Xerox 2004 Annual Report Download - page 72

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in the near term if actual future income or income tax
rates are lower than estimated, or if there are differences
in the timing or amount of future reversals of existing
taxable or deductible temporary differences.
At December 31, 2004, we had tax credit carryfor-
wards of $289 available to offset future income taxes,
of which $183 is available to carryforward indefinitely
while the remaining $106 will begin to expire, if not uti-
lized, in 2005. We also had net operating loss carryfor-
wards for income tax purposes of $252 that will expire
in 2005 through 2024, if not utilized, and $2.4 billion
available to offset future taxable income indefinitely.
From 1995 through 1998, we incurred capital
losses from the disposition of our insurance group
operations. Such losses were disallowed under the tax
law existing at the time of the respective dispositions.
As a result of IRS regulations issued in 2002, some
portion of the losses could be claimed subject to cer-
tain limitations. Wehave filed amended tax returns for
1995 through 1998 reporting $1.2 billion of additional
capital losses. As of December 31, 2004 we have $474
of capital gains available to be offset by these capital
losses and could realize a potential tax and related
interest benefit of approximately $195. We could also
realize additional income tax and related interest
benefits of $55associated with the further utilization
of these capital losses against a prior business sale.
The additional losses claimed and related tax benefits
are subject to formal review bythe U.S.government,
which is currently in process. We will not recognize
anytax benefitof these losses until this review has
reached a stage that wecan estimate the probability of
afavorable outcome. All remaining capital loss carry-
forwards from this matter expired December 31, 2003.
The aggregate potential tax benefit of approximately
$250 will not result in a significant cash refund, but
will increase tax credit carryforwards and reduce
taxes otherwise potentially due.
Note 14 – Contingencies
Guarantees, Indemnifications and
Warranty Liabilities:
As of December 31, 2004, we have accrued our
estimate of liability incurred under our indemnification
arrangements and guarantees, if any. The following
is a description of arrangements in which we are
aguarantor.
Indemnifications provided as part of contracts
and agreements: We are a party to a variety of
agreements pursuant to which we may be obligated
to indemnify the other party with respect to certain
matters. These obligations arise in the context of con-
tracts that we entered into for the sale or purchase of
businesses or real estate assets, under which we
customarily agree to hold the other party harmless
against losses arising from a breach of representations
and covenants, including obligations to pay rent.
Typically, these relate to such matters as adequate title
to assets sold, intellectual property rights, specified
environmental matters and certain income taxes. In
addition, we have provided guarantees on behalf of
our subsidiaries with respect to real estate leases. In
certain instances, these lease guarantees may remain
in effect subsequent to the sale of the subsidiary.
Furthermore, in certain contracts we have agreed to
indemnify various service providers, trustees and bank
agents from any third party claims related to their per-
formance on our behalf, with the exception of claims
that result from their own willful misconduct or gross
negligence. Also, in certain sales contracts, we have
guaranteed our performance to our customers and
indirectly the performance of third parties with whom
wehave subcontracted for their services.
In each of these circumstances, our payment
is conditioned on the other party making a claim
pursuant to the procedures specified in the particular
contract, which procedures typically allow us to
challenge the other party’sclaims. In the case of lease
guarantees, wemaycontest the liabilities asserted
under the lease. Further, our obligations under these
agreements and guarantees maybe limited in terms
of time and/or amount, and in some instances, we
mayhaverecourse against third parties for certain
payments we made.
Patent indemnifications: In most sales transactions
to resellers of our products, we indemnify against pos-
sible claims of patent infringement caused by our
products or solutions. These indemnifications usually
do not include limits on the claims, provided the claim
is made pursuant to the procedures required in the
sales contract. For the indemnification agreements
discussed above, it is not possible to predict the maxi-
mum potential amount of future payments under
these or similar agreements due to the conditional
nature of our obligations and the unique facts and cir-
cumstances involved in each agreement. Historically,
payments we have made under these agreements did
not have a material effect on our business, financial
condition or results of operations.
Indemnification of Officers and Directors: Our
corporate by-laws require that, except to the extent
expressly prohibited by law, we must indemnify Xerox
Corporation’s officers and directors against judgments,
fines, penalties and amounts paid in settlement,
including legal fees and all appeals, incurred in
connection with civil or criminal action or proceedings,
as it relates to their services to Xerox Corporation and
our subsidiaries. Although the by-lawsprovide no