American Home Shield 2007 Annual Report Download - page 66

Notes to the Consolidated Financial Statements
complexity of the matters under review and the extended period of time effectively covered by the IRS' examination were recorded.
This resulted in a non-cash reduction in the Company's 2004 income tax provision, thereby increasing 2004 consolidated net
income by approximately $159 million ($150 million related to continuing operations and $9 million related to discontinued
operations).
The U.S. Federal tax returns filed by the Company through the calendar year 2005 return have been reviewed by the IRS. The
Company paid $3 million (primarily in the first quarter of 2006) relating to the resolution of the 2003 and 2004 audits. In the fourth
quarter of 2006, the IRS completed the audit of the Company's tax return for 2005 with no adjustments or additional payments
required.
The reconciliation of income tax computed at the U.S. federal statutory tax rate to the Company's effective income tax rate for
continuing operations is as follows:
2006 2005 2004
Tax at U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local income
taxes, net of U.S.
federal benefit 3.5 3.3 3.6
Adjustment relating to the IRS agreement — (55.3)
Tax credits (0.7) (1.0) (0.7)
State NOL not previously recorded (2.0) — —
Other (1.8) 1.4 0.5
Effective rate 34.0% 38.7% (16.9%)
The effective tax rate for discontinued operations was a tax benefit of 0.0% in 2006 and included the impact of non-deductible
goodwill and tax expense of 39.5% in 2005. In 2004, the effective tax rate for discontinued operations was a tax benefit of 72.7%
and included a $9 million reduction in the tax provision resulting from the Company's comprehensive agreement with the Internal
Revenue Service.
Income tax expense from continuing operations is as follows:
(In thousands) 2006
Current Deferred Total
U.S. federal $ 71,091 $ 20,834 $ 91,925
State and local 3,199 937 4,136
$ 74,290 $ 21,771 $ 96,061
2005
Current Deferred Total
U.S. federal $ 12,393 $ 87,813 $ 100,206
State and local 1,723 12,208 13,931
$ 14,116 $ 100,021 $ 114,137
2004
Current Deferred Total
U.S. federal $ 129,943 $ (155,901) $ (25,958)
State and local 10,429 (30,250) (19,821)
$ 140,372 $ (186,151) $ (45,779)
Deferred income tax expense results from timing differences in the recognition of income and expense for income tax and financial
reporting purposes. Deferred income tax balances reflect the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting and income tax purposes. The deferred tax asset primarily reflects the impact of
future tax deductions related to the Company's accruals and certain net operating loss carryforwards. Management believes that,
based upon its history of profitable operations, it is probable that its deferred tax assets will be realized, primarily from the
generation of future taxable income. The deferred tax liability is primarily attributable to the basis differences related to intangible
assets.
In 2002, the Company adopted SFAS 142 which eliminated the requirement to record in the financial statements amortization
expense related to goodwill and intangible assets with indefinite lives. The Company is able to continue to amortize the intangible
assets for tax purposes which will yield an average annual tax benefit of approximately $50 to $55 million through 2012 for which
no corresponding income statement benefit is recorded. Subsequent to 2012, the benefit from the step-up in tax basis that resulted