Income Taxes

Income tax expense (benefit) for the years ended September 30, 2012, 2011 and 2010 was allocated as follows:



	Year Ended September 30,
(in millions)	2012			2011			2010
Income tax expense attributable to income from continuing operations	$	4.4		$	22.5		$	6.4
Income tax expense attributable to loss from discontinued operations	—			0.1			0.6
Income tax expense attributable to extraordinary loss	—			—			5.8
Taxes allocated to stockholders' equity, related to unrealized gains (losses) on available-for-sale securities	2.2			(0.3		)	0.1
Taxes allocated to stockholders' equity, related to pension liabilities	(1.0		)	(1.7		)	(1.1		)
Taxes allocated to stockholders' equity, related to unrealized loss on derivatives	—			0.6			0.7
Taxes allocated to additional paid-in capital, related to stock-based compensation	(0.2		)	—			—
Total income tax expense	$	5.4		$	21.2		$	12.5

The components of the provision for income taxes attributable to income from continuing operations were as follows:



	Year Ended September 30,
(in millions)	2012			2011		2010
Current taxes:
U.S. Federal	$	(5.7	)	$	9.1	$	—
U.S. State and local	0.5			1.7		0.4
International	10.1			9.9		4.8
Total current taxes	4.9			20.7		5.2
Deferred taxes	(0.5		)	1.8		1.2
Income tax expense	$	4.4		$	22.5	$	6.4

U.S. and international components of income (loss) from continuing operations, before income taxes, was as follows:



	Year Ended September 30,
(in millions)	2012			2011		2010
U.S.	$	(13.7	)	$	27.3	$	4.4
International	33.0			32.2		13.5
Income from continuing operations, before tax	$	19.3		$	59.5	$	17.9

Items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes were as follows:



	Year Ended September 30,
	2012		2011		2010
Federal statutory rate effect of:	35.0	%	35.0	%	35.0	%
U.S. State income taxes	(1.2	)%	0.9	%	2.9	%
Foreign earnings taxed at lower rates	(16.7	)%	(2.9	)%	(7.0	)%
Change in foreign valuation allowance	1.8	%	0.7	%	5.0	%
Change in state valuation allowance	(0.2	)%	1.0	%	—	%
Tax impact of state rate change	—	%	1.1	%	—	%
Uncertain tax positions	(1.2	)%	1.4	%	—	%
Non-deductible meals and entertainment	2.2	%	—	%	(0.8	)%
Foreign permanent items	4.9	%	—	%	—	%
Other reconciling items	(3.4	)%	0.6	%	0.5	%
Effective rate	21.2	%	37.8	%	35.6	%

The components of deferred income tax assets and liabilities were as follows:



(in millions)	September 30, 2012			September 30, 2011
Deferred tax assets:
Stock-based compensation	$	2.5		$	1.9
Pension liability	6.1			5.5
Deferred compensation	3.2			4.0
Foreign net operating loss carryforwards	2.0			1.5
State net operating loss carryforwards	4.9			4.1
Intangible assets	6.1			5.0
Partnership tax basis timing differences	1.1			2.4
Bad debt reserve	0.1			1.1
Foreign tax credit	0.3			0.6
Other compensation	4.5			3.3
Other	1.2			1.2
Total gross deferred tax assets	32.0			30.6
Less valuation allowance	(4.1		)	(3.7		)
Deferred tax assets	27.9			26.9
Deferred income tax liabilities:
Unrealized gain on securities	3.1			1.1
Prepaid expenses	1.1			1.5
Fixed assets	3.8			3.6
Deferred income tax liabilities	8.0			6.2
Net deferred tax assets	$	19.9		$	20.7

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.

As of September 30, 2012 and 2011, respectively, the Company has net operating loss carryforwards for foreign and state income tax purposes of $2.8 million and $1.9 million, net of valuation allowances, which are available to offset future foreign and state taxable income. The net operating loss carryforwards expire in tax years ending in 2020 through 2030.

The valuation allowance for deferred tax assets as of September 30, 2012 was $4.1 million. The net change in the total valuation allowance for the year ended September 30, 2012 was an increase of $0.4 million. The valuation allowances as of September 30, 2012 and 2011, respectively, were primarily related to state and foreign net operating loss carryforwards that, in the judgment of management, are not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. Based on the level of historical taxable income and projections for future taxable income, management believes that it is more likely than not that the Company will realize the tax benefit of the deferred tax assets, net of the existing valuation allowance, in the future.

The total amount of undistributed earnings in the Company’s foreign subsidiaries, for income tax purposes, was $130.7 million and $75.7 million as of September 30, 2012 and 2011, respectively. It is the Company’s current intention to reinvest undistributed earnings of its foreign subsidiaries in the foreign jurisdictions, resulting in the indefinite postponement of the remittance of those earnings. Accordingly, no provision has been made for foreign withholding taxes or United States income taxes which may become payable if undistributed earnings of foreign subsidiaries were paid as dividends to the Company.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authority, based upon the technical merits of the position. The tax benefit recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

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



	Year Ended September 30,
(in millions)	2012			2011		2010
Balance, beginning of year	$	0.9		$	—	$	—
Gross increases for tax positions related to current year	—			—		—
Gross increases for tax positions related to prior years	—			0.9		—
Gross decreases for tax positions of prior years	(0.1		)	—		—
Settlements	(0.1		)	—		—
Lapse of statute of limitations	(0.2		)	—		—
Balance, end of year	$	0.5		$	0.9	$	—

Included in the balance of uncertain tax benefits as of September 30, 2012, is $0.3 million of tax benefits that, if recognized, would affect the effective tax rate. While it is expected that the amount of unrecognized tax benefits will change in the next twelve months, the Company does not expect this change to have a material impact on the results of operations or the financial position of the Company.

Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets. Accrued interest, net of federal benefit, and penalties included in the consolidated balance sheets as of September 30, 2012 and 2011 was $0.2 million, respectively.

The Company recognizes accrued interest and penalties related to income taxes as a component of income tax expense. During 2012, 2011 and 2010, the amount of interest, net of federal benefit, and penalties recognized as a component of income tax expense was $0.3 million, $0.2 million and nil, respectively.

The Company and its subsidiaries file income tax returns with the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company has open tax years ranging from September 30, 2006 through September 30, 2011 with various taxing authorities. The Internal Revenue Service commenced an examination of the U.S. income tax return of FCStone for its fiscal year ended August 31, 2009, which was prior to acquisition. This examination was settled during 2012 with no adjustments. FCStone is a wholly-owned subsidiary acquired on September 30, 2009. Additionally, both INTL FCStone Inc. and FCStone are under separate state examinations for various periods, ranging from August 31, 2006 through September 30, 2009.