10. INCOME TAXES

The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income (loss) in each tax jurisdiction in which we operate and the ongoing development of tax planning strategies during the year. In addition, our provision for (benefit from) income taxes can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

The following is a summary of our income tax benefits and effective tax rates from continuing operations for the quarters and years to date ended September 30, 2013 and 2012 (dollars in thousands):


	For the Quarter Ended September 30,						For the Year to Date Ended September 30,
	2013			2012			2013			2012
Pretax loss	$	(68,765	)	$	(40,072	)	$	(166,269	)	$	(107,407	)
Benefit from income taxes	$	(25,333	)	$	(13,925	)	$	(70,145	)	$	(27,959	)
Effective rate		-36.8	%		-34.7	%		-42.2	%		-26.0	%

The increase in the effective rate for the quarter ended September 30, 2013 as compared to the prior year quarter was primarily due to earnings mix changes for our ground-based institutions versus our online institutions. The increase in the effective rate for the year to date ended September 30, 2013 as compared to the prior year was primarily due to the write-off of nondeductible goodwill in the prior year. The year to date rate was impacted by a $8.6 million favorable tax adjustment, which is comprised of $11.2 million related to the resolution of various state tax audits and exposures offset by $2.6 million of tax benefits recaptured due to the sale of AIU London. The effect of these discrete items was to increase the effective rate benefit by 5.2%. In addition, the cumulative effect of state and foreign valuation losses decreased the quarter’s effective rate benefit by 1.0%.

We estimate that it is reasonably possible that the liability for unrecognized tax benefits for a variety of uncertain tax positions will decrease by up to $0.9 million in the next twelve months as a result of the completion of various tax audits currently in process and the expiration of the statute of limitations in several jurisdictions. The income tax rate for the quarter and year to date ended September 30, 2013 does not take into account the possible reduction of the liability for unrecognized tax benefits. The impact of a reduction to the liability will be treated as a discrete item in the period the reduction occurs. We recognize interest and penalties related to unrecognized tax benefits in tax expense. As of September 30, 2013, we had accrued $3.1 million as an estimate for reasonably possible interest and accrued penalties.

Our tax returns are routinely examined by federal, state and foreign tax authorities and these audits are at various stages of completion at any given time. The Internal Revenue Service completed its examination of our U.S. income tax returns through our tax year ended December 31, 2007.

See Note 4 “Discontinued Operations” of the notes to our unaudited consolidated financial statements for income tax expense disclosures related to the pending sale of our International Schools.