INCOME TAXES

9 Months Ended

Jan. 31, 2021

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. 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 tax return to examination.

Our effective tax rate for continuing operations, including the effects of discrete tax items was 9.0% and 29.2% for the nine months ended January 31, 2021 and 2020, respectively. Discrete items decreased the effective tax rate for the nine months ended January 31, 2021 by 4.9% and increased the effective tax rate for the nine months ended January 31, 2020 by 4.3%. A discrete income tax expense of $19.5 million was recorded in the nine months ended January 31, 2021 compared to a discrete tax benefit of $27.7 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 offset by settlements with tax authorities and statute of limitation expirations. The discrete tax benefit recorded in the prior year resulted from the settlement of various matters, including expiration of statute of limitations and resolutions with tax authorities and valuation allowance changes related to utilization of foreign losses. Due to the loss through the third 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 can cause the effective tax rate through our third quarter to be significantly different than the rate for our full fiscal year.

Consistent with prior years, our pretax loss for the nine months ended January 31, 2021 is expected to be offset by income in the fourth quarter due to the established pattern of seasonality in our primary business operations. As such, management has determined that it is more-likely-than-not that realization of tax benefits recorded in our financial statements will occur within our fiscal year. The amount of tax benefit recorded for the nine months ended January 31, 2021 reflects management’s estimate of the annual effective tax rate applied to year-to-date loss from continuing operations adjusted for the tax impact of discrete items for the periods presented.

Changes in unrecognized tax benefits for nine months ended January 31, 2021 are as follows:


(in 000s)
Nine months ended January 31, 2021	Amount
Balance, beginning of the period	$	168,062
Additions based on tax positions related to prior years	117,770
Reductions based on tax positions related to prior years	(31,958)

Additions based on tax positions related to the current year	11,795
Reductions related to settlements with tax authorities	(26,556)
Expiration of statute of limitations	(5,423)

Balance, end of the period	$	233,690

We had gross unrecognized tax benefits of $233.7 million, $148.7 million and $168.1 million as of January 31, 2021 and 2020 and April 30, 2020, respectively. The gross unrecognized tax benefits increased $65.6 million and decreased $36.4 million during the nine months ended January 31, 2021 and 2020, respectively. The increase in unrecognized tax benefits during the nine months ending January 31, 2021 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 $71.0 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.