Quarterly report pursuant to sections 13 or 15(d)

Income Taxes

Income Taxes
6 Months Ended
Mar. 31, 2012
Income taxes [Abstract]  
Income taxes

Note 5. Income taxes

Alico's effective tax rate was 38.1% and 38.0% for the six months ended March 31, 2012 and 2011, respectively.

The Company applies a "more likely than not" threshold to the recognition and non-recognition of tax positions. A change in judgment related to prior years' tax positions is recognized in the quarter of such change. The Company had no reserve for uncertain tax positions as of March 31, 2012 and September 30, 2011. The Company recognizes interest and/or penalties related to income tax matters in income tax expense and in the income tax payable accounts.

In the fiscal years ended September 30, 2011 and 2010, the Internal Revenue Service ("IRS") issued five Revenue Agent Reports ("RARs") pursuant to its examinations of Alico, Agri-Insurance Company, Ltd. ("Agri-Insurance," a former subsidiary of Alico liquidated in September 2010) and Alico-Agri for the tax years 2005 through 2007. These RARs principally challenge (i) Agri-Insurance's ability to elect to be treated as a disregarded entity for US income tax purposes during the years under examination; and (ii) Alico-Agri's ability to recognize income from two real estate sales under the installment method by asserting that Alico-Agri was a dealer in real estate during the years under examination. Based on the positions taken in the RARs, the IRS claimed additional taxes and penalties due of $31.1 million consisting of $14.5 million in taxes and $16.6 million in penalties. The RARs did not quantify the interest on the taxes.

We contested the positions taken in the RARs and pursued resolution through the IRS Appeals process. On November 22, 2011, we reached an agreement in principle to settle the issues. The settlement provides that Agri-Insurance was eligible to elect to be treated as a disregarded entity for US income tax purposes. No determination was made as to whether Alico-Agri was a dealer in real estate; however, for the two sales transactions at issue, we agreed to treat one-third of the taxable gain as ordinary income, taxable in the year of sale, with the remaining two-thirds treated as capital gain eligible for installment sale treatment. Federal and state taxes, including interest, due as a result of the settlement are estimated at $1.4 million, of which we paid approximately $0.7 million on December 11, 2011. The settlement does not preclude Alico from using the installment sale method with respect to future transactions. See Note 12. Subsequent Events for further discussion.

The purchasers of the installment sale properties ultimately defaulted on the deferred payment obligations, and Alico-Agri recovered one of the properties through foreclosure and the other by deed in lieu of foreclosure.