6. INCOME TAXES

Fluctuations in our effective tax rate are due to changes within international and U.S. state effective tax rates resulting from our business mix and the impact of restructuring and employee severance, acquisition-related costs, litigation (recoveries)/charges, net, impairment charges, and other discrete items. The following table summarizes the provision for income taxes as a percentage of pretax earnings from continuing operations ("effective tax rate") for the three and nine months ended March 31, 2012 and 2011:


	Three Months Ended March 31,						Nine Months Ended March 31,
	2012 (1)			2011 (2)			2012 (3)			2011 (4)
Effective tax rate		34.9	%		41.3	%		36.9	%		35.5	%

(1)

During the three months ended March 31, 2012, the effective tax rate was impacted by net favorable discrete items of $3.6 million, or 0.7 percentage points. This included the favorable impact of settlement of federal, foreign and state tax controversies ($36.3 million), a favorable impact from the related reduction for interest on unrepatriated foreign earnings ($8.5 million), and a net unfavorable impact of remeasuring some current and prior years unrecognized tax benefits primarily as a result of ongoing negotiations with tax authorities ($43.8 million).

(2)	During the three months ended March 31, 2011, the effective tax rate was unfavorably impacted by net discrete items of $16.5 million, or 3.9 percentage points, primarily attributable to changes in state tax rules and deferred tax rate changes in certain foreign and state jurisdictions.

(3)

During the nine months ended March 31, 2012, the effective tax rate was impacted by net unfavorable discrete items of $4.8 million, or 0.4 percentage points. The discrete items included unfavorable amounts related to remeasuring certain unrecognized tax benefits, partially offset by the favorable impact of settling certain federal, state, and foreign tax matters.

(4)

During the nine months ended March 31, 2011, the effective tax rate was favorably impacted by net discrete items of $26.8 million, or 2.3 percentage points, primarily attributable to recognizing no income tax expense on the sale of CareFusion stock due to the release of a previously established deferred tax valuation allowance.

A tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement.

The following table summarizes the balance of unrecognized tax benefits and the amount of interest and penalties as of March 31, 2012 and June 30, 2011:


(in millions)	March 31, 2012		June 30, 2011
Unrecognized tax benefits (1) (2)	$	671.9	$	746.8
Portion that, if recognized, would reduce tax expense and effective tax rate		334.0		332.4
Accrued penalties and interest (3)		203.6		267.2

(1)	The full amount of unrecognized tax benefits is included in deferred income taxes and other liabilities in the condensed consolidated balance sheets.

(2)

It is reasonably possible that there could be a change in the amount of unrecognized tax benefits within the next 12 months due to activities of the Internal Revenue Service ("IRS") or other taxing authorities, including proposed assessments of additional tax, possible settlement of audit issues (primarily IRS audits for fiscal 2003 through 2005), reassessment of existing unrecognized tax benefits, or the expiration of applicable statutes of limitations. We estimate that the range of the possible change in unrecognized tax benefits within the next 12 months may be a net decrease of approximately zero to $290.0 million, exclusive of penalties and interest.

(3)	Balances are gross amounts before any tax benefits and are included in deferred income taxes and other liabilities in the condensed consolidated balance sheets.

We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. With few exceptions, we are subject to audit by taxing authorities for fiscal 2003 through the current fiscal year.

During the three months ended March 31, 2012, the IRS closed audits of fiscal 2001 and 2002 and is currently conducting audits of fiscal 2003 through 2010. We have received proposed adjustments from the IRS for fiscal 2003 through 2007 related to our transfer pricing arrangements between foreign and domestic subsidiaries and the transfer of intellectual property among subsidiaries of an acquired entity prior to its acquisition by us. The IRS proposed additional taxes of $849.0 million, excluding penalties and interest. If this tax ultimately must be paid, CareFusion is liable under the tax matters agreement for $591.5 million of the total amount. We disagree with these proposed adjustments, which we are contesting, and we have accounted for the unrecognized tax benefits related to them.