Callaway 2008 Annual Report Download - page 103

assets existing at the time of the acquisition. In the future, if the Company determines that the realization of these
Top-Flite deferred tax assets is more likely than not, the reversal of the related valuation allowance will reduce
goodwill instead of the provision for income taxes. The change in the valuation allowance during 2008 resulted
primarily from the reversal of the allowance related to the energy derivative valuation liability. Based on
management’s assessment, it is more likely than not that the net deferred tax assets will be realized through
future earnings.
A reconciliation of the effective tax rate is as follows:
Year Ended December 31,
2008 2007 2006
Statutory U.S. tax rate ................................................ 35.0% 35.0% 35.0%
State income taxes, net of U.S. tax benefit ................................ 3.6% 3.7% 3.5%
Federal and State tax credits, net of U.S. tax benefit ........................ (0.9)% (1.4)% (1.1)%
Expenses with no tax benefit .......................................... 1.4% 1.4% 5.3%
Domestic manufacturing tax benefits .................................... (0.3)% (0.8)% (0.5)%
Extra-territorial income exclusion benefit ................................ — — (0.8)%
Effect of foreign rate changes .......................................... — 0.2% —
Change in deferred tax valuation allowance ............................... (2.4)% 0.7% 0.3%
Reversal of previously accrued taxes .................................... (1.7)% (1.8)% (8.5)%
Accrual for interest and income taxes related to uncertain tax positions ......... — 1.1% —
Other ............................................................. — 0.1% 0.2%
Effective tax rate .................................................... 34.7% 38.2% 33.4%
In 2008, 2007 and 2006, the tax rate benefited from net favorable adjustments to previously estimated tax
liabilities in the amount of $1,716,000, $1,620,000 and $2,983,000, respectively. The most significant favorable
adjustments in each year related to adjustments resulting from the finalization of the Company’s prior year U.S.
and state income tax returns as well as agreements reached with the Internal Revenue Service (“IRS”) and other
major jurisdictions on certain issues necessitating a reassessment of the Company’s tax exposures for all open tax
years, with no individual year being significantly affected.
Effective January 1, 2007, the Company was required to adopt and implement the provisions of FIN 48,
which requires the Company to accrue for the estimated additional amount of taxes for uncertain tax positions if
it is more likely than not that the Company would be required to pay such additional taxes. An uncertain income
tax position will not be recognized if it has less than 50% likelihood of being sustained. As a result of the
adoption of FIN 48 in 2007, the Company recognized an increase in the liability for its uncertain tax positions of
$437,000, of which the entire charge was accounted for as a decrease to the beginning balance of retained
earnings. The accrual for uncertain tax positions can result in a difference between the estimated benefit recorded
in the Company’s financial statements and the benefit taken or expected to be taken in the Company’s income tax
returns. This difference is generally referred to as an “unrecognized tax benefit.”
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
2008 2007
Balance at January 1 ......................................................... $16,850 $23,632
Additions based on tax positions related to the current year ...................... 2,441 2,122
Additions for tax positions of prior years ..................................... 1,588 666
Reductions for tax positions of prior years—Other ............................. (156) (1,063)
Reductions for tax positions of prior years—Bilateral Advanced Pricing Agreement
between U.S. and Japan ................................................. — (8,239)
Settlements ............................................................ (2,327) (258)
Reductions due to lapsed statute of limitations ................................. (1,871) (10)
Balance at December 31 ...................................................... $16,525 $16,850
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