CVS 2007 Annual Report Download - page 68

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64 I CVS Caremark
Income Taxes
The income tax provision consisted of the following for the
respective years:
In millions 2007 2006 2005
Current: Federal $ 1,250.8 $ 676.6 $ 632.8
State 241.3 127.3 31.7
1,492.1 803.9 664.5
Deferred: Federal 206.0 47.6 17.9
State 23.6 5.4 1.9
229.6 53.0 19.8
Total $ 1,721.7 $ 856.9 $ 684.3
Following is a reconciliation of the statutory income tax rate to
the Company’s effective tax rate for the respective years:
2007 2006 2005
Statutory income tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal tax benefit 4.2 3.9 3.9
Other 0.3 0.1 (0.3)
Federal and net State
reserve release – (0.5) (2.8)
Effective tax rate 39.5% 38.5% 35.8%
Following is a summary of the significant components of the
Company’s deferred tax assets and liabilities as of the respective
balance sheet dates:
Dec. 29, Dec. 30,
In millions 2007 2006
Deferred tax assets:
Lease and rents $ 276.2 $ 265.8
Inventory 56.7 74.3
Employee benefits 186.0 82.4
Accumulated other comprehensive
items 34.7 41.8
Allowance for bad debt 74.6 36.6
Retirement benefits 6.2 4.0
Other 170.9 68.5
NOL 26.9 26.3
Total deferred tax assets 832.2 599.7
Deferred tax liabilities:
Depreciation and
amortization (3,928.9) (234.6)
Total deferred tax liabilities (3,928.9) (234.6)
Net deferred tax (liability)/assets $ (3,096.7) $ 365.1
The Company believes it is more likely than not the deferred
tax assets included in the above table will be realized during
future periods.
During the fourth quarters of 2006 and 2005, an assessment
of tax reserves resulted in the Company recording reductions of
previously recorded tax reserves through the income tax provision
of $11.0 million and $52.6 million, respectively.
The Company adopted FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109” (“FIN 48”), at the beginning of fiscal year
2007. As a result of the implementation, the Company reduced
its reserves for uncertain income tax positions by approximately
$4.0 million, which was accounted for as an increase to the
December 31, 2006 balance of retained earnings. The income
tax reserve increased during 2007 primarily due to the
Caremark Merger.
The following is a summary of our income tax reserve:
In millions 2007
Beginning Balance $ 43.2
Additions based on tax positions
related to the current year 207.5
Additions based on tax positions of prior years 4.5
Reductions for tax positions of prior years (6.7)
Expiration of statute of limitations (2.0)
Settlements (13.1)
Ending Balance $ 233.4
The Company and its subsidiaries are subject to U.S. federal
income tax as well as income tax of multiple state and local
jurisdictions. Substantially all material income tax matters have
been concluded for fiscal years through 1992.
On March 30, 2007, the Internal Revenue Service (the “IRS”)
completed an examination of the consolidated U.S. income tax
returns for AdvancePCS and its subsidiaries for the tax years
ended March 31, 2002, March 31, 2003 and March 24, 2004,
the date on which Caremark acquired AdvancePCS. In July 2007,
the IRS completed an examination of the Company’s consolidated
U.S. income tax returns for fiscal years 2004 and 2005.
During 2007, the IRS commenced an examination of the consoli-
dated U.S. income tax return of the Company for fiscal year 2007
pursuant to the Compliance Assurance Process (“CAP”) program.
The CAP program is a voluntary program under which taxpayers
seek to resolve all or most issues with the IRS prior to the filing
of their U.S. income tax returns in lieu of being audited in the
traditional manner.
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