8. INCOME TAXES

The components of income before income tax provision are as follows:



	2012		2011		2010
Domestic	$	257,866	$	230,334	$	207,210
Foreign	45,217		134,863		122,446
Total	$	303,083	$	365,197	$	329,656

The components of income tax expense are as follows:



	2012			2011		2010
Federal	$	54,179		$	75,290	$	78,224
Foreign	(7,850		)	18,788		14,066
State and local	25,723			25,356		26,386
Total income tax provision	$	72,052		$	119,434	$	118,676
Current	$	22,860		$	39,162	$	4,729
Deferred	49,192			80,272		113,947
Total income tax provision	$	72,052		$	119,434	$	118,676

Legg Mason received approximately $580,000 in tax refunds during the June 2009 quarter, primarily attributable to the utilization of $1,600,000 of realized losses incurred in fiscal 2009 on the sale of securities issued by structured investment vehicles. Federal legislation, enacted in November 2009 to temporarily extend the net operating loss carryback period from two to five years enabled Legg Mason to utilize an additional $1,300,000 of net operating loss deductions and, as a result, an additional $459,000 in tax refunds was received in January 2010.

A reconciliation of the difference between the effective income tax rate and the statutory federal income tax rate is as follows:



	2012		2011		2010
Tax provision at statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit⁽¹⁾	5.4		4.9		2.5
Effect of foreign tax rates⁽¹⁾	(1.8	)	(5.4	)	(3.5	)
Effect of loss on Australian restructuring	(6.0	)	—		—
Changes in U.K. tax rates on deferred tax assets and liabilities	(6.0	)	(2.5	)	—
Net (income) loss attributable to noncontrolling interests	(1.1	)	0.8		—
Other, net	(1.7	)	(0.1	)	2.0
Effective income tax rate	23.8	%	32.7	%	36.0	%


(1)	State income taxes include changes in valuation allowances, net of the impact on deferred tax assets of changes in state apportionment factors and planning strategies. The effect of foreign tax rates also includes changes in valuation allowances.

During the quarter ended September 30, 2010, the U.K. Finance (No. 2) Act 2010 was enacted, which reduced the main U.K. corporate tax rate from 28% to 27%. In July 2011, The U.K. Finance Act 2011 (the "Act") was enacted. The Act further reduced the main U.K. corporate tax rate from 27% to 26% effective April 1, 2011, and from 26% to 25% effective April 1, 2012. The reductions in the U.K. corporate tax rate resulted in tax benefits of $18,268 and $8,878, recognized in fiscal 2012 and 2011, respectively, as a result of the revaluation of deferred tax assets and liabilities at the new rates. In addition, during the year ended March 31, 2012, Legg Mason recorded $18,254 of tax benefits related to a restructuring of our Australian business.

Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the Consolidated Balance Sheets. These temporary differences result in taxable or deductible amounts in future years. A summary of Legg Mason's deferred tax assets and liabilities are as follows:



	2012			2011
DEFERRED TAX ASSETS
Accrued compensation and benefits	$	125,797		$	129,320
Accrued expenses	62,410			46,650
Operating loss carryforwards	397,013			375,703
Capital loss carryforwards	46,244			44,475
Convertible debt obligations	4,951			4,609
Foreign tax credit carryforward	59,871			45,119
Federal benefit of uncertain tax positions	17,602			17,451
Mutual fund launch costs	14,476			102
Net unrealized losses from investments	5,327			2,590
Other	18,119			6,844
Deferred tax assets	751,810			672,863
Valuation allowance	(102,722		)	(94,541		)
Deferred tax assets after valuation allowance	$	649,088		$	578,322


	2012			2011
DEFERRED TAX LIABILITIES
Basis differences, principally for intangible assets and goodwill	$	196,611		$	229,879
Depreciation and amortization	431,280			295,699
Other	3,667			4,369
Deferred tax liabilities	631,558			529,947
Net deferred tax asset	$	17,530		$	48,375

Certain tax benefits associated with Legg Mason's employee stock plans are recorded directly in Stockholders' Equity. No tax benefit was recorded to equity in fiscal 2012, 2011 or 2010, due to the net operating loss position of the Company. As of March 31, 2012, an additional $6,700 of net operating loss will be recognized as an increase in Stockholders' Equity when ultimately realized.

In connection with the completion and filing of its fiscal 2010 federal tax return in December 2010, Legg Mason recorded a net additional tax benefit of approximately $36,000 in fiscal 2011 with respect to the Equity Unit extinguishment that occurred in fiscal 2010. The tax benefit increased Additional paid-in capital in a manner consistent with the fiscal 2010 allocation of the extinguishment payment.

Legg Mason has various loss carryforwards that may provide future tax benefits. Related valuation allowances are established in accordance with accounting guidance for income taxes, if it is management's opinion that it is more likely than not that these benefits will not be realized. Substantially all of Legg Mason's deferred tax assets relate to U.S. and U.K. taxing jurisdictions. As of March 31, 2012, U.S. federal deferred tax assets aggregated $717,552, realization of which is expected to require approximately $4,120,000 of future U.S. earnings, approximately $169,000 of which must be in the form of foreign source income. Based on estimates of future taxable income, using assumptions consistent with those used in Legg Mason's goodwill impairment testing, it is more likely than not that current federal tax benefits relating to net operating losses are realizable and no valuation allowance is necessary at this time. With respect to those resulting from foreign tax credits, it is more likely than not that tax benefits relating to $10,370 of foreign tax credits will not be realized and a valuation allowance of $3,411 was established in fiscal 2012. While tax planning may enhance Legg Mason's tax positions, the realization of these current tax benefits is not dependent on any significant tax strategies. As of March 31, 2012, U.S. state deferred tax assets aggregated $236,675. Due to limitations on net operating loss and capital loss carryforwards and, taking into consideration certain state tax planning strategies, a valuation allowance was established for the state capital loss and net operating loss benefits in certain jurisdictions. An additional valuation allowance of $12,076 was recorded for fiscal 2012. Due to the uncertainty of future state apportionment factors and future effective state tax rates, the value of state net operating loss benefits ultimately realized may vary. A net release of $7,306 in fiscal 2012 of the full valuation allowance on foreign deferred tax assets related to various jurisdictions, primarily the U.K. and Japan. To the extent the analysis of the realization of deferred tax assets relies on deferred tax liabilities, Legg Mason has considered the timing, nature and jurisdiction of reversals, as well as, future increases relating to the tax amortization of goodwill and indefinite-life intangible assets.

