Xerox 2006 Annual Report Download - page 92

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share data and unless otherwise indicated)
A reconciliation of the U.S. federal statutory income tax rate to the consolidated effective income tax rate for the
three years ended December 31, 2006 was as follows:
2006 2005 2004
U.S. federal statutory income tax rate .............................................. 35.0% 35.0% 35.0%
Nondeductible expenses ........................................................ 1.4 3.4 3.4
Effect of tax law changes ....................................................... (1.8) 0.3 (1.5)
Change in valuation allowance for deferred tax assets ................................. 1.4 (4.6) 1.3
State taxes, net of federal benefit ................................................. 1.8 1.6 1.3
Audit and other tax return adjustments ............................................. (62.5) (25.5) 0.7
Tax-exempt income ............................................................ (0.9) (0.7) (0.7)
Dividends on Series B convertible preferred stock .................................... — — (0.6)
Other foreign, including earnings taxed at different rates .............................. (10.5) (10.3) (2.4)
Other ....................................................................... 0.5 0.2 (1.3)
Effective income tax rate .................................................. (35.6)% (0.6)% 35.2%
On a consolidated basis, we paid a total of $76,
$186, and $253 in income taxes to federal, foreign and
state jurisdictions in 2006, 2005 and 2004, respectively.
Total income tax (benefit) expense for the three
years ended December 31, 2006 was allocated as follows
(in millions):
2006 2005 2004
Income taxes on income ...... $(288) $ (5) $340
Common shareholders’
equity(1) ................. (466) (43) (20)
Total ..................... $(754) $(48) $320
(1) This consists of the tax effects of items in
accumulated other comprehensive loss and tax
benefits related to stock option and incentive plans.
2006 includes the effects of the adoption of FAS
158-See Note 1 for further information.
General Tax Contingencies and Audit Resolutions:
We are subject to ongoing tax examinations and
assessments in various jurisdictions. Accordingly, we
may record incremental tax expense based upon the
probable outcomes of such matters. In addition, when
applicable, we adjust the previously recorded tax expense
to reflect examination results. Our ongoing assessments
of the probable outcomes of the examinations and related
tax positions require judgment and can materially
increase or decrease our effective tax rate, as well as
impact our operating results.
2006: In the first quarter 2006, we recognized an
income tax benefit of $24 from the favorable resolution of
certain tax issues associated with our 1999–2003 Internal
Revenue Service (“IRS”) audit which at the time had not
yet been finalized. In the second quarter 2006, we
recognized an income tax benefit of $46 related to the
favorable resolution of certain tax matters associated with
the finalization of foreign tax audits. In the third quarter
2006, we received notice that the U.S. Joint Committee
on Taxation had completed its review of our 1999–2003
IRS audit and as a result of that review our audit for those
years had been finalized. Accordingly, we recorded an
aggregate income tax benefit of $448 associated with the
favorable resolution of certain tax matters from this audit.
The recorded benefit will not result in a significant cash
refund, but we expect it to increase tax credit
carryforwards and reduce taxes otherwise potentially due.
2005: In June 2005, the 1996-1998 IRS audit was
finalized. As a result, we recorded an aggregate second
quarter 2005 net income benefit of $343. $260 of this
benefit, which includes an after-tax benefit of $33 for
interest ($54 pre-tax benefit), is the result of a change in
tax law that allowed us to recognize a benefit for $1.2
billion of capital losses associated with the disposition of
our insurance group operations in those years. The claim
of additional losses and related tax benefits required
review by the U.S. Joint Committee on Taxation, which
was completed in June 2005. The benefit did not result in
a significant cash refund, but increased tax credit
carryforwards and reduced taxes otherwise potentially
due.
90