NOTE 13. INCOME TAX

The domestic and foreign components of income (loss) from continuing operations before provision for income taxes were as follows (in thousands):



	Year Ended August 31,
(in thousands)	2012		2011			2010
United States	$	114,406	$	(21,377	)	$	(148,829	)
Foreign	48,387		59,983			(12,560		)
Total	$	162,793	$	38,606		$	(161,389	)

The provision for income taxes from continuing operations includes the following:



	Year Ended August 31,
(in thousands)	2012			2011			2010
Current:
United States	$	1,560		$	23,452		$	(104,135	)
Foreign	419			352			(2,684		)
State and local	3,411			5,226			(18,581		)
Current taxes (benefit)	$	5,390		$	29,030		$	(125,400	)
Deferred:
United States	$	(65,710	)	$	(28,048	)	$	39,399
Foreign	7,130			9,742			34,749
State and local	(1,419		)	5,616			(8,008		)
Deferred taxes (benefit)	$	(59,999	)	$	(12,690	)	$	66,140
Total taxes (benefit) on income	$	(54,609	)	$	16,340		$	(59,260	)
Taxes (benefit) on discontinued operations	(8,419		)	(2,988		)	2,682
Taxes (benefit) on continuing operations	$	(46,190	)	$	19,328		$	(61,942	)

The Company paid taxes of $17.2 million in 2012. The Company had net tax refunds of $79.9 million and $38.4 million during the years ended 2011 and 2010, respectively.

The tax effects of significant temporary differences giving rise to deferred tax assets and liabilities are as follows:



	August 31,
(in thousands)	2012			2011
Deferred tax assets:
Deferred compensation and employee benefits	$	52,113		$	49,317
Net operating losses and credits	110,553			63,866
Reserves and other accrued expenses	41,516			44,683
Allowance for doubtful accounts	5,816			10,423
Inventory	1,881			3,603
Intangibles	9,668			11,098
Other	15,062			7,881
Total deferred tax assets	$	236,609		$	190,871
Valuation Allowance for deferred tax assets	(25,779		)	(75,289		)
Deferred tax assets, net	$	210,830		$	115,582
Deferred tax liabilities:
Fixed assets	$	111,777		$	84,825
Other	5,012			5,996
Total deferred tax liabilities	$	116,789		$	90,821
Deferred tax assets, net of deferred tax liabilities	$	94,041		$	24,761

Net operating losses giving rise to deferred tax assets consist of $217.2 million federal and $332.8 million state net operating losses that expire during the tax years ending from 2012 to 2032 and foreign net operating losses of $57.5 million that expire during the tax years ending from 2012 to 2017. These assets will be reduced as tax expense is recognized in future periods.

During the year ended August 31, 2012, the Company recorded a decrease to the valuation allowance in the amount of $49.5 million against deferred tax assets as well as the write off of net operating losses related to the disposition of CMCS. The decrease in the valuation allowance was offset by an increase for the benefit of net operating loss carryforwards in certain jurisdictions due to the uncertainty of their realization.

It is the Company’s intention to indefinitely reinvest all undistributed earnings of non-U.S. subsidiaries, which amounts to $472.5 million. As these earnings are considered permanently reinvested, no provisions for U.S. federal or state income taxes are required. Determination of the amount of unrecognized U.S. federal and state deferred tax liabilities on these unremitted earnings is not practicable.

Reconciliations of the United States statutory rates to the effective rates from continuing operations were as follows:



	Year Ended August 31,
	2012			2011			2010
Tax expense (benefit) at statutory rate of 35%	$	56,978		$	13,512		(56,486		)
State and local taxes	4,620			7,351			(12,530		)
Section 199 manufacturing deduction	—			(1,175		)	—
Foreign rate differential	(9,909		)	(9,617		)	(1,096		)
Change in valuation allowance	10,033			—			12,965
Liability for non-US earnings	—			8,848			—
Disposition of CMCS	(102,104		)	—			—
Research and experimentation tax credits	(11,500		)	—			—
Other	5,692			409			(4,795		)
Taxes (benefit) on continuing operations	$	(46,190	)	$	19,328		$	(61,942	)
Effective tax rates from continuing operations	(28.4		)%	50.1		%	38.4		%

The Company’s effective tax rate from discontinued operations for the years ended 2012, 2011 and 2010 were 84.9%, 2.0% and (2.6)%, respectively.

During the year ended August 31, 2012, the Company recognized a tax loss in the amount of $291 million related to its investments in its Croatian subsidiary. As a result, a tax benefit of $102.1 million was recorded from these losses in continuing operations for the year ended August 31, 2012. The Company will report and disclose the losses on these investments on its U.S. tax return as ordinary worthless stock and bad debt deductions. These tax benefits are the primary reason for the variance from the statutory tax rate of 35%. The Company also recorded a tax benefit of $11.5 million during the year ended August 31, 2012 related to federal and state research and experimentation expenditures.

As of August 31, 2012, gross unrecognized tax benefits totaled $27.4 million and accrued interest and penalties totaled $2.0 million, for an aggregate gross amount of $29.4 million.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):



(in thousands)	2012			2011			2010
Balance at September 1	$	10,762		$	20,367		$	1,532
Change in tax positions of current year	—			2,440			1,640
Change for tax positions of prior years	18,006			(12,045		)	17,302
Reductions due to settlements with taxing authorities	(600		)	—			—
Reductions due to statute of limitations lapse	(784		)	—			(107		)
Balance at August 31	$	27,384		$	10,762		$	20,367

If these tax positions were recognized, the impact on the effective tax rate would not be significant.

The Company’s policy classifies interest recognized on an underpayment of income taxes and any statutory penalties recognized on a tax position as tax expense and the balances at the end of a reporting period are recorded as part of the current or noncurrent reserve for uncertain income tax positions. For the year ended August 31, 2012, before any tax benefits, the Company recorded an increase of accrued interest and penalties on unrecognized tax benefits of $0.5 million.

During the next twelve months, it is reasonably possible that the statute of limitations may lapse pertaining to positions taken by the Company in prior year tax returns or that income tax audits in various taxing jurisdictions could be finalized. As a result, the total amount of unrecognized tax benefits may decrease, which could reduce the liability for uncertain tax positions by approximately $12.2 million.

The Company files income tax returns in the United States and multiple foreign jurisdictions with varying statutes of limitations. In the normal course of business, the Company and its subsidiaries are subject to examination by various taxing authorities. The following is a summary of tax years subject to examination:

US Federal — 2009 and forward

US States — 2006 and forward

Foreign — 2005 and forward

During the year ended August 31, 2011, the Company settled an examination with the Internal Revenue Service (“IRS”) related to 2006 to 2008 and recorded an expense of $0.8 million. The Company is also under examination by the IRS and state revenue authorities from 2009 to 2011. Management believes the Company's recorded tax liabilities as of August 31, 2012 sufficiently reflect the anticipated outcome of these examinations.