9. INCOME TAXES

Internal Revenue Service Settlement

In the first quarter of fiscal 2010, Sysco reached a settlement with the Internal Revenue Service (IRS) in connection with its audits of the company's 2003 through 2006 federal income tax returns. As a result of the settlement, Sysco agreed to cease paying U.S. federal taxes related to its affiliate Baugh Supply Chain Cooperative (BSCC) on a deferred basis and pay the amounts that were recorded within deferred taxes related to BSCC over a three-year period as follows:


	(In thousands)
Fiscal 2010	$	528,000
Fiscal 2011		212,000
Fiscal 2012		212,000

In the first 26 weeks of fiscal 2012, $106.0 million of payments were made related to the settlement. As noted in the table above, $212.0 million was paid related to the settlement in fiscal 2011, of which $106.0 million was paid in the first 26 weeks of fiscal 2011. Remaining amounts to be paid in fiscal 2012 will occur in connection with Sysco's quarterly tax payments in the third quarter and the fourth quarter. The company believes it has access to sufficient cash on hand, cash flow from operations and current access to capital to make the remaining payments.

Sysco's deferred taxes were impacted by the timing of these installment payments. Sysco reclassified amounts due within one year from deferred taxes to accrued income taxes at the beginning of each year in which settlement payments were to be made.

Uncertain Tax Positions

As of December 31, 2011, the gross amount of unrecognized tax benefits was $72.5 million and the gross amount of accrued interest liabilities was $35.2 million. It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the company's unrecognized tax positions will increase or decrease in the next twelve months either because Sysco prevails on positions that were being challenged upon audit or because the company agrees to their disallowance. Items that may cause changes to unrecognized tax benefits primarily include the consideration of various filing requirements in numerous states and the allocation of income and expense between tax jurisdictions. At this time, an estimate of the range of the reasonably possible change cannot be made.

Effective Tax Rates

The effective tax rate for the second quarter of fiscal 2012 was 37.81%. Earnings taxed at lower foreign statutory tax rates had the impact of reducing the effective tax rate.

The effective tax rate of 37.07% for the second quarter of fiscal 2011 was favorably impacted by the gain of $10.3 million recorded to adjust the carrying value of the company's COLI policies to their cash surrender values in the second quarter of fiscal 2011, which had the impact of decreasing income tax expense for the period by $4.0 million.

The effective tax rate for the first 26 weeks of fiscal 2012 was 37.31%. Earnings taxed at lower foreign statutory tax rates had the impact of reducing the effective tax rate.

The effective tax rate of 37.18% for the first 26 weeks of fiscal 2011 was favorably impacted by the adjustment of the carrying values of COLI policies to their cash surrender values. The gain of $23.9 million recorded in the first 26 weeks of fiscal 2011 was non-taxable for income tax purposes, and had the impact of decreasing income tax expense for the period by $9.2 million.

Other

The determination of the company's provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The company's provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, as well as foreign, jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the company's change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.