INCOME TAXES

6 Months Ended

Oct. 31, 2020

NOTE 7: INCOME TAXES

We file a consolidated federal income tax return in the U.S. with the IRS and file tax returns in various state, local, and foreign jurisdictions. Tax returns are typically examined and either settled upon completion of the examination or through the appeals process. Our U.S. federal income tax returns for 2017 and later years remain open for examination. Our U.S. federal income tax returns for 2016 and all prior periods are currently closed. With respect to state and local jurisdictions and countries outside of the U.S., we are typically subject to examination for three to six years after the income tax returns have been filed. Although the outcome of tax audits is always uncertain, we believe that adequate amounts of tax, interest, and penalties have been provided for in the accompanying consolidated financial statements for any adjustments that might be incurred due to federal, state, local or foreign audits.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law. The CARES Act includes, among other items, modifications to net operating loss carryback periods, net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act allows a five-year carryback of net operating losses generated between 2018 and 2021 to fully offset taxable income previously subject to a 35% statutory tax rate. As a result of the CARES Act and changes to our methods of accounting for items under the Internal Revenue Code, we anticipate generating a loss for tax purposes on our calendar 2020 tax return, plan to carry back the loss to two of the five preceding tax years, and obtain a refund of previously paid federal income taxes. For the quarter ended October 31, 2020, the net operating loss carryback has been factored into our annual effective tax rate which has reduced our effective tax rate and income taxes payable and increased our unrecognized tax benefits, income tax refund receivables, and deferred tax liabilities. We also expect that the net operating loss carryback will reopen our 2015 and 2016 tax returns to examination.

For the three months ended July 31, 2020, we reported income from continuing operations before income taxes of $124.0 million and income tax expense of $30.5 million, resulting in an effective tax rate of 24.6%. For the three months ended October 31, 2020, we reported loss from continuing operations before income taxes of $237.0 million and an income tax benefit of $14.5 million, resulting in an effective tax rate of 6.1%. The decreased effective tax rate for the current quarter reflects our expectation of a lower annual effective tax rate for the full fiscal year and $31.6 million of discrete tax expense recorded during the quarter, which is primarily related to applying the effects of the CARES Act and the anticipated taxable loss to our year-to-date results.

The decreased estimated annual effective tax rate for the fiscal year, including discrete items, causes a negative effective tax rate for the six months ended October 31, 2020, which resulted in income tax expense in a period of losses from continuing operations before income taxes. Our effective tax rate for continuing operations, including the effects of discrete tax items was (14.1)% and 29.7% for the six months ended October 31, 2020 and 2019, respectively. Discrete items decreased the effective tax rate for the six months ended October 31, 2020 by (28.5)% and increased the effective tax rate for the six months ended October 31, 2019 by 5.4%. A discrete income tax expense of $32.2 million was recorded in the six months ended October 31, 2020 compared to a discrete tax benefit of $25.2 million in the same period of the prior year. The discrete tax expense recorded in the current period primarily resulted from uncertain tax benefits related to the net operating loss carryback. The discrete tax benefit recorded in the prior year resulted primarily from favorable audit settlements, statutes of limitations releases and valuation allowance changes related to utilization of foreign losses. Due to the loss through the second quarter, a discrete tax benefit increases the tax rate while an item of discrete tax expense decreases the tax rate. The impact of discrete tax items combined with the seasonal nature of our business causes the effective tax rate through our second quarter to be significantly different than the rate for our full fiscal year.

Changes in unrecognized tax benefits for six months ended October 31, 2020 are as follows:


(in 000s)
Six months ended October 31, 2020	Amount
Balance, beginning of the period	$	168,062
Additions based on tax positions related to prior years	103,822
Reductions based on tax positions related to prior years	(8,180)

Reductions related to settlements with tax authorities	(17,632)
Expiration of statute of limitations	(3,819)

Balance, end of the period	$	242,253

We had gross unrecognized tax benefits of $242.3 million, $156.7 million and $168.1 million as of October 31, 2020 and 2019 and April 30, 2020, respectively. The gross unrecognized tax benefits increased $74.2 million and decreased $28.4 million during the six months ended October 31, 2020 and 2019, respectively. The increase in unrecognized tax benefits during the six months ending October 31, 2020 is primarily related to the net operating loss carryback. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $70.0 million within the next twelve months. The anticipated decrease is due to the expiration of statutes of limitations and anticipated closure of various state matters currently under examination. For such matters where a change in the balance of unrecognized tax benefits is not yet deemed reasonably possible, no estimate has been included.

We had income tax receivables of $57.9 million, $36.7 million, and $28.5 million as of October 31, 2020, 2019, and April 30, 2020, respectively, and we had net deferred tax liabilities of $113.5 million, $35.0 million, and $22.0 million as of October 31, 2020, 2019, and April 30, 2020, respectively. Our income tax receivables and net deferred tax liability balances increased primarily as a result of changes we made to our methods of accounting for items under the Internal Revenue Code during the quarter, which also impacted the timing of our tax payments.