UPS 2005 Annual Report Download - page 92

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 14. INCOME TAXES
The income tax expense (benefit) for the years ended December 31 consists of the following (in millions):
2005 2004 2003
Current:
U.S. Federal ...................................................... $1,683 $1,675 $1,103
U.S. State & Local ................................................. 176 71 112
Non-U.S.......................................................... 135 98 86
Total Current ................................................. 1,994 1,844 1,301
Deferred:
U.S. Federal ...................................................... 211 (155) 181
U.S. State & Local ................................................. 6 (84) (11)
Non-U.S.......................................................... (6) (16) 1
Total Deferred ................................................ 211 (255) 171
Total ........................................................ $2,205 $1,589 $1,472
Income before income taxes includes income of non-U.S. subsidiaries of $337, $270, and $237 million in
2005, 2004, and 2003, respectively.
A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended
December 31 consists of the following:
2005 2004 2003
Statutory U.S. federal income tax rate ................................... 35.0% 35.0% 35.0%
U.S. state & local income taxes (net of federal benefit) ...................... 2.0 1.2 1.5
Other ............................................................. (0.7) (3.9) (2.8)
Effective income tax rate ............................................. 36.3% 32.3% 33.7%
During the third quarter of 2004, we recognized a $99 million reduction of income tax expense related to the
favorable settlement of various U.S. federal tax contingency matters with the IRS pertaining to tax years 1985
through 1998, and various state and non-U.S. tax contingency matters.
During the fourth quarter of 2004, we recognized a $109 million reduction of income tax expense primarily
related to the favorable resolution of a U.S. state tax contingency matter, improvements in U.S. state and
non-U.S. effective tax rates, and the reversal of valuation allowances associated with certain U.S. state & local
and non-U.S. net operating loss and credit carryforwards due to sufficient positive evidence that the related
subsidiaries will be profitable and generate taxable income before such carryforwards expire.
During the first quarter of 2003, we recognized a $55 million reduction of income tax expense due to the
favorable resolution of several outstanding contingency matters with the IRS. During the third quarter of 2003,
we recognized a $22 million credit to income tax expense as a result of a favorable tax court ruling in relation to
an outstanding contingency matter with the IRS.
After filing our 2002 state tax returns during the fourth quarter of 2003, we completed a review of the
taxability of our operations in various U.S. state taxing jurisdictions and the effects of available state tax credits.
As a result of this review, we recorded a decrease of $39 million in the income tax provision in the fourth quarter
of 2003. This decrease includes a reduction in our estimated state tax liabilities and the effect of the estimated
state income tax effective rate applied to our temporary differences.
F-36