Note 17 — Income Taxes

The majority of the Company’s loss from continuing operations before income taxes for fiscal years 2012, 2011 and 2010 of $4.8 million, $4.8 million, and $14.3 million, respectively, is related to the Company’s domestic operations. See Note 19 for foreign income (loss) before income taxes and foreign tax expense. The majority of the Company’s foreign operations are included in the discontinued operations presentation in the consolidated financial statements.

Income tax expense (benefit) on continuing operations consists of the following:

 

		Year Ended August 31,
		2012				2011				2010
		(Dollars in thousands)
Current:
Federal		$	(162	)		$	34			$	(332	)
State			3				137				208
			(159	)			171				(124	)
Deferred:
Federal			4,582				9				(4,447	)
State			383				133				(131	)
			4,965				142				(4,578	)
Total		$	4,806			$	313			$	(4,702	)

 

		Year Ended August 31,
		2012				2011				2010
		(Dollars in thousands)
Comprehensive tax expense (benefit) allocable to:
Income (loss) before taxes		$	4,806			$	313			$	(4,702	)
Discontinued operations			—				—				(4,495	)
Comprehensive income (loss)			(4,924	)			3,856				891
		$	(118	)		$	4,169			$	(8,306	)

A reconciliation of the statutory federal tax to the actual provision (benefit) for taxes is as follows:

 

		Year Ended August 31,
		2012				2011				2010
		(Dollars in thousands)
Statutory tax rate			35	%			35	%			35	%
Statutory tax on income		$	(1,666	)		$	(1,682	)		$	(5,016	)
State taxes, net of federal benefit			219				52				33
Non-deductible expenses related to preferred stock			4,547				2,687				1,020
Research credit			(73	)			(195	)			(54	)
Ethanol credit			—				(975	)			(975	)
Foreign tax loss with no benefit			(38	)			200				34
Prior year true up			95				79				306
Unrecognized tax benefits			(165	)			67				(139	)
Valuation allowance			1,787				—				—
Other			100				80				89
Total provision (benefit)		$	4,806			$	313			$	(4,702	)

 

The significant components of deferred tax assets and liabilities are as follows:

 

		August 31,
		2012				2011
		(Dollars in thousands)
Deferred tax assets:
Alternative minimum tax credit		$	3,354			$	3,108
Postretirement benefits			18,060				12,377
Provisions for accrued expenses			2,908				1,893
Stock-based compensation			2,420				2,357
Deferred flood losses			—				2,625
Net operating loss carryforward			7,469				8,242
Tax credit carryforwards			4,152				4,325
Other			2,025				2,935
			40,388				37,862
Less - valuation allowance			(1,787	)			—
Total deferred tax assets			38,601				37,862
Deferred tax liabilities:
Depreciation			21,762				21,678
Hedging			1,004				448
Other			2,560				2,132
Total deferred tax liabilities			25,326				24,258
Net deferred tax assets		$	13,275			$	13,604
Recognized as:
Other current assets		$	167			$	909
Deferred tax asset			13,108				12,695
Total net deferred tax assets		$	13,275			$	13,604

At August 31, 2012, the Company had a U.S. federal alternative minimum tax credit carryforward of $3.4 million with no expiration, research and development credit carryforwards of $1.4 million expiring 2025 through 2032, a small ethanol producer credit of $2.8 million expiring 2014, and a net operating loss carryforward of $18.7 million expiring in 2030. The Company also has U.S. state net operating loss carryforwards of $20.8 million with expiration dates between 2013 and 2030.

In fiscal 2012, the Company recorded a $1.8 million valuation allowance related to small ethanol producer tax credit carryforwards which expire in fiscal 2014. Tax laws require that any net operating loss carryforwards be utilized before the Company can utilize the small ethanol producer tax credit carryforwards. As a result of challenging market trends in the third quarter related to the cost of corn and ethanol pricing and the redemptions of the Company’s Series A Preferred Stock discussed in Note 7, estimates of future taxable income during the carryforward periods have been revised. Due to the near-term expiration of the small ethanol producer tax credit carryforward period, the Company does not believe it has sufficient positive evidence to substantiate that the small ethanol tax credit carryforwards are realizable at a more-likely-than-not level of assurance and has recorded a $1.8 million valuation allowance. The valuation allowance will be reversed in future periods if it is more likely than not that these tax credit carryforwards will be utilized.

