McKesson 2012 Annual Report Download - page 79

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
75
We have federal, state and foreign income tax net operating loss carryforwards of $173 million, $2,456 million
and $249 million. The federal and state net operating losses will expire at various dates from 2013 through 2032.
Substantially all of our foreign net operating losses have indefinite lives. We believe that it is more likely than not
that the benefit from certain state and foreign net operating loss carryforwards may not be realized. In recognition
of this risk, we have provided valuation allowances of $10 million and $66 million on the deferred tax assets relating
to these state and foreign net operating loss carryforwards. We also have federal and state capital loss carryforwards
of $9 million and $28 million, which will expire at various dates from 2013 through 2017. We have provided
valuation allowances of $1 million on the deferred tax assets relating to the state capital loss carryforwards.
Recognition of a deferred tax asset for excess tax benefits due to stock option exercises that have not yet been
realized through a reduction in income taxes payable is prohibited. Such unrecognized deferred tax benefits totaled
$11 million as of March 31, 2012 and will be accounted for as a credit to shareholders’ equity, if and when realized
through a reduction in income taxes payable.
We also have federal and state income tax credit carryforwards of $131 million, which are primarily federal
alternative minimum tax credit carryforwards that have an indefinite life. However, we believe that it is more likely
than not that the benefit from certain state tax credits of $9 million may not be fully realized. In recognition of this
risk, we have provided a valuation allowance of $2 million. In addition, we have Canadian research and
development credit carryforwards of $13 million, and we believe it is more likely than not that these credits will be
realized. The Canadian research and development credits will expire at various dates from 2029 to 2032.
The following table summarizes the activity related to our gross unrecognized tax benefits for the last three
years:
Years Ended March 31,
(In millions) 2012 2011 2010
Unrecognized tax benefits at beginning of period $
635
$ 619 $ 526
Additions based on tax positions related to prior years
11
32 50
Reductions based on tax positions related to prior years
(72)
(60) (12)
Additions based on tax positions related to current year
37
50 72
Reductions based on settlements
(1)
(6) (16)
Reductions based on the lapse of the applicable statutes of
limitations
(15)
— (1)
Unrecognized tax benefits at end of period $
595
$ 635 $ 619
Of the total $595 million in unrecognized tax benefits at March 31, 2012, $387 million would reduce income
tax expense and the effective tax rate if recognized. During the next twelve months, it is reasonably possible that
audit resolutions, the expiration of statutes of limitations and tax accounting method changes could potentially
reduce our unrecognized tax benefits by up to $232 million. However, this amount may change because we
continue to have ongoing negotiations with various taxing authorities throughout the year.
We report interest and penalties on tax deficiencies as income tax expense. At March 31, 2012, before any tax
benefits, our accrued interest on unrecognized tax benefits amounted to $140 million. We recognized an income tax
expense of $7 million, before any tax effect, related to interest in our consolidated statements of operations during
2012. We have no material amounts accrued for penalties.
7. Discontinued Operation
In July 2010, our Technology Solutions segment sold its wholly-owned subsidiary, McKesson Asia Pacific Pty
Limited (“MAP”), a provider of phone and web-based healthcare services in Australia and New Zealand, for net
sales proceeds of $109 million. The divestiture generated a pre-tax and after-tax gain of $95 million and $72
million. As a result of the sale, we were able to utilize capital loss carry-forwards for which we previously recorded
a valuation allowance of $15 million. The release of the valuation allowance is included as a tax benefit in our after-
tax gain on the divestiture. The after-tax gain on disposition was recorded as a discontinued operation in our
consolidated statement of operations in 2011. The historical financial operating results and net assets of MAP were
not material to our consolidated financial statements for all periods presented.