NOTE 10: INCOME TAXES

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


	For the Year Ended June 30,
	2012		2011		2010
U.S.	$	122,917	$	427,726	$	345,850
Foreign		83,221		66,706		66,772

Total	$	206,138	$	494,432	$	412,622

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:	2012			2011		2010
Current Tax Provision
U.S. Federal	$	62,176		$	114,295	$	117,423
State and Local		12,595			24,057		24,563
Foreign		(350	)		285		14

Total Current		74,421			138,637		142,000
Deferred Tax Provision
U.S. Federal		(13,742	)		19,671		(8,253	)
State and Local		1,563			5,130		(1,108	)
Foreign		1,515			164		—

Total Deferred		(10,664	)		24,965		(9,361	)

Income Tax Provision	$	63,757		$	163,602	$	132,639

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):


	2012					2011					2010
Income Tax at Statutory Rate	$	72,148		35.0	%	$	173,051		35.0	%	$	144,418		35.0	%
Lower Rates on Foreign Operations		(27,480	)	-13.3	%		(22,413	)	-4.5	%		(22,524	)	-5.5	%
State Income Taxes		7,827		3.8	%		16,762		3.4	%		13,129		3.1	%
Stock Options		838		0.4	%		481		0.1	%		(164	)	0.0	%
Nondeductible Goodwill		14,182		6.8	%		—		—			—		—
Tax Credits and Other		(3,758	)	-1.8	%		(4,279	)	-0.9	%		(2,220	)	-0.5	%

Income Tax Provision	$	63,757		30.9	%	$	163,602		33.1	%	$	132,639		32.1	%

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,
	2012			2011			2010
Loss Carryforwards, net	$	12,022		$	10,477		$	11,053
Employee Benefits		10,456			4,278			4,330
Stock-Based Payments		12,732			9,262			7,250
Deferred Rent		19,464			17,668			13,909
Receivable Reserve		21,026			22,240			19,951
Depreciation		—			—			2,778
Other Reserves		5,044			4,122			2,792
Less: Valuation Allowance		(9,376	)		(6,852	)		(6,852	)

Gross Deferred Tax Assets		71,368			61,195			55,211

Depreciation		(40,101	)		(26,321	)		—
Amortization of Intangible Assets		(65,697	)		(79,446	)		(74,357	)

Gross Deferred Tax Liability		(105,798	)		(105,767	)		(74,357	)

Net Deferred Taxes	$	(34,430	)	$	(44,572	)	$	(19,146	)

DeVry has net operating loss carryforwards in various tax jurisdictions expiring at various times through the years ending June 30, 2032.

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. Four 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, and AUC School of Medicine BV (AUC) incorporated under the laws of Sint Maarten 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. AUC’s effective tax rate reflects benefits derived from investment incentives.

Valuation allowances have been established for approximately $9.4 million and $6.9 million for the years ended June 30, 2012 and 2011, respectively. The valuation allowances are composed of $6.5 million related to our Canadian subsidiary in both years ended June 30, 2012 and 2011 and $2.9 million and $0.3 million for the years ended June 30, 2012 and 2011, respectively, for certain state net operating loss carryforwards that may expire before their benefits are utilized.

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, 2012 and 2011, cumulative undistributed earnings attributable to international operations were approximately $414.0 million and $332.3 million, respectively.

The effective tax rate was 30.9% for fiscal year 2012, compared to 33.1% for the prior year. The lower effective income tax rate in fiscal year 2012 was due primarily to a decrease 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, 2012 the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $22.0 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $13.3 million. As of June 30, 2011, our gross unrecognized tax benefits, including positions impacting only the timing of benefits, was $11.9 million. The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is $11.9 million. We expect that our unrecognized tax benefits will decrease by approximately $11.8 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, 2012, 2011, and 2010 was $1.9 million, $1.0 million, and $0.7 million respectively. Interest and penalties recognized during the years ended June 30, 2012, 2011, and 2010 were $0.9 million, $0.3 million and $0.2 million respectively. The changes in our unrecognized tax benefits were (dollars in millions):


	For the Year Ended June 30,
	2012			2011			2010
Beginning Balance, July 1	$	11.9		$	7.1		$	2.2
Increases from Positions Taken During Prior Periods		10.1			1.9			2.2
Decreases from Positions Taken During Prior Periods		(3.5	)		(1.3	)		(0.7	)
Increases from Positions Taken During the Current Period		3.5			4.2			3.4

Ending Balance, June 30	$	22.0		$	11.9		$	7.1

The Internal Revenue Service is currently examining DeVry’s 2010 and 2011 U.S. Federal Income Tax Returns. DeVry generally remains subject to examination for all tax years beginning on or after July 1, 2007.