Cardinal Health 2008 Annual Report Download - page 120

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more likely than not to expire unutilized. However, to the extent that tax benefits related to these carryforwards
are realized in the future, the reduction in the valuation allowance would be applied against income tax expense,
with the following exception. Subsequent to the fiscal year ended June 30, 2008, the Company completed the
acquisition of Borschow Hospital & Medical Supplies, Inc. If it is determined that some amount of valuation
allowance can be released due to the acquisition, the release could be applied against goodwill. The maximum
amount of potential release to goodwill associated with this transaction is estimated to be $39.7 million.
In the first quarter of fiscal 2008, the Company adopted the provisions of FIN No. 48, “Accounting for
Uncertainty in Income Taxes.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in
the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This standard
provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that
the position will be sustained upon examination, including resolutions of any related appeals or litigation
processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit
that is greater than 50% likely of being realized upon settlement. The cumulative effect of adoption of this
interpretation was a $139.3 million reduction of retained earnings.
The Company had $762.9 million and $596.6 million of unrecognized tax benefits at June 30, 2008 and
July 1, 2007, respectively. Included in the June 30, 2008 and July 1, 2007 balances are $529.1 million and $386.5
million, respectively, of unrecognized tax benefits that, if recognized, would have an impact on the effective tax
rate. The remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly
certain but for which there is uncertainty as to the timing of such deductibility and to tax positions related to
acquired companies in the amount of $18.8 million and $21.0 million at June 30, 2008 and July 1, 2007,
respectively. Recognition of these tax benefits would not affect the Company’s effective tax rate. The Company
includes the full amount of unrecognized tax benefits in deferred income taxes and other liabilities in the
consolidated balance sheets. A reconciliation of the unrecognized tax benefits from July 1, 2007 to June 30, 2008
is as follows:
(in millions)
Balance at July 1, 2007 ............................................. $596.6
Additions for tax positions of the current year ........................... 83.3
Additions for tax positions of prior years ............................... 189.4
Reductions for tax positions of prior years .............................. (75.6)
Settlements with tax authorities ...................................... (7.8)
Expiration of the statute of limitations ................................. (23.0)
Balance at June 30, 2008 ........................................... $762.9
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax
expense. As of June 30, 2008 and July 1, 2007, the Company had $195.4 million and $148.9 million,
respectively, accrued for the payment of interest and penalties. These balances are gross amounts before any tax
benefits and are included in deferred income taxes and other liabilities in the consolidated balance sheets. For the
year ended June 30, 2008, the Company recognized $46.5 million of interest and penalties in the consolidated
statement of earnings.
The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and
various foreign jurisdictions. With few exceptions, the Company is subject to audit by taxing authorities for fiscal
years ending June 30, 2001 through the current fiscal year.
The Internal Revenue Service (“IRS”) currently has ongoing audits of fiscal years 2001 through 2005.
During the three months ended December 31, 2007, the Company was notified that the IRS has transferred
jurisdiction over fiscal years 2001 and 2002 from the Office of Appeals back to the Examinations level to
reconsider previously-unadjusted specific issues. During the three months ended March 31, 2008, the Company
received Notices of Proposed Adjustment (“NPAs”) from the IRS related to fiscal years 2001 through 2005
96