Note K — Income Taxes

The effective income tax rate was 25.6% in the first nine months of 2010, compared with 24.1% in the first nine months of 2011. The tax rates in both periods were lowered by discrete items. The first nine months of 2010 included a $13.0 million income tax benefit related to refund claims in a foreign jurisdiction. The first nine months of 2011 included $6.0 million in net tax benefits related to settlements of prior years' tax audits and prior years' tax fillings, $2.8 million of tax benefits related to the realization of unrecognized tax benefits resulting from expiration of statutes of limitations and $16.8 million in income tax benefits related to the release of valuation allowances in foreign jurisdictions due to improved profitability in the respective jurisdictions. In addition, the tax rate in the first nine months of 2011 benefited from a higher percentage of income in lower tax rate jurisdictions compared with the 2010 period. The effective tax rate for the full year 2010 was 23.6% (24.9% on earnings before the goodwill and intangible asset impairment charge).

VF files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous states and foreign jurisdictions. During 2010, the United States Internal Revenue Service ("IRS") commenced an examination of tax years 2007, 2008 and 2009. During the first quarter of 2011, VF settled with the IRS its examination of tax years 2004, 2005 and 2006. VF is currently subject to examination by various state tax authorities. While the outcome of any one examination is not expected to have a material impact on VF's consolidated financial statements, management regularly assesses the outcomes of both ongoing and future examinations to ensure VF's provision for income taxes is sufficient. Management believes that some of these audits and negotiations will conclude during the next 12 months.

During the first nine months of 2011, the amount of unrecognized tax benefits and associated interest increased by $14.4 million to $72.0 million. This increase included the addition of $26.6 million unrecognized tax benefits and associated interest from the Timberland acquisition, which was partially offset by VF's audit settlements and other net reductions of $12.2 million. Of the $12.2 million net decrease, $5.4 million favorably impacted income tax expense. Management believes that it is reasonably possible that the amount of unrecognized income tax benefits may decrease during the next 12 months by approximately $13.3 million related to the completion of audits and other settlements with tax authorities and the expiration of statutes of limitations. Of the $13.3 million, $10.1 million would reduce income tax expense.