Income Taxes

6 Months Ended

Jun. 30, 2011

Income Taxes

Income Taxes

7. Income Taxes

Our effective income tax rates for the six months ended June 30, 2011 and 2010 were 27.4% and 6.1%, respectively. Our effective income tax rates for the three months ended June 30, 2011 and 2010 were 27.5% and (2.0)%, respectively. The effective income tax rates in 2011 were unfavorably impacted by a higher proportion of domestic income, which is taxed at a higher rate relative to foreign income. The effective income tax rates in 2010 were favorably impacted by a $42.4 million tax benefit related to final settlement of U.S. and Spanish federal income tax audits. The effective income tax rates in 2010 were also favorably impacted by the tax-free treatment of indemnification income received in connection with the settlement of the Spanish income tax audit.

During the second quarter of 2010, the Spanish tax authorities concluded their routine examination of our Spanish spirits companies, which included the spirits and wine brands as well as certain distribution assets acquired from Pernod Ricard S.A. (Pernod Ricard) in July 2005. Pursuant to the acquisition agreement, Pernod Ricard indemnified the Company for pre-acquisition income tax contingencies and liabilities. The tax returns that were subject to examination included the 2004 through 2006 periods, and the majority of the audit assessment related to pre-acquisition issues. The Spanish tax authorities issued a net assessment of approximately $29.3 million ($22.9 million for tax and $6.4 million for related interest and penalties), which we paid in July 2010. Pursuant to the acquisition agreement, we negotiated and received a tax indemnification payment from Pernod Ricard related to the above assessment and recorded other expense (income), net of $25.6 million related to the finalization of the income tax indemnification on these matters.

Also during the second quarter of 2010, the Internal Revenue Service concluded its routine examination of the Company's 2006 and 2007 tax years.

As a result of the conclusion of the above-mentioned audit examinations, during the second quarter of 2010, we recorded approximately $42.4 million of previously unrecognized tax benefits (net of current and deferred taxes) in net income.

It is reasonably possible that, within the next 12 months, total unrecognized tax benefits may decrease in the range of $5 million to $20 million, primarily as a result of the conclusion of U.S. federal, state and foreign income tax proceedings.

We do not provide for deferred income taxes on undistributed earnings of foreign subsidiaries that we expect to permanently reinvest. As a result of the Proposed Separation and related transactions, it is possible that the above tax assertion regarding permanent reinvestment of foreign earnings could change.