NOTE 10. INCOME TAXES

The significant components of income before income taxes and the consolidated income tax provision were as follows:


	Years Ended September 30
	2011		2010		2009
Income before income taxes:
Domestic	$	122.5	$	169.4	$	(221.4	)
Foreign		37.2		13.5		(157.4	)
Total	$	159.7	$	182.9	$	(378.8	)

Income tax expense:
Current provision
Federal	$	41.1		$	35.9		$	23.3
State		2.3			(5.3	)		(0.3	)
Foreign		4.3			7.0			1.4
Total current provision		47.7			37.6			24.4
Deferred provision:
Federal		(0.8	)		15.2			(3.2	)
State		(0.2	)		4.4			5.3
Foreign		(20.5	)		(0.3	)		(0.3	)
Total deferred provision		(21.5	)		19.3			1.8
Income tax expense	$	26.2		$	56.9		$	26.2

Differences between income tax expense reported for financial reporting purposes and that computed based upon the application of the statutory U.S. Federal tax rate to the reported income before income taxes were as follows:


	Years Ended September 30
	2011						2010						2009
				% of						% of						% of
				Pretax						Pretax						Pretax
	Amount			Income			Amount			Income			Amount			Income

Federal income tax (a)	$	55.9			35.0		$	64.0			35.0		$	(132.6	)		35.0
State income tax (b)		2.4			1.5			4.8			2.6			3.6			(0.9	)
Foreign income tax (c)		(8.0	)		(5.0	)		(0.6	)		(0.3	)		(2.1	)		0.5
Impairment of goodwill and other intangibles		-			-			-			-			163.3			(43.1	)
Application of federal tax credits		(4.1	)		(2.5	)		(0.6	)		(0.3	)		(3.6	)		0.9
Adjustment of estimated income tax accruals		2.3			1.4			(9.7	)		(5.4	)		0.2			-
Valuation of tax attributes		(19.5	)		(12.2	)		-			-			(1.9	)		0.5
Other, net		(2.8	)		(1.8	)		(1.0	)		(0.5	)		(0.7	)		0.2
Income tax expense	$	26.2			16.4		$	56.9			31.1		$	26.2			(6.9	)

(a)	At statutory rate.

(b)	Net of Federal benefit.

(c)	Federal tax rate differential.

The tax effect of temporary differences that gave rise to the deferred tax balance sheet accounts were as follows:


	Years Ended September 30
	2011			2010
Deferred tax assets:
Employee benefit accruals	$	57.4		$	45.4
Reserve for bad debts		9.0			10.4
Net operating loss carryforwards - state		2.7			2.1
Tax credit carryforwards		1.9			2.4
Foreign (loss carryforwards and other tax attributes)		18.4			21.7
Other, net		31.8			34.3
		121.2			116.3
Less: Valuation allowance		(8.1	)		(28.5	)
Total deferred tax assets		113.1			87.8

Deferred tax liabilities:
Depreciation		(42.5	)		(41.2	)
Amortization		(25.4	)		(31.1	)
Other, net		(4.7	)		(6.4	)
Total deferred tax liabilities		(72.6	)		(78.7	)
Deferred tax asset - net	$	40.5		$	9.1

At September 30, 2011, we had $18.4 million of deferred tax assets related to operating loss carryforwards and other tax attributes in foreign jurisdictions. These tax attributes are subject to various carryforward periods with the majority eligible to be carried forward for an unlimited period. We also had $2.7 million of deferred tax assets related to state net operating loss carryforwards, which expire between 2012 and 2027 and $1.9 million of deferred tax assets related to state credits, which expire between 2012 and 2026.

The gross deferred tax assets as of September 30, 2011 were reduced by valuation allowances of $8.1 million, relating primarily to foreign operating loss carryforwards and other tax attributes, as it is more likely than not that some portion or all of these tax attributes will not be realized. The valuation allowance was reduced by $20.4 million during fiscal 2011 due to releases of valuation allowances on deferred tax assets realized or expected to be utilized as well as adjustments in value of related deferred tax assets.

In evaluating whether it is more likely than not that we would recover our deferred tax assets, future taxable income, the reversal of existing temporary differences and tax planning strategies were considered. We believe that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances.

We file a consolidated federal income tax return as well as multiple state, local and foreign jurisdiction tax returns. In the normal course of business, we are subject to examination by the taxing authorities in each of the jurisdictions where we file tax returns. During fiscal 2011, the Internal Revenue Service ("IRS") concluded its audit for fiscal year ended 2009. Also during fiscal 2011, the IRS initiated and is still conducting its post-filing examination of the fiscal 2010 consolidated federal return. We also continued to participate in the IRS Compliance Assurance Program ("CAP") for fiscal year 2011 and have submitted the application to remain in the CAP for fiscal 2012 and 2013. The CAP provides the opportunity for the IRS to review certain tax matters prior to us filing our tax return for the year, thereby reducing the time it takes to complete the post-filing examination. We are also subject to state and local or foreign income tax examinations by taxing authorities for years back to fiscal 2003.

We also have on-going audits in various stages of completion in several state and foreign jurisdictions, one or more of which may conclude within the next 12 months. Such settlements could involve some or all of the following: the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of unrecognized tax benefits. The resolution of these matters, in combination with the expiration of certain statutes of limitations in various jurisdictions, make it reasonably possible that our unrecognized tax benefits may decrease as a result of either payment or recognition by approximately $12 to $14 million in the next twelve months, excluding interest.

The total amount of gross unrecognized tax benefits as of September 30, 2011, 2010 and 2009 was $17.8 million, $24.0 million and $35.5 million which includes $11.5 million, $8.0 million and $17.3 million, that, if recognized, would impact the effective tax rate in future periods. The remaining amount relates to items which, if recognized, would not impact our effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


	Years Ended September 30
	2011			2010			2009
Balance at October 1	$	24.0		$	35.5		$	29.6
Increases in tax position of prior years		0.4			3.9			2.6
Decreases in tax position of prior years		(3.0	)		(6.8	)		(3.1	)
Increases in tax positions related to the current year		5.1			1.4			8.0
Settlements with taxing authorities		(5.2	)		(6.0	)		(1.0	)
Lapse of applicable statute of limitations		(3.5	)		(4.0	)		(1.2	)
Change in positions due to acquisitions or dispositions		-			-			0.7
Foreign currency adjustments		-			-			(0.1	)
Total change		(6.2	)		(11.5	)		5.9
Balance at September 30	$	17.8		$	24.0		$	35.5

We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Accrued interest and penalties, which are not presented in the reconciliation table above, were $1.9 million, $2.1 million and $6.8 million at September 30, 2011, 2010 and 2009. During fiscal 2011 and 2009, we recognized $0.1 million and $0.8 million of income tax expense for interest and penalties, while in fiscal 2010 we recognized $3.0 million of income tax benefit for interest and penalties.

The amount of gross unrecognized tax benefits reflected in our financial statements includes amounts related to our former funeral services business for taxing jurisdictions where we filed consolidated tax returns. Pursuant to the Tax Sharing Agreement entered into as part of the spin-off, Hillenbrand, Inc. is responsible for the portion of the unrecognized tax benefits attributable to the funeral services business. As of September 30, 2011, such gross unrecognized tax benefits were $2.6 million, excluding interest.