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INCOME TAXES
 6 Months Ended
Jun. 30, 2012
INCOME TAXES  
INCOME TAXES

(14)                          INCOME TAXES

 

Uncertain Tax Positions

 

As of June 30, 2012, we had gross unrecognized tax benefits of $85.5 (net unrecognized tax benefits of $66.7), of which $66.2, if recognized, would impact our effective tax rate from continuing operations.

 

We classify interest and penalties related to unrecognized tax benefits as a component of our income tax provision.  As of June 30, 2012, gross accrued interest excluded from the amounts above totaled $13.9 (net accrued interest of $11.0). There were no significant penalties recorded during the three and six months ended June 30, 2012 or July 2, 2011.

 

Based on the outcome of certain examinations or as a result of the expiration of statute of limitations for certain jurisdictions, we believe that within the next 12 months it is reasonably possible that our previously unrecognized tax benefits could decrease by approximately $30.0 to $40.0.

 

Other Tax Matters

 

The effective income tax rate for the quarter ended June 30, 2012 was 19.5%, compared to 15.8% for the quarter ended July 2, 2011.  The current quarter’s rate was impacted by income tax benefits of $2.5 related to favorable results from various audit settlements and statute expirations during the period. The effective income tax rate for the three months ended July 2, 2011 was impacted favorably by tax benefits of $2.5 associated with the conclusion of a Canadian appeals process. In addition, we recorded an income tax benefit of $9.8 associated with the $24.7 impairment charge that was recorded during the three months ended July 2, 2011 related to the goodwill and indefinite-lived intangible assets of SPX Heat Transfer Inc.  The effective income tax rate for the six months ended June 30, 2012 was 32.5%, compared to 25.3% for the comparable period in 2011.  The effective income tax rate for the six months ended June 30, 2012 was impacted unfavorably by an incremental tax charge of $6.1 associated with the deconsolidation of the dry cooling products business in China, as the goodwill allocated to the transaction is not deductible for tax purposes, and favorably by the items for the quarter ended June 30, 2012 noted above.  The effective income tax rate for the six months ended July 2, 2011 was impacted by the items noted above for the quarter ended July 2, 2011.

 

We perform reviews of our income tax positions on a continuous basis and accrue for potential uncertain positions when we determine that an uncertain position meets the criteria of the Income Taxes Topic of the Codification. Accruals for these uncertain tax positions are recorded in “Income taxes payable” and “Deferred and other income taxes” in the accompanying condensed consolidated balance sheets based on the expectation as to the timing of when the matters will be resolved. As events change and resolution occurs, these accruals are adjusted, such as in the case of audit settlements with taxing authorities.

 

The IRS concluded its audit of our 2008 and 2009 federal income tax returns during the quarter ended June 30, 2012 and issued a Revenue Agent’s Report (“RAR”).  We disagree with and have protested certain adjustments within the RAR to the Appeals Office of the IRS.  Upon issuance of the RAR, we reduced a portion of our liability for uncertain tax positions to reflect amounts determined to be effectively settled, resulting in the recognition of income tax benefits of $1.8 to continuing operations.  While resolution of these issues may result in tax liabilities that differ from the accruals established, we believe any contingencies are adequately provided for, and will not have a material adverse effect on our financial position, results of operations or liquidity.  We reasonably expect to conclude this appeals process within the next twelve months.

 

State income tax returns generally are subject to examination for a period of three to five years after filing the respective tax returns. The impact on such tax returns of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. We have various state income tax returns in the process of examination, administrative appeal or litigation. We believe that any uncertain tax positions related to these examinations have been adequately provided for.

 

We have various foreign income tax returns under examination. Significant jurisdictions with tax examinations underway include Canada for the 2000 to 2002 and 2006 tax returns, Germany for the 2005 to 2009 tax returns, Denmark for the 2006 to 2010 tax returns, and the United Kingdom for the 2009 tax return. We believe that any uncertain tax positions related to these examinations have been adequately provided for.

 

An unfavorable resolution of one or more of the above matters could have a material adverse effect on our results of operations or cash flows in the quarter and year in which an adjustment is recorded or the tax is due or paid. As audits and examinations are still in process or we have not yet reached the final stages of the appeals process for the above matters, the timing of the ultimate resolution and any payments that may be required for the above matters cannot be determined at this time.

 

Upon the conclusion of our disposition activities discussed in Note 3, we may recognize an additional income tax provision or benefit, generally, as part of discontinued operations.