IBM 2009 Annual Report Download - page 105

Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
The settlements and reductions to the unrecognized tax
benefits for tax positions of prior years are primarily attributable to
the conclusion of the company’s various U.S., state and non-U.S.
income tax examinations and various non-U.S. matters including
impacts due to lapses in statutes of limitation.
The liability at December 31, 2009 of $4,790 million can be
reduced by $577 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
$4,213 million, if recognized, would favorably affect the com-
pany’s effective tax rate. The net amounts at December 31,
2008 and December 31, 2007 were $3,366 million and $2,598
million, respectively.
Interest and penalties related to income tax liabilities are
included in income tax expense. During the year ended December
31, 2009, the company recognized $193 million in interest and
penalties; in 2008, the company recognized $96 million in inter-
est and penalties and in 2007, the company recognized $85
million in interest and penalties. The company has $479 million
for the payment of interest and penalties accrued at December
31, 2009 and had $286 million accrued at December 31, 2008.
Within the next 12 months, the company believes it is reason-
ably possible that the total amount of unrecognized tax benefits
associated with certain positions may be significantly reduced.
The potential decrease in the amount of unrecognized tax ben-
efits is primarily associated with the possible resolution of the
company’s U.S. income tax audit for 2006 and 2007, as well as
various non-U.S. audits. Specific positions that may be resolved,
and that may significantly reduce the related amount of unrecog-
nized tax benefits, include transfer pricing matters, tax incentives
and credits as well as various other foreign tax matters including
foreign tax loss utilization. The company estimates that the unrec-
ognized tax benefits at December 31, 2009 could be reduced by
approximately $1,100 million.
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 authorities for years through 2003. The years subsequent
to 2003 contain matters that could be subject to differing inter-
pretations 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.
During the fourth quarter of 2008, the U.S. Internal Revenue
Service (IRS) concluded its examination of the company’s income
tax returns for 2004 and 2005 and issued a final Revenue Agent’s
Report (RAR). The company has agreed with all of the adjust-
ments contained in the RAR, with the exception of a proposed
adjustment, with a pre-tax amount in excess of $2 billion, relating
to valuation matters associated with the intercompany transfer
of certain intellectual property in 2005 and computational issues
related to certain tax credits. The company disagrees with the
IRS position on these specific matters and in March 2009 filed a
protest with the IRS Appeals Office.
The audit of the company’s 2006 and 2007 U.S. income tax
returns commenced in the first quarter of 2009. The company
anticipates that this audit will be completed by the end of 2010.
The company has not provided deferred taxes on $26.0
billion of undistributed earnings of non-U.S. subsidiaries at
December 31, 2009, as it is the company’s policy to indefinitely
reinvest these earnings 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 pages 47 to 49.
Note Q.
Research, Development
and Engineering
RD&E expense was $5,820 million in 2009, $6,337 million in
2008 and $6,153 million in 2007.
The company incurred expense of $5,523 million in 2009,
$6,015 million in 2008 and $5,754 million in 2007 for scien-
tific research and the application of scientific advances to the
development of new and improved products and their uses, as
well as services and their application. Within these amounts,
software-related expense was $2,991 million, $3,359 million and
$3,037 million in 2009, 2008 and 2007, respectively. In addition,
included in the expense was a charge of $24 million in 2008 for
acquired IPR&D.
Expense for product-related engineering was $297 million,
$322 million and $399 million in 2009, 2008 and 2007, respectively.
103