Eli Lilly 2009 Annual Report Download - page 78

Domestic and Puerto Rican companies contributed approximately 39 percent and 7 percent in 2009 and
2007, respectively, to consolidated income before income taxes and generated the entire consolidated loss
before income taxes in 2008. We have a subsidiary operating in Puerto Rico under a tax incentive grant.
The current tax incentive grant will not expire prior to 2017.
At December 31, 2009, we had an aggregate of $15.46 billion of unremitted earnings of foreign
subsidiaries that have been or are intended to be permanently reinvested for continued use in foreign
operations and that, if distributed, would result in additional income tax expense at approximately the
U.S. statutory rate.
Cash payments (refunds) of income taxes totaled $1.14 billion, $(52.0) million, and $1.01 billion in 2009,
2008, and 2007, respectively.
Following is a reconciliation of the income tax expense (benefit) applying the U.S. federal statutory rate to
income (loss) before income taxes to reported income tax expense:
2009 2008 2007
Income tax (benefit) at the U.S. federal statutory tax rate . . . . . . . . . . . $1,875.2 $ (457.7) $1,356.9
Add (deduct)
International operations, including Puerto Rico. . . ............... (741.1) (641.3) (450.7)
General business credits . . . . . . . . . ......................... (79.4) (58.0) (60.3)
Government investigation charges . . ......................... 0.6 359.3 —
Acquisitions and non-deductible acquired in-process research and
development . . . . ...................................... — 1,819.4 208.1
IRS audit conclusion ...................................... (54.4) (210.3) —
Sundry . . . . . . . . . . ...................................... 28.1 (47.1) (130.2)
Income tax expense . . ...................................... $1,029.0 $ 764.3 $ 923.8
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
2009 2008
Beginning balance at January 1 . ....................................... $1,012.3 $1,657.4
Additions based on tax positions related to the current year . . ................ 179.1 115.6
Additions for tax positions of prior years . . . . . . . .......................... 133.2 288.8
Reductions for tax positions of prior years . . . . . . .......................... (104.2) (234.9)
Lapses of statutes of limitation . ....................................... (3.3) (216.2)
Settlements. . . .................................................... (178.8) (598.4)
Balance at December 31 . . . . . . ....................................... $1,038.3 $1,012.3
The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was
$836.8 million and $863.8 million at December 31, 2009 and 2008, respectively.
We file income tax returns in the U.S. federal jurisdiction and various state, local, and non-U.S. jurisdic-
tions. We are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations in
major taxing jurisdictions for years before 2002. During the first quarter of 2008, we completed and
effectively settled our IRS audit of tax years 2001-2004 except for one matter for which we were seeking
resolution through the IRS administrative appeals process. As a result of the IRS audit conclusion, gross
unrecognized tax benefits were reduced by approximately $618 million, and the consolidated results of
operations were benefited by $210.3 million through a reduction in income tax expense. The majority of
the reduction in gross unrecognized tax benefits related to intercompany pricing positions that were
agreed with the IRS in a prior audit cycle for which a prepayment of tax was made in 2005. Application of
the prepayment and utilization of tax carryovers resulted in a refund of approximately $50 million.
The IRS began its examination of tax years 2005-2007 during the third quarter of 2008. In addition, the IRS
administrative appeals matter from the 2001-2004 IRS audit was settled in the third quarter of 2009.
Considering the current status of the 2005-2007 IRS examination and the settlement of the IRS
administrative appeals matter from the 2001-2004 audit, gross unrecognized tax benefits were reduced
approximately $190 million in the third quarter of 2009. As a result, our income tax expense was reduced
by $54.4 million. After utilization of all tax credit carryovers, a cash payment of $52.8 million was paid in
the third quarter of 2009 upon settlement of the IRS appeals matter. While the IRS is currently examining
tax years 2005-2007, the resolution of all issues in this audit period will likely extend beyond the next
12 months.
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FORM 10-K