Eli Lilly 2008 Annual Report Download - page 58

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FINANCIALS
56
Following is a reconciliation of the income tax expense (benefi t) applying the U.S. federal statutory rate to
income (loss) before income taxes to reported income tax expense:
2008 2007 2006
Income tax (benefi t) at the U.S. federal statutory tax rate . . . . . . . . . $(457.7) $1,356.9 $1,196.3
Add (deduct)
Acquisitions and non-deductible acquired in-process
research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,819.4 208.1 —
International operations, including Puerto Rico . . . . . . . . . . . . . . . (641.3) (450.7) (229.9)
Government investigation charges . . . . . . . . . . . . . . . . . . . . . . . . . . 359.3 — —
IRS audit conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (210.3) — —
General business credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58.0) (60.3) (47.6)
Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47.1) (130.2) (163.5)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 764.3 $ 923.8 $ 755.3
We adopted FIN 48 on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute
for the fi nancial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. As a result of the implementation of FIN 48, we recognized an increase of $8.6 million in the liability for
unrecognized tax benefi ts, and an offsetting reduction to the January 1, 2007 balance of retained earnings. A rec-
onciliation of the beginning and ending amount of gross unrecognized tax benefi ts is as follows:
2008 2007
Beginning balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,657.4 $1,470.8
Additions based on tax positions related to the current year . . . . . . . 115.6 206.4
Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . 288.8 35.6
Reductions for tax positions of prior years. . . . . . . . . . . . . . . . . . . . . . (234.9) (53.1)
Lapses of statutes of limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (216.2) —
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (598.4) (2.3)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,012.3 $1,657.4
The total amount of unrecognized tax benefi ts that, if recognized, would affect our effective tax rate was
$863.8 million at December 31, 2008.
We fi le income tax returns in the U.S. federal jurisdiction and various state, local, and non-U.S. jurisdictions.
We are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations in major taxing
jurisdictions for years before 2002. During the fi rst quarter of 2008, we completed and effectively settled our
Internal Revenue Service (IRS) audit of tax years 2001-2004 except for one matter for which we will seek resolution
through the IRS administrative appeals process. As a result of the IRS audit conclusion, gross unrecognized tax
benefi ts were reduced by approximately $618 million, and the consolidated results of operations were benefi ted by
$210.3 million through a reduction in income tax expense. The majority of the reduction in gross unrecognized tax
benefi ts related to intercompany pricing positions that were agreed with the IRS in a prior audit cycle for which a
prepayment of tax was made in 2005. Application of the prepayment and utilization of tax carryovers resulted in a
refund of approximately $50 million. The IRS began its examination of tax years 2005-2007 during the third quarter
of 2008. We do not believe it is reasonably possible that the total amount of unrecognized tax benefi ts will signifi -
cantly increase or decrease within the next twelve months.
We recognize both accrued interest and penalties related to unrecognized tax benefi ts in income tax expense.
During the years ended December 31, 2008, 2007, and 2006, we recognized income tax expense (benefi t) of
$(118.0) million, $66.6 million, and $51.2 million, respectively, related to interest and penalties. At December
31, 2008 and 2007, our accruals for the payment of interest and penalties totaled $177.6 million and $364.2 mil-
lion, respectively. Substantially all of the expense (benefi t) and accruals relate to interest. The change in the 2008
accrual refl ects the impact of the effective settlement of the IRS audit discussed above.