		—			1.4			—
Change in valuation allowance on deferred tax assets		(0.2	)		—			(1.5	)
Other, including changes in liabilities recorded for uncertain tax positions		(3.2	)		(3.7	)		(2.5	)
Effective income tax rate		32.2	%		33.6	%		32.8	%

At the beginning of fiscal year 2010, Universal had approximately $52 million of undistributed earnings of foreign subsidiaries on which no provision for U.S. income taxes had been recorded because those earnings were designated as permanently reinvested. Effective March 31, 2010, the Company changed the classification of those earnings to reflect a change in management's intent to repatriate the earnings consistent with appropriate tax planning and good business practice in the respective foreign countries. As a result of this change, approximately $3.5 million of additional income tax expense was recognized in fiscal year 2010 to record the applicable U.S. income tax liability. The Company no longer has any undistributed earnings of foreign subsidiaries that are classified as permanently reinvested.

The U.S. and foreign components of income before income taxes and other items were as follows:

	Fiscal Year Ended March 31,
	2011		2010		2009

United States	$	32,826	$	48,675	$	103,791
Foreign		210,073		207,953		93,358
Total	$	242,899	$	256,628	$	197,149

Significant components of deferred tax liabilities and assets were as follows:

	March 31,
	2011			2010
Liabilities
Foreign withholding taxes	$	16,692		$	16,438
Undistributed earnings		34,015			23,937
Goodwill		31,515			34,973
All other		22,386			27,320
Total deferred tax liabilities	$	104,608		$	102,668
Assets
Employee benefit plans	$	50,761		$	48,392
Deferred compensation		5,055			4,082
Valuation allowances on Brazilian farmer advances and value-added tax credits		36,232			30,920
All other		34,571			41,155
Total deferred tax assets		126,619			124,549
Valuation allowance		(3,427	)		(4,082	)
Net deferred tax assets	$	123,192		$	120,467

At March 31, 2011, the Company had no material net operating loss carryforwards in either its domestic or foreign operations.

Combined Income Tax Expense (Benefit)

The combined income tax expense (benefit) allocable to continuing operations, other comprehensive income, and direct adjustments to shareholders' equity was as follows:

	Fiscal Year Ended March 31,
	2011		2010			2009

Continuing operations	$	78,349	$	86,283		$	64,588
Other comprehensive income		3,210		6,520			(26,285	)
Direct adjustments to shareholders' equity		159		(454	)		(848	)
Total	$	81,718	$	92,349		$	37,455

Uncertain Tax Positions

A reconciliation of the beginning and ending balance of the gross liability for uncertain tax positions for the fiscal years ended March 31, 2011, 2010 and 2009, is as follows:

	Fiscal Year Ended March 31,
	2011			2010			2009
Liability for uncertain tax positions, beginning of year	$	22,184		$	22,740		$	25,801
Additions:
Related to tax positions for the current year		1,184			9,609			3,277
Related to tax positions for prior years		77			574			1,873
Reductions:
Related to tax positions for prior years		(205	)		(1,674	)		—
Due to settlements with tax jurisdictions		(12,765	)		(1,552	)		—
Due to lapses of statutes of limitations		(1,571	)		(4,802	)		(5,032	)
Other reductions		—			(4,041	)		—
Effect of currency rate movement		319			1,330			(3,179	)
Liability for uncertain tax positions, end of year	$	9,223		$	22,184		$	22,740

Of the total $12.8 million reduction in the liability for uncertain tax positions in fiscal year 2011 due to settlements with tax jurisdictions, approximately $5.7 million represented tax paid and $7.1 million represented amounts reversed through income tax expense. Of the total liability for uncertain tax positions at March 31, 2011, approximately $0.9 million could have an effect on the consolidated effective tax rate if the tax benefits are recognized. The liability for uncertain tax positions includes $0.7 million related to tax positions for which it is reasonably possible that the amounts could change significantly before March 31, 2012. This amount reflects a possible decrease in the liability for uncertain tax positions that could result from the completion and resolution of tax audits and the expiration of open tax years in various tax jurisdictions.

The Company recognizes accrued interest related to uncertain tax positions as interest expense, and it recognizes penalties as a component of income tax expense. The consolidated statements of income include net expense for interest and penalties of $0.2 million in fiscal year 2011, a net reversal of interest and penalties of $2.6 million in fiscal year 2010, and net expense for interest and penalties of $3.6 million in fiscal year 2009. At March 31, 2011 and 2010, $5.8 million and $6.5 million, respectively, were accrued for interest and penalties.

Universal and its subsidiaries file a U.S. federal consolidated income tax return, as well as returns in several U.S. states and a number of foreign jurisdictions. As of March 31, 2011, the Company's earliest open tax year for U.S. federal income tax purposes was its fiscal year ended March 31, 2008. Open tax years in state and foreign jurisdictions generally range from three to six years.