IBM 2009 Annual Report Download - page 104

Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
A reconciliation of the statutory U.S. federal tax rate to the
company’s continuing operations effective tax rate is as follows:
For the year ended December 31: 2009 2008 2007
Statutory rate 35% 35% 35%
Foreign tax differential (9) (8) (6)
State and local 1 1 1
Other (1) (2) (2)
Effective rate 26% 26% 28%
The effect of tax law changes on deferred tax assets and liabilities
did not have a material impact on the company’s effective tax rate.
The significant components of deferred tax assets and liabili-
ties that are recorded in the Consolidated Statement of Financial
Position were as follows:
Deferred Tax Assets
($ in millions)
At December 31: 2009 2008*
Retirement benefits $ 3,921 $ 5,215
Share-based and other compensation 1,853 2,579
Domestic tax loss/credit carryforwards 859 862
Deferred income 847 739
Foreign tax loss/credit carryforwards 680 642
Bad debt, inventory and warranty reserves 605 561
Capitalized research and development 539 795
Depreciation 485 388
Other 1,999 1,863
Gross deferred tax assets 11,788 13,644
Less: valuation allowance 812 720
Net deferred tax assets $10,976 $12,924
* Reclassified to conform with 2009 presentation.
Deferred Tax Liabilities
($ in millions)
At December 31: 2009 2008*
Leases $2,129 $1,913
Depreciation 1,138 941
Goodwill and intangible assets 639 552
Software development costs 409 449
Retirement benefits 389 104
Other 874 697
Gross deferred tax liabilities $5,578 $4,656
* Reclassified to conform with 2009 presentation.
For income tax return purposes, the company has foreign and
domestic loss carryforwards, the tax effect of which is $860 mil-
lion as well as domestic and foreign credit carryforwards of $679
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
due to the level of uncertainty associated with the sustainability
of the losses which are under examination by the local taxing
authority. The tax benefit of these losses approximated $930
million at December 31, 2009. In addition, during the second
quarter of 2009, foreign tax losses were utilized against a prior
year tax liability resulting in a cash benefit of approximately $360
million. However, the company has recorded an unrecognized
tax benefit for the entire amount received given the degree of
uncertainty in sustaining the associated tax benefit. The com-
pany expects that the local taxing authority will complete its field
examination in early 2010.
The valuation allowance at December 31, 2009, principally
applies to certain foreign, state and local loss carryforwards
that, in the opinion 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 an increase
of $92 million.
The amount of unrecognized tax benefits at December 31,
2009 increased by $892 million in 2009 to $4,790 million. A rec-
onciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:
($ in millions)
2009 2008 2007
Balance at January 1 $3,898 $ 3,094 $2,414
Additions based on tax positions
related to the current year 554 1,481 745
Additions for tax positions of prior years 634 747 195
Reductions for tax positions
of prior years (including impacts
due to a lapse in statute) (277) (1,209) (144)
Settlements (19) (215) (116)
Balance at December 31 $4,790 $ 3,898 $3,094
The additions to the unrecognized tax benefits related to the
current and prior years are primarily attributable to non-U.S.
issues, certain tax incentives and credits, acquisition-related
matters and other non-U.S. and state matters.
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