Berkshire Hathaway 2008 Annual Report Download - page 51

Notes to Consolidated Financial Statements (Continued)
(15) Income taxes (Continued)
Charges for income taxes are reconciled to hypothetical amounts computed at the U.S. Federal statutory rate in the table
shown below (in millions).
2008 2007 2006
Earnings before income taxes ...................................................... $7,574 $20,161 $16,778
Hypothetical amounts applicable to above computed at the Federal statutory rate .............. $2,651 $ 7,056 $ 5,872
Tax-exempt interest income ........................................................ (88) (33) (44)
Dividends received deduction ...................................................... (415) (306) (224)
State income taxes, less Federal income tax benefit ..................................... 162 152 99
Foreign tax rate differences ........................................................ (59) (36) (45)
Effect of income tax rate changes on deferred income taxes * ............................. — (90) —
Non-taxable exchange of investment ................................................. (154) — —
Other differences, net ............................................................. (119) (149) (153)
Total income taxes ............................................................... $1,978 $ 6,594 $ 5,505
*Relates to adjustments made to deferred income tax assets and liabilities in 2007 upon the enactment of reductions to
corporate income tax rates in the United Kingdom and Germany.
Berkshire or its subsidiaries file income tax returns in the U.S. federal jurisdiction and in many state, local and foreign
jurisdictions. Berkshire subsidiaries are under examination in many of these jurisdictions. With few exceptions, Berkshire and
its subsidiaries have settled tax return liabilities with U.S. federal, state, local, or foreign tax authorities for years before 1999.
During 2008, Berkshire and the U.S. Internal Revenue Service (“IRS”) have tentatively resolved all proposed adjustments for
the 1999 through 2001 tax years at the IRS Appeals level. The IRS has completed the examination of the consolidated U.S.
federal income tax returns for the 2002 through 2004 tax years. The proposed adjustments, predominantly related to timing of
deductions for insurance subsidiaries, are currently being reviewed in the IRS appeals process. The IRS is currently auditing our
consolidated U.S. federal income tax returns for the 2005 and 2006 tax years. While it is reasonably possible that certain of the
income tax examinations will be settled within the next twelve months, management believes that there are no jurisdictions in
which the outcome of unresolved issues or claims is likely to be material to the Consolidated Financial Statements.
At December 31, 2008 and 2007 net unrecognized tax benefits were $803 million and $851 million, respectively. Included
in the balance at December 31, 2008, are approximately $650 million of tax positions that, if recognized, would impact the
effective tax rate. The remaining balance in net unrecognized tax benefits principally relates to tax positions for which the
ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the
impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would
not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. As
of December 31, 2008, management does not expect any material changes to the estimated amount of unrecognized tax benefits
in the next twelve months.
(16) Dividend restrictions – Insurance subsidiaries
Payments of dividends by insurance subsidiaries are restricted by insurance statutes and regulations. Without prior regulatory
approval, insurance subsidiaries may declare up to approximately $9 billion as ordinary dividends before the end of 2009.
Combined shareholders’ equity of U.S. based property/casualty insurance subsidiaries determined pursuant to statutory
accounting rules (Statutory Surplus as Regards Policyholders) was approximately $51 billion at December 31, 2008 and $62
billion at December 31, 2007. The decline in statutory surplus in 2008 was primarily due to declines in market values of equity
securities.
Statutory surplus differs from the corresponding amount determined on the basis of GAAP. The major differences between
statutory basis accounting and GAAP are that deferred charges reinsurance assumed, deferred policy acquisition costs,
unrealized gains and losses on investments in fixed maturity securities and related deferred income taxes are recognized under
GAAP but not for statutory reporting purposes. In addition, statutory accounting for goodwill of acquired businesses requires
amortization of goodwill over 10 years, whereas under GAAP, goodwill is not amortized and is subject to periodic tests for
impairment.
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