Income Taxes

Income tax expense (benefit) for the years ended September 30, 2013, 2012 and 2011 was allocated as follows:



	Year Ended September 30,
(in millions)	2013			2012			2011
				(As Restated)			(As Restated)
Income tax expense attributable to income from continuing operations	$	3.3		$	3.1		$	20.9
Income tax expense attributable to loss from discontinued operations	—			—			0.1
Taxes allocated to stockholders’ equity, related to unrealized gains (losses) on available-for-sale securities	(1.6		)	2.2			(0.3		)
Taxes allocated to stockholders’ equity, related to pension liabilities	1.8			(1.0		)	(1.7		)
Taxes allocated to stockholders’ equity, related to unrealized loss on derivatives	—			—			0.6
Taxes allocated to additional paid-in capital, related to share-based compensation	—			(0.2		)	—
Total income tax expense	$	3.5		$	4.1		$	19.6

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



	Year Ended September 30,
(in millions)	2013			2012			2011
				(As Restated)			(As Restated)
Current taxes:
U.S. Federal	$	(1.2	)	$	(6.9	)	$	7.6
U.S. State and local	(1.3		)	0.4			1.6
International	13.5			10.1			9.9
Total current taxes	11.0			3.6			19.1
Deferred taxes	(7.7		)	(0.5		)	1.8
Income tax expense	$	3.3		$	3.1		$	20.9

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



	Year Ended September 30,
(in millions)	2013			2012			2011
				(As Restated)			(As Restated)
U.S.	$	(21.7	)	$	(17.2	)	$	23.2
International	44.3			33.0			32.2
Income from continuing operations, before tax	$	22.6		$	15.8		$	55.4

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,
	2013		2012		2011
			(As Restated)		(As Restated)
Federal statutory rate effect of:	35.0	%	35.0	%	35.0	%
U.S. State and local income taxes	0.8	%	(2.0	)%	0.8	%
Foreign earnings taxed at lower rates	(20.1	)%	(20.4	)%	(3.1	)%
Change in foreign valuation allowance	(0.2	)%	2.2	%	0.7	%
Change in state valuation allowance	(7.6	)%	(0.2	)%	1.0	%
Tax impact of U.S. State and local rate change	(2.4	)%	—	%	1.2	%
Uncertain tax positions	(0.3	)%	(1.5	)%	1.5	%
Non-deductible meals and entertainment	1.3	%	2.7	%	—	%
Foreign permanent items	4.3	%	6.0	%	—	%
Other reconciling items	3.9	%	(4.2	)%	0.6	%
Penalties	2.4	%	—	%	—	%
Audit settlements	(1.7	)%	—	%	—	%
Effective rate	15.4	%	17.6	%	37.7	%

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



(in millions)	September 30, 2013			September 30, 2012
				(As Restated)
Deferred tax assets:
Share-based compensation	$	2.7		$	2.5
Pension liability	3.4			6.1
Deferred compensation	2.3			3.2
Foreign net operating loss carryforwards	1.9			2.0
U.S. State and local net operating loss carryforwards	4.9			4.9
U.S. Federal net operating loss carryforwards	7.3			—
Intangible assets	6.9			6.1
Capital loss carryforwards	0.7			1.1
Bad debt reserve	0.2			0.1
Foreign tax credit	0.1			0.3
Other compensation	1.6			4.5
Other	1.4			1.2
Total gross deferred tax assets	33.4			32.0
Less valuation allowance	(2.3		)	(4.1		)
Deferred tax assets	31.1			27.9
Deferred income tax liabilities:
Unrealized gain on securities	1.3			3.1
Prepaid expenses	0.9			1.1
Fixed assets	3.4			3.8
Deferred income tax liabilities	5.6			8.0
Net deferred tax assets	$	25.5		$	19.9

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, 2013 and 2012, the Company has net operating loss carryforwards for U.S. federal, state, and local and foreign income tax purposes of $11.8 million and $2.8 million, net of valuation allowances, respectively, which are available to offset future taxable income in these jurisdications. The U.S. federal net operating loss carryforward of $7.3 million expires in 2033. The state and local net operating loss carryforwards of $4.5 million, net of valuation allowance, expire in tax years ranging from 2020 through 2033.

The valuation allowance for deferred tax assets as of September 30, 2013 was $2.3 million. The net change in the total valuation allowance for the year ended September 30, 2013 was a decrease of $1.8 million. The valuation allowances as of September 30, 2013 and 2012 were primarily related to U.S. state and local 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.

The Company incurred U.S. federal, state, and local taxable (losses) income for the years ended September 30, 2013, 2012 and 2011 of $(22.2) million, $(21.2) million, and $22.7 million, respectively. There are no significant differences between actual levels of past taxable income and the results of continuing operations, before income taxes in these jurisdictions. U.S. federal, state, and local taxable losses incurred during the years ended September 30, 2013 and 2012 were attributable to a decrease in exchange-traded and OTC derivative transactional volumes and revenue caused by consecutive droughts in the U.S., as well as losses incurred in the physical base metals business. During 2013, the Company elected to pursue an exit of its physical base metals business through an orderly liquidation of open positions. Additionally, the Company completed an acquisition of the accounts of Tradewire Securities. Although both the exit of the physical base metals business and the acquisition of the Tradewire Securities accounts are expected to positively affect future levels of taxable income, the expected impact cannot be reliably projected. When evaluating if U.S. federal, state, and local deferred taxes are realizable, the Company considered deferred tax liabilities of $4.3 million that are scheduled to reverse from 2014 to 2018 and $1.3 million of deferred tax liabilities associated with unrealized gains in securities which the Company could sell, if necessary. Furthermore, the Company considered its ability to implement business and tax planning strategies that would allow the remaining U.S. federal, state, and local deferred tax assets, net of valuation allowances, to be realized within 16 years. Based on the tax planning strategies that can be implemented, 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 $123.1 million and $93.8 million as of September 30, 2013 and 2012, 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 U.S. federal 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 consolidated 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)	2013			2012			2011
Balance, beginning of year	$	0.5		$	0.9		$	—
Gross increases for tax positions related to current year	0.1			—			—
Gross increases for tax positions related to prior years	—			—			0.9
Gross decreases for tax positions of prior years	(0.2		)	(0.1		)	—
Settlements	(0.2		)	(0.1		)	—
Lapse of statute of limitations	(0.1		)	(0.2		)	—
Balance, end of year	$	0.1		$	0.5		$	0.9

Included in the balance of uncertain tax benefits as of September 30, 2013, is $0.1 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 in 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, 2013 and 2012 was $0.0 million and $0.2 million, respectively.

The Company recognizes accrued interest and penalties related to income taxes as a component of income tax expense. During 2013, 2012 and 2011, the amount of interest, net of federal benefit, and penalties recognized as a component of income tax expense was $(0.2) million, $0.3 million and $0.2 million, respectively.

The Company and its subsidiaries file income tax returns with the U.S. federal jurisdiction and various U.S. state and local and foreign jurisdictions. The Company has open tax years ranging from September 30, 2008 through September 30, 2013 with U.S. federal and state and local taxing authorities. In the U.K., the Company has open tax years ending September 30, 2012 to September 30, 2013. In Brazil, the Company has open tax years ranging from December 31, 2008 through December 31, 2012. In Argentina, the Company has open tax years ranging from December 31, 2006 to September 30, 2013. The Internal Revenue Service commenced an examination of the U.S. income tax return for the fiscal year ended September 30, 2010. Additionally, INTL FCStone is under state examinations for various periods, ranging from September 2009 through September 30, 2012. There are no examinations taking place in foreign jurisdictions.