Income Taxes

After including the tax effect of the loss on the sale of U.S. Pipe, our U.S. deferred tax liabilities are insufficient to fully support our U.S. deferred tax assets, which include net operating loss carryforwards. Accordingly, we initially recorded income tax expense to establish valuation allowances related to our overall deferred tax assets during the quarter ended June 30, 2012.

We reevaluate the need for a valuation allowance against the U.S. deferred tax assets each quarter, considering results to date, projections of taxable income, tax planning strategies and reversing taxable temporary differences. During the nine months ended June 30, 2013, we decreased our U.S. deferred tax valuation allowance by $15.1 million, including $7.1 million included in other comprehensive income and $3.5 million in discontinued operations. Notwithstanding the valuation allowance, our net operating loss carryforwards remain available to offset future taxable earnings.

The components of income tax expense on continuing operations are provided below.



	Three months ended						Nine months ended
	June 30,						June 30,
	2013			2012			2013			2012
	(in millions)
Expense (benefit) from pre-tax operating income (loss)	$	8.1		$	3.8		$	9.6		$	(2.4	)
Deferred tax asset valuation allowance adjustment	(4.0		)	—			(4.5		)	5.9
Other discrete items	0.1			(0.4		)	—			0.6
	$	4.2		$	3.4		$	5.1		$	4.1

We did not allocate any income tax expense to discontinued operations in the three or nine months ended June 30, 2013. We allocated $4.3 million and $26.4 million of income tax benefit to discontinued operations in the three and nine months ended June 30, 2012, respectively. For the three months ended June 30, 2012, the allocation consisted of benefits from operations of $0.1 million and valuation allowance-related benefits of $4.2 million. For the nine months ended June 30, 2012, the allocation consisted of a benefit from operations of $50.7 million offset by valuation allowance-related expenses of $24.3 million.

At June 30, 2013 and September 30, 2012, the gross liabilities for unrecognized income tax benefits were $3.2 million and $4.3 million, respectively.

We recognize interest related to uncertain income tax positions as interest expense and would recognize any penalties that may be incurred as selling, general and administrative expense. At June 30, 2013 and September 30, 2012, we had $0.8 million and $0.9 million, respectively, of accrued interest liabilities related to uncertain tax positions.

Generally, our state income tax returns are closed for years prior to 2006, except to the extent of our state net operating loss carryforwards, and our Canadian income tax returns are closed for years prior to 2006. During 2012, we concluded an audit by the IRS for the years 2007 through 2010 with no adverse changes. We are also under audit by several states at various levels of completion. We do not have any material unpaid assessments.