IBM 2008 Annual Report Download - page 103

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Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION and Subsidiary Companies
For income tax return purposes, the company has foreign and domes-
tic loss carryforwards, the tax effect of which is $ million as well
as state tax credit carryforwards of $ million. Substantially all of
these carryforwards are available for at least two years or are available
for ten years or more.
The company has certain foreign tax loss carryforwards that have
not been reflected in the gross deferred tax asset balance. These
losses, the potential tax benefit of which is approximately $. billion,
have not been recorded in the Consolidated Statement of Financial
Position as the company has not determined if it will claim these
losses. The company is currently evaluating whether to claim these
losses and expects to make a decision within the next six months.
The valuation allowance at December , , principally applies
to certain foreign, state and local loss carryforwards that, in the opin-
ion of management, are more likely than not to expire unutilized.
However, to the extent that tax benefits related to these carryforwards
are realized in the future, the reduction in the valuation allowance
will reduce income tax expense. The year-to-year change in the
allowance balance was a decrease of $ million.
The amount of unrecognized tax benefits at December , 
determined in accordance with the provisions of FIN  increased by
$ million in  to $, million. A reconciliation of the begin-
ning and ending amount of unrecognized tax benefits is as follows:
($  ) 2008 2007
Balance at January 1 $ 3,094 $2,414
Additions based on tax positions related
to the current year 1,481 745
Additions for tax positions of prior years
747 195
Reductions for tax positions of prior years
(including impacts due to a lapse in statute) (1,209) (144)
Settlements (215) (116)
BALANCE AT DECEMBER 31 $ 3,898 $3,094
The additions to the unrecognized tax benefits related to the current
and prior years are primarily attributable to various transfer pricing
and related valuation matters, certain tax incentives and credits,
acquisition-related matters and other non-U.S. and state matters.
The settlements and reductions to the unrecognized tax benefits
for tax positions of prior years are primarily attributable to the con-
clusion of the company’s various U.S. and non-U.S. income tax
examinations, the agreement reached with the IRS regarding claims
for certain tax incentives, the company’s analysis with respect to
certain issues associated with newly published U.S. tax regulations
and various non-U.S. matters including impacts due to lapses in
statutes of limitation.
The liability at December ,  of $, million can be
reduced by $ million of offsetting tax benefits associated with the
correlative effects of potential transfer pricing adjustments, state
income taxes and timing adjustments. The net amount of $,
million, if recognized, would favorably affect the company’s effective
tax rate.
Interest and penalties related to income tax liabilities are included
in income tax expense. During the year ended December , ,
the company recognized $ million in interest and penalties; in
, the company recognized $ million in interest and penalties.
The company has $ million for the payment of interest and penal-
ties accrued at December ,  and had $ million accrued at
December , .
It is not anticipated that the amount of unrecognized tax benefits
reflected as of December ,  will materially change in the next
 months; any changes are not expected to have a significant impact
on the results of operations, cash flows or the financial position of
the company.
With limited exception, the company is no longer subject to U.S.
federal, state and local or non-U.S. income tax audits by taxing author-
ities for years through . The years subsequent to  contain
matters that could be subject to differing interpretations of applicable
tax laws and regulations as it relates to the amount and/or timing
of income, deductions and tax credits. Although the outcome of
tax audits is always uncertain, the company believes that adequate
amounts of tax and interest have been provided for any adjustments
that are expected to result for these years.
It is expected that the audit of the company’s  and  U.S.
income tax returns will commence in the first quarter of .
The company has not provided deferred taxes on $. billion of
undistributed earnings of non-U.S. subsidiaries at December ,
, as it is the company’s policy to indefinitely reinvest these earn-
ings in non-U.S. operations. However, the company periodically
repatriates a portion of these earnings to the extent that it does not
incur an additional U.S. tax liability. Quantification of the deferred
tax liability, if any, associated with indefinitely reinvested earnings is
not practicable.
For additional information on the company’s effective tax rate
refer to the “Looking Forward” section of the Management Discussion
on page .
Note Q.
Research, Development and Engineering
RD&E expense was $, million in , $, million in 
and $, million in .
The company incurred expense of $, million in , $,
million in  and $, million in  for scientific research and
the application of scientific advances to the development of new and
improved products and their uses, as well as services and their appli-
cation. Within these amounts, software-related expense was $,
million, $, million and $, million in ,  and ,
respectively. In addition, included in the expense was a charge of $
million in  and $ million in  for acquired IPR&D.
Expense for product-related engineering was $ million, $
million and $ million in ,  and , respectively.