The following deferred tax assets and valuation allowances relating to carryforwards have been recorded at March 31, 2012 and 2011, respectively.



	2012		2011		Expires Beginning after Fiscal Year
Deferred tax assets
U.S. federal net operating losses	$	219,984	$	203,971	2029
U.S. federal capital losses	74		74		2015
U.S. federal foreign tax credits	59,871		45,119		2015
U.S. state net operating losses ^(1,2)	151,772		143,542		2015
U.S. state capital losses	39,046		36,675		2015
Non-U.S. net operating losses	25,257		28,190		2011
Non-U.S. capital losses	7,124		7,726		n/a
Total deferred tax assets for carryforwards	$	503,128	$	465,297
Valuation allowances
U.S. federal capital losses	$	74	74
U.S. federal foreign tax credits	6,542		3,131
U.S. state net operating losses	23,911		14,206
U.S. state capital losses	39,046		36,675
Non-U.S. net operating losses	22,956		28,190
Non-U.S. capital losses	7,124		7,726
Valuation allowances for carryforwards	99,653		90,002
Non-U.S. other deferred assets	3,069		4,539
Total valuation allowances	$	102,722	$	94,541


(1)	Substantially all of the U.S. state net operating losses carryforward through fiscal 2029.


(2)	Due to potential for change in the factors relating to apportionment of income to various states, the Company's effective state tax rates are subject to fluctuation which will impact the value of the Company's deferred tax assets, including net operating losses, and could have a material impact on the future effective tax rate of the Company.

Legg Mason had total gross unrecognized tax benefits of approximately $90,831, $77,653 and $51,027 as of March 31, 2012, 2011 and 2010, respectively. Of these totals, approximately $62,400, $53,500 and $40,600, respectively, (net of the federal benefit for state tax liabilities) are the amounts of unrecognized benefits which, if recognized, would favorably impact future income tax provisions and effective tax rates.

A reconciliation of the beginning and ending amount of unrecognized gross tax benefits for the years ended March 31, 2012, 2011 and 2010, is as follows:



	2012			2011			2010
Balance, beginning of year	$	77,653		$	51,027		$	43,662
Additions based on tax positions related to the current year	9,822			1,361			2,830
Additions for tax positions of prior years	10,668			34,959			12,664
Reductions for tax positions of prior years	(3,575		)	(6,107		)	(5,846		)
Decreases related to settlements with taxing authorities	(3,185		)	(2,667		)	(515		)
Expiration of statute of limitations	(552		)	(920		)	(1,768		)
Balance, end of year	$	90,831		$	77,653		$	51,027

Although management cannot predict with any degree of certainty the timing of ultimate resolution of matters under review by various taxing jurisdictions, it is reasonably possible that the Company's gross unrecognized tax benefits balance may change within the next twelve months by up to $20,500 as a result of the expiration of statutes of limitation and the completion of tax authorities' exams.

The Company accrues interest related to unrecognized tax benefits in interest expense and recognizes penalties in other operating expense. During the years ended March 31, 2012, 2011 and 2010, the Company recognized approximately $1,300, $3,000, and $2,200, respectively, which was substantially all interest. At March 31, 2012, 2011 and 2010, Legg Mason had approximately $10,000, $9,000, and $6,000, respectively, accrued for interest and penalties on tax contingencies in the Consolidated Balance Sheets.

Legg Mason is under examination by the Internal Revenue Service and other tax authorities in various states. The following tax years remain open to income tax examination for each of the more significant jurisdictions where Legg Mason is subject to income taxes: after fiscal 2005 for U.S. federal; after fiscal 2005 for the United Kingdom; after fiscal 2003 for the state of California; after fiscal 2005 for the state of New York; and after fiscal 2008 for the states of Connecticut, Maryland and Massachusetts. The Company does not anticipate making any significant cash payments with the settlement of these audits in excess of amounts that have been reserved.

In a prior year, Legg Mason initiated plans to repatriate accumulated earnings of approximately $225,000, of which approximately $100,000 has been repatriated as of March 31, 2012. Legg Mason currently intends to repatriate $100,000 to $150,000 of foreign earnings to create foreign source income in order to utilize foreign tax credits that may otherwise expire unutilized. No further repatriation of accumulated prior period foreign earnings beyond the above range is currently planned, however, Legg Mason may repatriate future earnings.

Except as noted above, Legg Mason intends to permanently reinvest cumulative undistributed earnings of its non-U.S. subsidiaries in non-U.S. operations. Accordingly, no U.S. federal income taxes have been provided for the undistributed earnings to the extent that they are permanently reinvested in Legg Mason's non-U.S. operations. It is not practical at this time to determine the income tax liability that would result upon repatriation of the earnings.