NOTE 10: INCOME TAXES

The components of income before income taxes are as follows (dollars in thousands).

		For the Year Ended June 30,
		2011		2010		2009
U.S.	$	427,726	$	345,850	$	179,517
Foreign		66,706		66,772		57,835
Total	$	494,432	$	412,622	$	237,352


The income tax provisions (benefits) related to the above results are as follows (dollars in thousands):

		For the Year Ended June 30,
Income Tax Provision:		2011		2010		2009

Current Tax Provision
U.S. Federal	$	114,295	$	117,423	$	58,638
State and Local		24,057		24,563		6,532
Foreign		285		14		(1,418)
Total Current		138,637		142,000		63,752
Deferred Tax Provision
U.S. Federal		19,671		(8,253)		7,722
State and Local		5,130		(1,108)		226
Foreign		164		-		-
Total Deferred		24,965		(9,361)		7,948
Income Tax Provision	$	163,602	$	132,639	$	71,700

The income tax provisions differ from those that would be computed using the statutory U.S. federal rate as a result of the following items (dollars in thousands):

		2011			2010			2009
Income Tax at Statutory Rate	$	173,051	35.0%	$	144,418	35.0%	$	83,073	35.0%
Lower Rates on Foreign Operations		(22,413)	-4.5%		(22,524)	-5.5%		(19,186)	-8.1%
State Income Taxes		16,762	3.4%		13,129	3.1%		8,574	3.6%
Stock Options		481	0.1%		(164)	0.0%		372	0.2%
Tax Credits and Other		(4,279)	-0.9%		(2,220)	-0.5%		(1,133)	-0.5%
Income Tax Provision	$	163,602	33.1%	$	132,639	32.1%	$	71,700	30.2%

Deferred income tax assets (liabilities) result primarily from temporary differences in the recognition of various expenses for tax and financial statement purposes, and from the recognition of the tax benefits of net operating loss carryforwards. These assets and liabilities are composed of the following (dollars in thousands):

		For the Year Ended June 30,
		2011		2010		2009
Loss Carryforwards, net	$	10,477	$	11,053	$	9,373
Employee Benefits		4,278		4,330		5,585
Stock-Based Payments		9,262		7,250		6,239
Deferred Rent		17,668		13,909		7,132
Receivable Reserve		22,240		19,951		17,235
Depreciation		-		2,778		5,062
Other Reserves		4,122		2,792		538
Less: Valuation Allowance		(6,852)		(6,852)		(6,852)
Gross Deferred Tax Assets		61,195		55,211		44,312
Depreciation		(26,321)		-		-
Amortization of Intangible Assets		(79,446)		(74,357)		(74,754)
Gross Deferred Tax Liability		(105,767)		(74,357)		(74,754)
Net Deferred Taxes	$	(44,572)	$	(19,146)	$	(30,442)

DeVry has net operating loss carryforwards in various tax jurisdictions expiring at various times through the years ending June 30, 2031.

DeVry's effective income tax rate reflects benefits derived from significant operations outside the United States. Earnings of these international operations are not subject to U.S. federal or state income taxes, so long as such earnings are not repatriated, as discussed below. Three of our subsidiaries, Ross University School of Medicine (the Medical School) incorporated under the laws of the Commonwealth of Dominica, Ross University School of Veterinary Medicine (the Veterinary School) incorporated under the laws of the Federation of St. Christopher, Nevis, St. Kitts in the West indies, and DeVry Brasil incorporated under the laws of Brazil, all benefit from local tax incentives. The Medical and Veterinary Schools have agreements with the respective governments that exempt them from local income taxation through the years 2043 and 2023, respectively, while DeVry Brasil's effective tax rate reflects benefits derived from their participation in PROUNI, a Brazilian program for providing scholarships to a portion of its undergraduate students.

Valuation allowances have been established for approximately $6.8 million for the years ended June 30, 2011 and 2010. The valuation allowances are composed of $6.5 million related to our Canadian subsidiary and $0.3 million for certain state net operating loss carryforwards that may expire before their benefits are utilized. The Canadian valuation allowances are composed of net operating losses of $2.5 million, depreciation of $3.5 million and $0.5 million of other deferred tax benefits.

DeVry historically has included U.S. net operating loss carryforwards of approximately $3.0 million, which are permanently precluded from use under Internal Revenue Code Section 382: Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change, in its inventory of deferred tax assets, offset by a full valuation allowance. DeVry will no longer reflect deferred tax assets that become subject to these limitations, nor will corresponding valuation allowances for these items be required. Therefore, for the year ended June 30, 2011, deferred tax assets have been reduced by $3.0 million related to U.S. net operating loss carryforwards which are permanently precluded from use under Internal Revenue Code Section 382 with a corresponding reduction in the valuation allowance to reflect this change.

Based on DeVry's expectations for future taxable income, management believes that it is more likely than not that operating income in respective jurisdictions will be sufficient to recognize fully all deferred tax assets, except as explained above.

DeVry has not recorded a U.S. federal or state tax provision for the undistributed earnings of its international subsidiaries. It is DeVry's intention to indefinitely reinvest accumulated cash balances, future cash flows and post-acquisition undistributed earnings and profits to improve the facilities and operations of its international Schools and pursue future opportunities outside the United States. In accordance with this plan, cash held by the international subsidiaries will not be available for general company purposes and under current laws will not be subject to U.S. taxation. As of June 30, 2011 and 2010, cumulative undistributed earnings attributable to international operations were approximately $332.3 million and $266.8 million, respectively.

The effective tax rate was 33.1% for fiscal year 2011, compared to 32.1% for the prior year. The higher effective income tax rate in fiscal year 2011 was primarily due to an increase in the proportion of income generated by U.S. operations versus the offshore operations of Ross University as compared to the prior year.

As of June 30, 2011 the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $11.9 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $11.9 million. As of June 30, 2010, our gross unrecognized tax benefits, including positions impacting only the timing of benefits, was $7.1 million. The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is $7.1 million. We expect that our unrecognized tax benefits will decrease by approximately $3.2 million during the next twelve months. DeVry classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. The total amount of interest and penalties accrued as of June 30, 2011, 2010, and 2009 was $1.0 million, $.7 million, and $.5 million respectively. Interest and penalties recognized during the years ended June 30, 2011, 2010, and 2009 were $0.3 million, $.2 million and $.1 million respectively. The changes in our unrecognized tax benefits were (dollars in millions):

			For the Year Ended June 30,
			2011		2010		2009
Beginning Balance, July 1		$	7.1	$	2.2	$	2.6
	Increases from Positions Taken During Prior Periods		1.9		2.2		-
	Decreases from Positions Taken During Prior Periods		(1.3)		(0.7)		(0.5)
	Increases from Positions Taken During the Current Period		4.2		3.4		0.1
Ending Balance, June 30		$	11.9	$	7.1	$	2.2

DeVry generally remains subject to examination for all tax years beginning on or after July 1, 2006.