Note 4. Income taxes:

Alico's effective tax rate was 38.5% and 39.8% for the nine months ended June 30, 2011 and 2010, 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 June 30, 2011. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense and in the liability for uncertain tax positions.

On June 17, 2011, March 9, 2011, October 28, 2010 and September 9, 2010, the Internal Revenue Service ("IRS") issued Revenue Agent Reports ("RARs") pursuant to its examinations of Alico, Agri-Insurance and Alico-Agri for the tax years 2005 through 2007 (the "Dispute Period"). These RARs principally challenge (i) Agri-Insurance's ability to elect to be treated as a United States taxpayer during the years under examination; and (ii) Alico-Agri's ability to recognize income from 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, including the Adjusted RAR, as described below, the IRS claims additional taxes and penalties due of $29.8 million consisting of $14.5 million in taxes and $15.3 million in penalties. The RARs did not quantify the interest on the taxes.

The Company maintains that Agri-Insurance was eligible to make the election to be treated as a United States taxpayer and that Alico did not meet the criteria for classification as a dealer in real estate during the years under examination. Alico submitted a rebuttal to IRS Appeals on December 14, 2010 for the September 9, 2010 and October 28, 2010 RARs and on April 6, 2011 for the March 9, 2011 RAR and intends to vigorously defend the tax positions it has taken. The IRS responded to the April 6, 2011 rebuttal with an Adjusted RAR on June 17, 2011 agreeing to remove certain penalties totaling approximately $1.7 million but recalculating and asserting other penalties that also totaled approximately $1.7 million. The Company has an Appeals Conference scheduled with the IRS on August 17, and August 18, 2011. See Note 11 - Subsequent Events.

Classification as a dealer in real estate may preclude the Company's use of the installment method on two transactions and may require payment of taxes, penalties and interest on the full amount of the related gain including the gain on the deferred portion of the sales price. However, during the fiscal year ended September 30, 2010, the purchasers of the installment sale property defaulted on the deferred payment obligations and Alico-Agri recovered the properties through foreclosure. The Company's liquidity could be impacted for the period of time between the payment of taxes, penalties and interest on the deferred portion of the sales price and the eventual recovery of taxes due to the Company's loss on the purchasers' default. The timing difference that would result from the payment of claimed taxes and the subsequent receipt of refunds or credits realized against future taxes would be presented in the Company's deferred tax accounts. The Company would record expenses for penalties and interest incurred in the period in which any settlement is reached with the IRS.

If the Company were required to pay a substantial portion of the taxes and penalties calculated by the IRS, and interest thereon, it could materially affect the Company's liquidity.