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TAXES ON INCOME | 12 Months Ended
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Sep. 30, 2011
TAXES ON INCOME |
TAXES ON INCOME |
10. TAXES ON INCOME The components of earnings before income taxes, after adjusting earnings for non-controlling interests, are as follows:
|  | Year ended September 30,
|  | 2011 |  | 2010
Earnings (loss) before income taxes in: |  |  |  |  |  |  |  |  |  |
United States |  |  | $ | (4,148,000 | ) |  |  | $ | (1,845,000 | )
Canada |  |  |  | 5,540,000 |  |  |  |  | 6,450,000 |
|  |  | $ | 1,392,000 |  |  |  | $ | 4,605,000 |
The components of the income tax provision related to the above earnings are as follows:
|  | Year ended September 30,
|  | 2011 |  | 2010
Current provision (benefit): |  |  |  |  |  |  |  |
United States – Federal |  |  | $ | - |  |  |  | $ | (1,465,000 | )
United States – State |  |  |  | 18,000 |  |  |  |  | 73,000 |
|  |  |  | 18,000 |  |  |  |  | (1,392,000 | )
Canadian |  |  |  | 808,000 |  |  |  |  | 1,179,000 |
Total current |  |  |  | 826,000 |  |  |  |  | (213,000 | )
Deferred provision: |  |  |  |  |  |  |  |  |  |
United States |  |  |  | 84,000 |  |  |  |  | 191,000 |
Canadian |  |  |  | 591,000 |  |  |  |  | 787,000 |
Total deferred |  |  |  | 675,000 |  |  |  |  | 978,000 |
|  |  | $ | 1,501,000 |  |  |  | $ | 765,000 |
Barnwell’s effective consolidated income tax rate for fiscal 2011, after adjusting earnings before income taxes for non-controlling interests, was 108%, as compared to 17% for fiscal 2010. Included in the income tax provision for fiscal 2011 is the impact of Canadian income taxes that are not estimated to have a current or future benefit as foreign tax credits or deductions for U.S. tax purposes. Partially offsetting the expense was a $257,000 benefit from the lapsing of the statute of limitations for a portion of uncertain tax positions related to Canadian income taxes. Included in the income tax provision for fiscal 2010 is a $1,465,000 income tax benefit from the reversal of the valuation allowance on U.S. federal income tax losses due to a change in tax law enacted in November 2009 which expanded the number of years Barnwell can carry back such losses. There was no such benefit in fiscal 2011. Partially offsetting this benefit was the impact of the portion of Canadian income taxes that are not estimated to have a current or future benefit as foreign tax credits or deductions for U.S. tax purposes. A reconciliation between the reported income tax provision and the amount computed by multiplying the earnings attributable to Barnwell before income taxes by the U.S. federal tax rate of 35% is as follows:
|  | Year ended September 30,
|  | 2011 |  |  | 2010
Tax expense computed by applying statutory rate |  |  | $ | 487,000 |  |  | $ | 1,612,000 |
Increase (decrease) in the valuation allowance |  |  |  | 928,000 |  |  |  | (1,189,000 | )
Additional effect of the foreign tax provision on the total tax provision |  |  |  | 390,000 |  |  |  | 482,000 |
State income taxes |  |  |  | 18,000 |  |  |  | 73,000 |
Uncertain tax positions – lapses of statute |  |  |  | (257,000 | ) |  |  | - |
Other |  |  |  | (65,000 | ) |  |  | (213,000 | )
|  |  | $ | 1,501,000 |  |  | $ | 765,000 |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2011 and 2010 are as follows:
|  | September 30,
|  | 2011 |  |  | 2010 |
Deferred income tax assets: |  |  |  |  |  |  |  |  |  |
U.S. tax effect of deferred Canadian taxes |  |  | $ | 1,323,000 |  |  |  | $ | 1,144,000 |
Foreign tax credit carryover |  |  |  | 1,656,000 |  |  |  |  | 691,000 |
Alternative minimum tax credit carryover |  |  |  | 460,000 |  |  |  |  | 460,000 |
U.S. federal net operating loss carryover |  |  |  | 79,000 |  |  |  |  | - |
Tax basis of investment in land and residential real estate in excess of book basis |  |  |  | 1,383,000 |  |  |  |  | 1,186,000 |
Property and equipment accumulated tax depreciation and depletion in excess of book under U.S. tax law |  |  |  | 4,655,000 |  |  |  |  | 5,471,000 |
Liabilities accrued for books but not for tax under U.S. tax law |  |  |  | 4,242,000 |  |  |  |  | 4,208,000 |
Liabilities accrued for books but not for tax under Canadian tax law |  |  |  | 1,616,000 |  |  |  |  | 1,601,000 |
Other |  |  |  | 1,177,000 |  |  |  |  | 979,000 |
Total gross deferred tax assets |  |  |  | 16,591,000 |  |  |  |  | 15,740,000 |
Less valuation allowance |  |  |  | (14,975,000 | ) |  |  |  | (14,131,000 | )
Net deferred income tax assets |  |  |  | 1,616,000 |  |  |  |  | 1,609,000 |
Deferred income tax liabilities: |  |  |  |  |  |  |  |  |  |
Property and equipment accumulated tax depreciation and depletion in excess of book under Canadian tax law |  |  |  | (5,508,000 | ) |  |  |  | (4,965,000 | )
Other |  |  |  | (392,000 | ) |  |  |  | (316,000 | )
Total deferred income tax liabilities |  |  |  | (5,900,000 | ) |  |  |  | (5,281,000 | )
Net deferred income tax liability |  |  | $ | (4,284,000 | ) |  |  | $ | (3,672,000 | )
Net deferred income tax liability is included in the Consolidated Balance Sheets as follows:
