Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

NOTE 3. INCOME TAXES

Moody's effective tax rate was 28.5% and 24.4% for the three months ended September 30, 2011 and 2010, respectively, and 29.9% and 30.9% for the nine months ended September 30, 2011 and 2010, respectively. The increase in the ETR compared to the third quarter of 2010 was primarily due to a tax benefit associated with foreign earnings in 2010, partially offset by a tax benefit from the settlement of state tax audits in the current period. The decrease in the ETR compared to the nine months ended September 30, 2010 was primarily due to lower U.S. taxes on foreign earnings and state income taxes in the current period.

The Company classifies interest related to UTBs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating income, net. The Company had an overall decrease in its UTBs of $12.6 million ($10.4 million net of federal tax benefit) during the third quarter of 2011 and an overall decrease in its UTBs during the first nine months of 2011 of $6.2 million ($8.7 million, net of federal tax benefit).

Prepaid taxes of $12.6 million and $82.3 million at September 30, 2011 and December 31, 2010, respectively, are included in other current assets in the consolidated balance sheets.

Moody's Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. Moody's U.S. federal tax returns filed for the years 2008 through 2010 remain subject to examination by the IRS. The Company's tax filings in New York State for the years 2004 through 2007 are currently under examination. The income tax returns for 2008 and 2009 remain open to examination for both New York State and New York City. Tax filings in the U.K. for 2007 through 2009 remain open to examination.

For ongoing audits, it is possible the balance of UTBs could decrease in the next twelve months as a result of the settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax authorities which could necessitate increases to the balance of UTBs. As the Company is unable to predict the timing or outcome of these audits, it is therefore unable to estimate the amount of changes to the balance of UTBs at this time. However, the Company believes that it has adequately provided for its financial exposure relating to all open tax years by tax jurisdiction in accordance with the applicable provisions of Topic 740 of the ASC regarding UTBs.