INCOME TAXES

9 Months Ended

Sep. 30, 2011

INCOME TAXES

INCOME TAXES

NOTE 8—INCOME TAXES

        For the three months ended September 30, 2011 and 2010, Tree.com recorded a tax provision (benefit) of $(0.2) million and $0.04 million, respectively, which represents an effective tax rate of 4.8% and (0.6)%, respectively. The tax rates are lower than the federal statutory rate of 35% primarily due to an increase in the valuation allowance on deferred tax assets.

        For the nine months ended September 30, 2011 and 2010, Tree.com recorded a tax provision of $0.1 million and $0.9 million, respectively, which represents an effective tax rate of (0.4)% and (3.8)%, respectively. The tax rates are lower than the federal statutory rate of 35% primarily due to an increase in the valuation allowance on deferred tax assets.

        Tree.com's unrecognized tax benefits decreased by approximately $0.04 million for the three months ended September 30, 2011. The decrease was due to a partial release of the reserves for uncertain tax positions. Tree.com believes that it is reasonably possible that its remaining unrecognized tax benefits could decrease by approximately $0.06 million within twelve months of the current reporting date due to the expiration of state statute of limitations. An estimate of other changes in unrecognized tax benefits cannot be made, but are not expected to be significant.

        For the three and nine months ended September 30, 2011, Tree.com determined that its activity yielded an unusual effective tax rate; therefore, Tree.com utilized the actual year to date effective tax rate for purposes of determining year to date tax expense. This approach is consistent with the nine months ended September 30, 2010.

        The North Carolina Department of Revenue ("NCDOR") has completed its audit of the Company's North Carolina corporate income and franchise tax returns for the years ended December 31, 2006 through 2008, and issued a notice of assessment to the Company in October 2011. The range of possible loss is estimated to be $-0- to $3.6 million. No reserve has been established for this matter as the Company has determined that the likelihood of a loss is not probable.