|  |  | September 30, |
|  |  | 2011 |  |  | 2010 |
Current deferred income tax asset (included in other current assets) |  |  | $ | 197,000 |  |  |  | $ | 192,000 |
Deferred income tax liability |  |  | (4,481,000 | ) |  |  | (3,864,000 | )
Net deferred income tax liability |  |  | $ | (4,284,000 | ) |  |  | $ | (3,672,000 | )
The total valuation allowance increased $844,000 for the year ended September 30, 2011. The increase was due primarily to increases in the valuation allowances for foreign tax credit carryovers which are not more likely than not to have a future tax benefit. Of the total increase in the valuation allowance for fiscal 2011, $928,000 was recognized as income tax expense and $84,000 was credited to accumulated other comprehensive income (loss). Net deferred tax assets at September 30, 2011 of $1,616,000 consists primarily of Canadian deferred tax assets related to liabilities accrued for book purposes but not for tax purposes that are estimated to be realized through future Canadian income tax deductions against future Canadian oil and natural gas earnings. At September 30, 2011, Barnwell had foreign tax credit carryovers, alternative minimum tax credit carryovers, and federal net operating loss carryovers totaling $1,656,000, $460,000 and $233,000, respectively. All three items were fully offset by valuation allowances at September 30, 2011. The foreign tax credit carryovers expire in fiscal years 2013-2021. FASB ASC Topic 740, Income Taxes, prescribes a threshold for recognizing the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. Barnwell files U.S. federal income tax returns, income tax returns in various U.S. states, and Canadian federal and provincial tax returns. A number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized tax benefits reflect the more likely than not outcome. We adjust these unrecognized tax benefits, as well as the related interest, based on ongoing changes in facts and circumstances. Settlement of any particular position could require the use of cash. Favorable resolution for an amount less than the amount estimated by Barnwell would be recognized as a decrease in the effective income tax rate in the period of resolution, and unfavorable resolution in excess of the amount estimated by Barnwell would be recognized as an increase in the effective income tax rate in the period of resolution. In November 2010, the Company settled and paid the province of Alberta’s reassessment of Canadian provincial taxes. The Alberta provincial reassessment resulted from the Canada Revenue Agency’s examination of the Company’s fiscal 2005 and 2006 Canadian federal returns, which was settled in September 2010. There was no material difference between the province of Alberta’s reassessment and the related uncertain tax provision previously recorded by the Company. Below are the changes in uncertain tax positions for the years ended September 30, 2011 and 2010.
|  |  |  |  |  |  |  | Total |
|  |  |  |  |  |  |  | Unrecognized |
|  | Tax Positions |  |  | Accrued |  |  | Tax |
|  | Taken |  |  | Interest |  |  | Benefits |
Balance as of September 30, 2009 |  |  | $ | 1,231,000 |  |  |  | $ | 375,000 |  |  |  | $ | 1,606,000 |
Effect of tax positions taken in prior years |  |  | 129,000 |  |  |  | 32,000 |  |  |  | 161,000 |
Settlements |  |  | (364,000 | ) |  |  | (109,000 | ) |  |  | (473,000 | )
Lapse of statute |  |  | (71,000 | ) |  |  | (57,000 | ) |  |  | (128,000 | )
Translation adjustments |  |  | 55,000 |  |  |  | 16,000 |  |  |  | 71,000 |
Balance as of September 30, 2010 |  |  | 980,000 |  |  |  | 257,000 |  |  |  | 1,237,000 |
Effect of tax positions taken in prior years |  |  | 11,000 |  |  |  | (4,000 | ) |  |  | 7,000 |
Settlements |  |  | (172,000 | ) |  |  | (67,000 | ) |  |  | (239,000 | )
Lapses of statute |  |  | (155,000 | ) |  |  | (102,000 | ) |  |  | (257,000 | )
Translation adjustments |  |  | 7,000 |  |  |  | 6,000 |  |  |  | 13,000 |
Balance as of September 30, 2011 |  |  | $ | 671,000 |  |  |  | $ | 90,000 |  |  |  | $ | 761,000 |
The total amount of unrecognized tax benefits at September 30, 2011 that, if recognized, would impact the effective tax rate was $761,000. Uncertain tax positions consist primarily of Canadian federal and provincial audit issues that involve transfer pricing adjustments. Because of a lack of clarity and uniformity regarding allowable transfer pricing valuations by differing jurisdictions, it is reasonably possible that the total amount of uncertain tax positions may significantly increase or decrease within the next 12 months, and the estimated range of any such variance is not currently estimable based upon facts and circumstances as of September 30, 2011. Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities at September 30, 2011:
Jurisdiction |  | Fiscal Years Open |
U.S. federal |  | 2006, 2008 – 2010 |
Various U.S. states |  | 2008 – 2010 |
Canada federal |  | 2004 – 2010 |
Various Canadian provinces |  | 2004 – 2010 |

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 + Details
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