Income Taxes

9 Months Ended

Apr. 30, 2011

Income Taxes

Income Taxes

(13)          Income Taxes

At April 30, 2011 and July 31, 2010, total unrecognized tax benefits, excluding interest, were $6,853,000 and $7,056,000, respectively. Of these amounts, $5,849,000 and $6,060,000, respectively, net of the reversal of the federal benefit recognized relating to potential state tax liabilities, would positively impact our effective tax rate, if recognized. Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our financial statements. Of the total unrecognized tax benefits, $4,914,000 and $5,220,000 were recorded as non-current income taxes payable in our Condensed Consolidated Balance Sheets at April 30, 2011 and July 31, 2010, respectively.

Our policy is to recognize interest and penalties relating to uncertain tax positions in income tax expense. At April 30, 2011 and July 31, 2010, interest accrued relating to income taxes was $547,000 and $580,000, respectively, net of the related income tax benefit.

The Internal Revenue Service ("IRS") has conducted audits of our federal income tax returns for the past several years and is currently conducting an audit for the fiscal years ended July 31, 2007 and July 31, 2008. Tax years prior to fiscal 2007 are not subject to examination by the IRS. For both years currently under audit, we believe the IRS is focusing on the allowable amount of federal research and experimentation credits utilized as well as the amount of our domestic production activities deduction. In May 2011, we reached a preliminary agreement with the IRS relating to our domestic production activities deductions (for fiscal 2007 and fiscal 2008) which did not result in any material adjustment to our income tax provisions for any prior periods.  Although adjustments relating to the audits and related settlements for prior years were immaterial, a resulting tax assessment or settlement for fiscal 2007, fiscal 2008, or other potential future periods could have a material adverse effect on our consolidated results of operations and financial condition. The IRS is not currently examining any of the federal income tax returns filed by Radyne.