SanDisk 2006 Annual Report Download - page 139

Significant components of the Company’s deferred tax assets as of December 31, 2006 and January 1, 2006 were as
follows (in thousands):
December 31,
2006
January 1,
2006
Deferred tax assets:
Inventoryvaluation ....................................... $ 14,600 $ 2,000
Deferred revenue recognized for tax purposes .................... 57,400 51,000
Accruals and reserves not currently deductible ................... 133,800 56,600
Unrealized loss on investments ............................... 24,500 20,400
Fixed assets and amortizable intangibles ........................ 44,800 15,500
Deductible stock options ................................... 19,800 —
Deductible original issue discount............................. 136,700 —
Net operating loss and tax credit carryforwards ................... 53,000 —
Other.................................................. 3,400 5,200
Subtotal: Deferred tax assets .................................. 488,000 150,700
Valuation allowance for deferred tax assets ...................... (60,100) (14,900)
Total deferred tax assets ...................................... $427,900 $135,800
Deferred tax liabilities:
Acquired intangibles ...................................... $ (63,800) $ —
Unrealized gain on sale of foundry shares ....................... (28,200) (19,500)
U.S. taxes provided on unremitted earnings of foreign subsidiaries .... (88,500) (26,500)
Total deferred tax liabilities ................................... (180,500) (46,000)
Total net deferred tax assets ................................... $247,400 $ 89,800
At December 31, 2006, a $60.1 million valuation allowance was provided on gross deferred tax assets, based
upon available evidence that it is more likely than not that some of the deferred tax assets will not be realized. At
January 1, 2006, $14.9 million valuation allowance was provided based, more likely than not, on our inability to
recognize a tax benefit from certain write-downs on the Company’s investment in Tower. The valuation allowance
increased $45.2 million in fiscal 2006 from fiscal 2005, primarily due to acquired deferred tax assets. Should the
Company have the ability to benefit from the valuation allowance in future periods, approximately $45 million
would be credited to goodwill, while the remainder would benefit the income statement.
The Company also has federal and state net operating loss carryforwards of approximately $8 million and
$52 million before federal benefit, respectively. Some net operating losses will begin to expire in fiscal 2012, if not
utilized. The Company also has federal and state research credit carryforwards of approximately $9 million and
$7 million before federal benefit, respectively. Some credit carryforwards will begin to expire in fiscal 2008, if not
utilized. These carryforwards are subject to annual limitations, including Section 382 of the Internal Revenue Code
of 1986, as amended, for U.S. tax purposes and similar state provisions.
No provision has been made for U.S. income taxes or foreign withholding taxes on $55 million of cumulative
unremitted earnings of certain foreign subsidiaries as of December 31, 2006, since the Company intends to
indefinitely reinvest these earnings. If these earnings were distributed to the United States, the Company would be
subject to additional U.S. income taxes and foreign withholding taxes (subject to adjustment for foreign tax credits).
As of December 31, 2006, the unrecognized deferred tax liability for these earnings was $19 million.
The Company’s subsidiary, SanDisk IL Ltd., formerly msystems Ltd., is an “industrial company” under the
Law for the Encouragement of Industry (Taxation), and its production facilities have been awarded “Approved
Enterprise” status by the Israeli government under the Capital Investments Law according to six separate
F-40
Notes to Consolidated Financial Statements — (Continued)