Income Tax

9 Months Ended

Sep. 30, 2011

Income Tax [Abstract]

Income Tax

Note 10 – Income Tax

                The provision for income taxes is different from the amount computed by applying U.S. statutory rates to consolidated losses before taxes.  The significant reason for these differences is as follows (dollars in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2011	2010	2011	2010
Expected tax provision (benefit)	$         (1)	$         259	$      635	$     186
Increase (reduction) in taxes resulting from:
Change in valuation allowance, other	(881)	(108)	(15,721)	41
Foreign income tax provision	59	204	354	497
Foreign withholding tax provision	112	319	326	586
Tax effect of foreign tax rates on current income	(1)	(151)	(148)	(227)
State and local tax provision	180	129	414	342
Federal tax litigation accrual	493	233	963	12,244
Actual tax provision (benefit)	$       (39)	$         885	$ (13,177)	$ 13,669

Pursuant to ASC 740-10, a provision should be made for the tax effect of earnings of foreign subsidiaries that are not permanently invested outside the United States. Our intent is that earnings of our foreign subsidiaries not be permanently invested outside the United States.

            The Reading Australia consolidated group of subsidiaries generated earnings in the nine months ending September 30, 2011, but had no cumulative earnings available for distribution.  No current or cumulative earnings were available for distribution in the Reading New Zealand consolidated group of subsidiaries or in the Puerto Rico subsidiary as of September 30, 2011.  We have provided $453,000 in foreign withholding taxes connected with foreign retained earnings.

Deferred income taxes reflect the "temporary differences" between the financial statement carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, adjusted by the relevant tax rate. In accordance with FASB ASC 740-10 – Income Taxes ("ASC 740-10"), we record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax planning strategies, and recent financial performance. ASC 740-10 presumes that a valuation allowance is required when there is substantial negative evidence about realization of deferred tax assets, such as a pattern of losses in recent years, coupled with facts that suggest such losses may continue.

In the period ending June 30, 2011, the Company determined that substantial negative evidence regarding the realizable nature of deferred tax assets continues to exist in the U.S., New Zealand, and Puerto Rico subsidiaries, arising from ongoing pre-tax financial losses. Accordingly, the Company continues to record a full valuation allowance for net deferred tax assets available in these subsidiaries. After consideration of a number of factors for the Reading Australia group, including its recent history of pretax financial income, its expected future earnings, the increase in market value of its real estate assets, which would cause taxable gain if sold, and having executed in June 2011 a credit facility of over $100 million to resolve potential liquidity issues, the Company determined that it is more likely than not that deferred tax assets in Reading Australia will be realized. Accordingly, during the nine months ended September 30, 2011, Reading Australia reversed $13.8 million of the valuation allowance previously recorded against its net deferred tax, which mainly reflects the loss carryforwards available to offset future taxable income in Australia.

We have accrued $28.0 million in income tax liabilities as of September 30, 2011, of which $25.8 million has been classified as income taxes payable and $2.3 million have been classified as non-current tax liabilities. As part of current tax liabilities, we have accrued $20.3 in connection with the negotiated Tax Court judgment, dated January 6, 2011, implementing our agreement with the IRS as to the final disposition of the 1996 tax litigation matter discussed in Note 13 – Commitments and Contingencies below. We believe these amounts represent an adequate provision for our income tax exposures, including income tax contingencies related to foreign withholding taxes described in Note 12 – Other Liabilities.

            In accordance with FASB ASC 740-10-25 – Income Taxes - Uncertain Tax Positions ("ASC 740-10-25"), we record interest and penalties related to income tax matters as part of income tax expense.

            The following table is a summary of the activity related to unrecognized tax benefits, excluding interest and penalties, for the periods ending September 30, 2011, December 31, 2010, and December 31, 2009 (dollars in thousands):

	Nine Months Ended September 30, 2011	Year Ended December 31, 2010	Year Ended December 31, 2009
Unrecognized tax benefits – gross beginning balance	$     8,058	$  11,412	$  11,271
Gross increases – prior period tax provisions	199	--	92
Gross decreases – prior period tax positions	(6,035)	--	--
Gross increases – current period tax positions	--	405	219
Settlements	--	(3,189)	--
Statute of limitations lapse	--	(570)	(170)
Unrecognized tax benefits – gross ending balance	$     2,222	$     8,058	$  11,412

            At December 31, 2010, the total balance of the gross unrecognized tax benefit was $20.6 million (of which approximately $12.6 million represents interest).  Of this $20.6 million, approximately $19.5 million would impact the effective tax rate if recognized.  For the nine months ending September 30, 2011 we recorded a reduction to our gross unrecognized tax benefits of $6.0 million and a decrease to tax interest of $10.5 million, reflecting the negotiated Tax Court judgment referenced above, which is a liability no longer in the nature of a reserve for uncertain positions.  The net tax balance is approximately $2.2 million, of which $1.1 million would impact the effective rate if recognized.

            It is difficult to predict the timing and resolution of uncertain tax positions.  Based upon the Company's assessment of many factors, including past experience and judgments about future events, it is probable that within the next 12 months the reserve for uncertain tax positions will increase within a range of $0.6 million to $0.9 million.  The reasons for such changes include but are not limited to tax positions expected to be taken during the next twelve months, reevaluation of current uncertain tax positions, expiring statutes of limitations, and interest related to the "Tax Audit/Litigation" matter discussed below.

            Our company and subsidiaries are subject to U.S. federal income tax, income tax in various U.S. states, and income tax in Australia, New Zealand, and Puerto Rico.

Generally, changes to our federal and most state income tax returns for the calendar year 2007 and earlier are barred by statutes of limitations.Certain domestic subsidiaries filed federal and state tax returns for periods before these entities became consolidated with us.These subsidiaries were examined by the IRS for the years 1996 to 1999 and significant tax deficiencies were assessed for those years.Those deficiencies have been settled, as discussed in "Tax Audit/Litigation," Note 13 – Commitments and Contingencies.Our income tax returns of Australia filed since inception in 1995 are generally open for examination because of operating losses.The income tax returns filed in New Zealand and Puerto Rico for calendar year 2006 and afterward generally remain open for examination as of September 30, 2011.