Union Pacific 2006 Annual Report Download - page 60

For the years ended December 31, reconciliation between statutory and effective tax rates is as follows:
Tax Rate Percentages 2006 2005 2004
Federal statutory tax rate ............................................... 35.0% 35.0% 35.0%
State statutory rates, net of federal benefits ................................. 2.9 2.9 2.9
Deferred tax adjustments ............................................... (0.5) (8.2) (2.9)
Tax credits .......................................................... (1.0) (1.2) (5.6)
Other .............................................................. -0.1 -
Effective tax rate ...................................................... 36.4% 28.6% 29.4%
Deferred income tax liabilities (assets) were comprised of the following at December 31:
Millions of Dollars 2006 2005
Net current deferred income tax asset ............................................ $ (319) $ (304)
Property ................................................................... 9,356 9,216
State taxes, net .............................................................. 617 592
Other ...................................................................... (277) (326)
Net long-term deferred income tax liability ....................................... 9,696 9,482
Net deferred income tax liability ................................................ $9,377 $9,178
All federal income tax years prior to 1995 are closed. Federal income tax liabilities for tax years 1986 through
1994 have been resolved. Interest calculations for these years are in process and may take several years to resolve
with the Internal Revenue Service (IRS). The IRS is examining the Corporation’s federal income tax returns for
tax years 2003 and 2004 and should complete their exam in 2007. The IRS has completed its examinations and
issued notices of deficiency for tax years 1995 through 2002, and we are in the IRS Appeals process for these years.
As previously reported, among their proposed adjustments is the disallowance of tax deductions claimed in
connection with certain donations of property. In the fourth quarter of 2005, the IRS National Office issued a
Technical Advice Memorandum that left unresolved whether the deductions were proper, pending further factual
development. We continue to dispute the donation issue, as well as many of the other proposed adjustments, and
will contest the associated tax deficiencies through the IRS Appeals process, and, if necessary, litigation. We do not
expect that the ultimate resolution of these examinations will have a material adverse effect on our Consolidated
Financial Statements.
As reported in the Corporation’s Forms 10-Q for the quarters ended June 30, 2005, and September 30, 2005,
the final settlements for pre-1995 tax years, along with the IRS Examination Reports for tax years 1995 through
2002, among other things, were considered in a review and re-evaluation of the Corporation’s estimated deferred
tax assets and liabilities. This review resulted in a reduction of deferred income tax liabilities and income tax
expense of $118 million in the third quarter of 2005.
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