In the fourth quarter of fiscal 2012, the Company recorded a $44,000 valuation allowance related to charitable contributions which expire in fiscal years 2013 through 2015. Tax laws limit the deduction of charitable contributions to 10% of otherwise taxable income with the excess carried forward for 5 years. Utilization of net operating loss carryforwards are considered to reduce taxable income. Due to the near-term expiration of these deductions, the Company does not believe that it has sufficient positive evidence to substantiate that the charitable contributions carryforwards are realizable at a more-likely-than-not level of assurance and has recorded a valuation allowance. The valuation allowance will be reversed in future periods if it is more likely than not that these deductions will be utilized.

 

At August 31, 2012, the Company had $13.3 million of net deferred tax assets. Other than for the ethanol tax credit and charitable contributions discussed above, a valuation allowance has not been provided on the net U.S. deferred tax assets as of August 31, 2012. The determination of the need for a valuation allowance requires significant judgment and estimates. The Company evaluates the requirement for a valuation allowance each quarter as the Company incurred book losses in fiscal 2012 and the two previous fiscal years. However, dividends on the Series A Preferred Stock, as well as the accretion of the related discount, which are included in interest expense in the Consolidated Statement of Operations, are not deductible for U.S. federal income tax purposes, which resulted in the Company having taxable income in fiscal years 2012 and 2011. The Company believes that it is more likely than not that future operations will generate sufficient taxable income to realize its deferred tax assets. However, there can be no assurance that management’s current plans will be achieved or that a valuation allowance will not be required in the future.

Deferred tax liabilities or assets are not recognized on temporary differences from undistributed earnings of foreign subsidiaries and from foreign exchange translation gains or losses on permanent advances to foreign subsidiaries as the Company does not expect that the divestiture of its foreign subsidiaries will result in any tax benefit or expense.

The total amount of gross unrecognized tax benefits was $1.1 million at August 31, 2012, all of which, if recognized, would impact the Company’s effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (dollars in thousands):

 

		2012				2011
Unrecognized tax benefits at beginning of year		$	1,220			$	1,131
Additions for tax positions related to prior years			112				82
Additions for tax positions related to current year			62				97
Reductions due to lapse of applicable statute of limitations			(336	)			(90	)
Unrecognized tax benefits at end of year		$	1,058			$	1,220

The Company’s policy is to recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense (benefit) in the consolidated statements of operations. As of August 31, 2012 and 2011, the Company had $0.2 million of accrued interest and penalties included in the long-term tax liability. During fiscal 2012, the Company decreased the liability for unrecognized tax benefits by $11,000 for interest and $6,000 for penalties.

The Company files tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions, and is subject to examination by taxing authorities in all of those jurisdictions. From time to time, the Company’s tax returns are reviewed or audited by U.S. federal and various U.S. state taxing authorities. The Company believes that adjustments, if any, resulting from these reviews or audits would not be material, individually or in the aggregate, to the Company’s financial position, results of operations or liquidity. It is reasonably possible that the amount of unrecognized tax benefits related to certain of the Company’s tax positions will increase or decrease in the next twelve months as audits or reviews are initiated and settled. At this time, an estimate of the range of a reasonably possible change cannot be made. In January 2011, the U.S. Internal Revenue Service (“IRS”) notified the Company that its tax refund of $3.5 million resulting from a carryback of tax losses from fiscal year 2009 to fiscal years 2006 and 2007 was being evaluated to determine whether the refund would be examined or accepted without examination. In March 2012, the Company was notified by the IRS that it had completed its review with no material adjustments. The Company is not subject to income tax examinations by U.S. federal or state jurisdictions for fiscal years prior to 2007.