Provision for Income Taxes

3 Months Ended

Oct. 31, 2012

Provision for Income Taxes

10. Provision for Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current period and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

It is the Company’s policy to recognize interest and penalties accrued relative to unrecognized tax benefits in income tax expense. For the three month period ended October 31, 2012, the Company released $247 of gross uncertain tax benefit reserves and related interest recorded at July 31, 2012 as a result of statute of limitation expirations. The Company accrued $362 in interest and penalties during the three month period ended October 31, 2012 related to the remaining uncertain tax benefits recorded at July 31, 2012.

Generally, fiscal years 2009, 2010 and 2011 remain open for federal, state and foreign income tax purposes. The Company and its subsidiaries file a consolidated U.S. federal income tax return and multiple state income tax returns. The federal returns are subject to examination by taxing authorities for all years after fiscal 2008. The Company is currently being audited by the state of California for tax years ended July 31, 2007 and July 31, 2008 and by the state of Indiana for tax years ended July 31, 2008, 2009 and 2010. The Company believes it has fully reserved for its exposure to additional payments for uncertain tax positions related to its California and Indiana income tax returns in its liability for unrecognized tax benefits.

The overall effective income tax rate for the three months ended October 31, 2012 was 34.9% compared with 35.5% for the three months ended October 31, 2011. The primary reason for the decrease in the overall effective income tax rate from October 31, 2011 to October 31, 2012 was due to the release of uncertain tax benefit reserves discussed above.

The Company anticipates a decrease of $3,641 in unrecognized tax benefits and $901 in accrued interest and penalties related to these unrecognized tax benefits, within the next 12 months from expected settlements or payments of uncertain tax positions and lapses of the applicable statutes of limitations. In addition, the Company is currently in the process of pursuing a variety of settlement alternatives with taxing authorities. It is reasonably possible that some of these settlements could be successfully finalized in the next 12 months. If these settlements are successfully finalized within the next 12 months, the gross unrecognized tax benefits may decrease between approximately $3,200 and $12,900 and related accrued interest and penalties may decrease between approximately $1,800 and $5,800. It is reasonably possible that some of these settlements will result in cash payments being made by the Company to various taxing authorities. Actual results may differ materially from these estimates.