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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share data and unless otherwise indicated)
The tax effects of temporary differences that give
rise to significant portions of the deferred taxes at
December 31, 2007 and 2006 were as follows (in
millions):
2007 2006
Tax effect of future tax deductions
Research and development ..... $ 895 $1,133
Post-retirement medical
benefits .................... 577 602
Depreciation .................. 292 261
Net operating losses ........... 576 553
Other operating reserves ....... 216 185
Tax credit carryforwards ....... 434 354
Deferred compensation ........ 249 232
Allowance for doubtful
accounts ................... 100 108
Restructuring reserves .......... 15 70
Pension ....................... 58 274
Other ......................... 181 138
3,593 3,910
Valuation allowance ............... (747) (647)
Total deferred tax assets ........ $ 2,846 $ 3,263
Tax effect of future taxable income
Unearned income and
installment sales ............ $(1,283) $(1,277)
Intangibles and goodwill ....... (142) –
Other ......................... (40) (28)
Total deferred tax liabilities ......... (1,465) (1,305)
Total deferred taxes, net ......... $ 1,381 $ 1,958
The above amounts are classified as current or long-
term in the Consolidated Balance Sheets in accordance
with the asset or liability to which they relate or, when
applicable, based on the expected timing of the reversal.
Current deferred tax assets at December 31, 2007 and
2006 amounted to $200 and $271, respectively.
The deferred tax assets for the respective periods
were assessed for recoverability and, where applicable, a
valuation allowance was recorded to reduce the total
deferred tax asset to an amount that will, more likely than
not, be realized in the future. The net change in the total
valuation allowance for the years ended December 31,
2007 and 2006 was an increase of $100 and an increase
of $57, respectively. The valuation allowance relates
primarily to certain net operating loss carryforwards, tax
credit carryforwards and deductible temporary differences
for which we have concluded it is more likely than not that
these items will not be realized in the ordinary course of
operations.
Although realization is not assured, we have
concluded that it is more-likely-than-not that the deferred
tax assets for which a valuation allowance was
determined to be unnecessary, will be realized in the
ordinary course of operations based on the available
positive and negative evidence, including scheduling of
deferred tax liabilities and projected income from
operating activities. The amount of the net deferred tax
assets considered realizable, however, could be reduced 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, 2007, we had tax credit
carryforwards of $434 available to offset future income
taxes, of which $240 are available to carryforward
indefinitely while the remaining $194 will begin to expire,
if not utilized, in 2008. We also had net operating loss
carryforwards for income tax purposes of $255 that will
expire in 2008 through 2024, if not utilized, and $2.7
billion available to offset future taxable income
indefinitely.
Note 16 – Contingencies
Brazil Tax and Labor Contingencies
Our Brazilian operations were involved in various
litigation matters and have received or been the subject
of numerous governmental assessments related to
indirect and other taxes as well as disputes associated
with former employees and contract labor. The tax
matters, which comprise a significant portion of the total
contingencies, principally relate to claims for taxes on the
internal transfer of inventory, municipal service taxes on
rentals and gross revenue taxes. We are disputing these
tax matters and intend to vigorously defend our position.
Based on the opinion of legal counsel and current reserves
for those matters deemed probable of loss, we do not
believe that the ultimate resolution of these matters will
materially impact our results of operations, financial
position or cash flows. The labor matters principally relate
to claims made by former employees and contract labor
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