Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

Note 10. Income Taxes

     The effective tax rate for continuing operations was 16.2% for the nine months ended September 30, 2011 and 16.8% for the nine months ended September 30, 2010. Income tax expense for continuing operations was reduced by $9.7 million during the nine months ended September 30, 2011 for discrete tax adjustments related to the settlement of the discontinued operations asbestos liability that was required under accounting principles to be classified in continuing operations. During the nine months ended September 30, 2010 Cooper reduced income tax expense for continuing operations by $40.8 million to recognize the discrete tax effects related to the contribution of net assets to the Tools joint venture. Excluding these discrete tax adjustments, Cooper’s effective tax rate for continuing operations was 17.9% for the nine months ended September 30, 2011 and 20.5% for the nine months ended September 30, 2010.

     Net deferred taxes recognized in the balance sheet consist of:

	September			December
	30, 2011			31, 2010
	(in millions)
Other current assets	$	91.4		$	76.0
Other noncurrent assets		—			42.1
Other long-term liabilities		(114.2	)		—
Net deferred tax assets (liabilities)	$	(22.8	)	$	118.1

     The decrease during 2011 in the net deferred tax assets recognized was primarily related to the settlement of the discontinued operations asbestos liability as further discussed in Note 15 of the Notes to the Consolidated Financial Statements.

     The Internal Revenue Service (IRS) completed its examinations of Cooper’s 2007 and 2008 Federal Tax Returns and issued notices of assessment in the amounts of $16 million and $14 million, respectively, primarily by challenging Cooper’s intercompany pricing with a foreign affiliate. During the first quarter of 2011 the IRS and Cooper finalized a settlement regarding these matters. After consideration of the related liability Cooper had recorded, the settlement had no significant effect on Cooper’s consolidated financial statements.

     In June 2008 the German Tax Authorities issued a proposed audit finding related to a 2004 reorganization that was treated as a non-taxable event. In December 2009 at Cooper’s request, the German taxing authorities finalized and issued a notice of assessment for €62.8 million, inclusive of €5.7 million of interest, related to this matter. To continue to challenge the German tax authorities finding, Cooper paid the assessment in December 2009 for approximately $90 million and filed a suit to challenge the notice of assessment. Cooper continues to believe that the reorganization was properly reflected on its German income tax returns in accordance with applicable tax laws and regulations in effect during the period involved and will challenge the assessment vigorously. Although the outcome of the proceedings with the German Tax Authorities cannot be predicted with certainty, management believes that it is more likely than not that its tax position related to the 2004 reorganization will prevail. As such, Cooper has recognized the €62.8 million tax payment, including interest, in other noncurrent assets in the accompanying balance sheets.

The German tax payment has been included in Cooper’s foreign tax credit calculations in the United States, which would be amended upon successful defense of the German reorganization.

     Cooper is under examination by various United States State and Local taxing authorities, as well as various taxing authorities in other countries. Cooper is no longer subject to U.S. Federal income tax examinations by tax authorities for years prior to 2010 and, with few exceptions, Cooper is no longer subject to State and Local, or non-U.S. income tax examinations by tax authorities for years before 2000. Cooper fully cooperates with all audits, but defends existing positions vigorously. These audits are in various stages of completion. To provide for potential tax exposures, Cooper maintains a liability for unrecognized tax benefits, which management believes is adequate. The results of future audit assessments, if any, could have a material effect on Cooper’s cash flows as these audits are completed.

     At September 30, 2011 and December 31, 2010, Cooper has a foreign deferred tax asset of approximately $1.1 billion and $1.1 billion, respectively, relating to a net operating loss carryforward that was approved by a foreign jurisdiction in September 2009. Although this net operating loss carryforward has an indefinite life, a corresponding valuation allowance for the same amount was recognized because management believes at this time it is more likely than not that the deferred tax asset will not be realized.

     Cooper has unrecognized gross tax benefits of $14.2 million at September 30, 2011. Approximately $9.2 million of the unrecognized tax benefits would favorably impact the effective tax rate if recognized. Cooper believes it is reasonably possible that additional tax benefits in the range of approximately $1 to $6 million could be recognized during the next 12 months as audits close and statutes expire.