Xerox 2008 Annual Report Download - page 84

Notes to the Consolidated
Financial Statements
(in millions, except per share data and
unless otherwise indicated)
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, 2008, we had tax credit carryforwards of $552
available to offset future income taxes, of which $213 are
available to carryforward indefinitely while the remaining $339 will
begin to expire, if not utilized, in 2009. We also had net operating
loss carryforwards for income tax purposes of $345 that will expire
in 2009 through 2024, if not utilized, and $2.3 billion available to
offset future taxable income indefinitely.
Note 16 – Contingencies
Brazil Tax and Labor Contingencies
Our Brazilian operations are 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 for the equivalent
payment of all social security and other related labor benefits, as
well as consequential tax claims, as if they were regular employees.
Following our assessment of the most recent trend in the outcomes
of these matters, we reassessed the probable estimated loss and,
as a result, recorded an additional reserve of $36 in 2008. As of
December 31, 2008, the total amounts related to the unreserved
portion of the tax and labor contingencies, inclusive of any related
interest, amounted to approximately $839, with the decrease from
December 31, 2007 balance of $1.1 billion primarily related to
currency partially offset by the additional reserve. In connection
with the above proceedings, customary local regulations may
require us to make escrow cash deposits or post other security of
up to half of the total amount in dispute. As of December 31, 2008
we had $167 of escrow cash deposits for matters we are disputing
and there are liens on certain Brazilian assets with a net book value
of $30 and additional letters of credit of approximately $88.
Generally, any escrowed amounts would be refundable and any
liens would be removed to the extent the matters are resolved in
our favor. We routinely assess all these matters as to probability of
ultimately incurring a liability against our Brazilian operations and
record our best estimate of the ultimate loss in situations where we
assess the likelihood of an ultimate loss as probable.
Legal Matters
As more fully discussed below, we are involved in a variety of
claims, lawsuits, investigations and proceedings concerning
securities law, intellectual property law, environmental law,
employment law and the Employee Retirement Income Security
Act (“ERISA”). We determine whether an estimated loss from a
contingency should be accrued by assessing whether a loss is
deemed probable and can be reasonably estimated. We assess our
potential liability by analyzing our litigation and regulatory matters
using available information. We develop our views on estimated
losses in consultation with outside counsel handling our defense in
these matters, which involves an analysis of potential results,
assuming a combination of litigation and settlement strategies.
Should developments in any of these matters cause a change in
our determination as to an unfavorable outcome and result in the
need to recognize a material accrual, or should any of these
matters result in a final adverse judgment or be settled for
significant amounts, they could have a material adverse effect on
our results of operations, cash flows and financial position in the
period or periods in which such change in determination, judgment
or settlement occurs.
The following is a summary of significant developments in
litigation matters:
•Carlson v. Xerox Corporation, et al. – settlement reached,
approved by the district court and paid.
•In re Xerox Corp. ERISA Litigation – settlement reached and
preliminary court approval granted.
•Florida State Board of Administration, et al v. Xerox
Corporation, et al. – settlement reached and paid.
•National Union Fire Insurance Company v. Xerox
Corporation, et al. – settlement reached and payment made to
Xerox.
•Digwamaje et al. v. IBM et al. – amended complaint drops
Xerox as a defendant.
•Warren, et al. v. Xerox Corporation – settlement received final
court approval and was paid.
82 Xerox 2008 Annual Report