IBM 2010 Annual Report Download - page 109

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies 107
Deferred Tax Liabilities
($ in millions)
At December 31: 2010 2009
Leases $1,950 $2,129
Depreciation 1,223 1,138
Goodwill and intangible assets 909 639
Software development costs 638 409
Retirement benefits 338 389
Other 1,114 874
Gross deferred tax liabilities $6,172 $5,578
For income tax return purposes, the company has foreign and
domestic loss carryforwards, the tax effect of which is $909 million,
as well as domestic and foreign credit carryforwards of $797 million.
Substantially all of these carryforwards are available for at least
two years or are available for 10 years or more.
The valuation allowance at December 31, 2010 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 valu-
ation allowance will reduce income tax expense. The year-to-year
change in the allowance balance was a decrease of $17 million.
The amount of unrecognized tax benefits at December 31, 2010
increased by $503 million in 2010 to $5,293 million. A reconciliation
of the beginning and ending amount of unrecognized tax benefits
is as follows:
($ in millions)
2010 2009 2008
Balance at January 1 $ 4,790 $3,898 $3,094
Additions based on tax positions
related to the current year 1,054 554 1,481
Additions for tax positions of prior years 1,768 634 747
Reductions for tax positions
of prior years (including impacts
due to a lapse in statute) (1,659) (277) (1,209)
Settlements (660) (19) (215)
Balance at December 31 $ 5,293 $4,790 $3,898
The additions to 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 state
issues. The settlements and reductions to unrecognized tax
benefits for tax positions of prior years are primarily related to
non-U.S. audits and to the conclusion of the IRS examination of
the company’s income tax returns for 2006 and 2007 discussed on
page 106, as well as impacts due to lapses in statutes of limitation.
In April 2010, the company appealed the determination of a
non-U.S. local taxing authority with respect to certain foreign tax
losses. The tax benefit of these losses, approximately $1,475 million,
has been included in unrecognized tax benefits within 2010 addi-
tions for tax positions of prior years. This amount includes the
portion of these losses that had been utilized against a prior year
liability. As this amount was disallowed and a tax payment made
in the first quarter of 2010 it has also been included as part of the
settlements amount for 2010. No final determination has been
reached on this matter.
The liability at December 31, 2010 of $5,293 million can be
reduced by $444 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 $4,849
million, if recognized, would favorably affect the company’s effective
tax rate. The net amounts at December 31, 2009 and 2008 were
$4,213 million and $3,366 million, respectively.
Interest and penalties related to income tax liabilities are
included in income tax expense. During the year ended December
31, 2010, the company recognized a $15 million benefit in interest
expense and penalties; in 2009, the company recognized $193
million in interest expense and penalties, and in 2008, the company
recognized $96 million in interest expense and penalties. The
company has $374 million for the payment of interest and penalties
accrued at December 31, 2010 and had $479 million accrued at
December 31, 2009.
Within the next 12 months, the company believes it is reasonably
possible that the total amount of unrecognized tax benefits asso-
ciated with certain positions may be reduced. The company
expects that certain U.S. federal, foreign and state issues may be
concluded in the next 12 months. The company estimates that the
unrecognized tax benefits at December 31, 2010 could be reduced
by $280 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 2004. The years subsequent to 2004
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 out-
come 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.