Eli Lilly 2010 Annual Report Download - page 75

FORM 10-K
Following is a reconciliation of the income tax expense (benefit) applying the U.S. federal statutory rate to income
(loss) before income taxes to reported income tax expense:
2010 2009 2008
Income tax (benefit) at the U.S. federal statutory tax rate ......................... $2,283.8 $1,875.2 $ (457.7)
Add (deduct)
International operations, including Puerto Rico ............................... (823.3) (741.1) (641.3)
U.S. health care reform tax law change ...................................... 85.1 0.0 0.0
General business credits .................................................. (83.2) (79.4) (58.0)
Government investigation charges .......................................... 0.0 0.6 359.3
Acquisitions and non-deductible acquired IPR&D ............................. 0.0 0.0 1,819.4
IRS audit conclusion ...................................................... 0.0 (54.4) (210.3)
Sundry ................................................................. (6.7) 28.1 (47.1)
Income taxes .............................................................. $1,455.7 $1,029.0 $ 764.3
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
2010 2009
Beginning balance at January 1 ....................................................... $1,351.2 $1,223.2
Additions based on tax positions related to the current year ............................... 186.2 179.1
Additions for tax positions of prior years ................................................ 117.0 170.4
Reductions for tax positions of prior years .............................................. (30.2) (45.1)
Lapses of statutes of limitation ........................................................ (7.0) (3.3)
Settlements ........................................................................ (0.1) (178.8)
Changes related to the impact of foreign currency translation .............................. 2.5 5.7
Balance at December 31 ............................................................. $1,619.6 $1,351.2
The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $1.07 billion
and $836.8 million at December 31, 2010 and 2009, respectively.
We file 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 2005. The IRS began its examination of tax years 2005-2007 during the third quarter of 2008. In the
third quarter of 2009, we settled an IRS administrative appeals matter from the 2001-2004 IRS audit. Considering the
status of the 2005-2007 IRS examination at that time and the settlement of the IRS administrative appeals matter
from the 2001-2004 audit, gross unrecognized tax benefits were reduced approximately $190 million in the third
quarter of 2009. Additionally, in the third quarter of 2009, our income tax expense was reduced by $54.4 million, and
a cash payment of $52.8 million was paid, after utilization of applicable tax credit carryovers.
The IRS continues its examination of tax years 2005-2007. In the first quarter of 2010, we began the process of
advancing the examination procedures to tax years 2008-2009 for certain matters currently being examined in the
2005-2007 audit cycle. We believe it is reasonably possible these IRS examinations will be concluded separately as
follows: first, the conclusion of tax years 2005-2006; and second, the conclusion of tax year 2007 along with certain
matters related to tax years 2008-2009. It is reasonably possible that both of these examinations could conclude
within the next 12 months; however, only matters relating to the resolution of 2005-2006 may be reasonably
estimated at this time. As a result, we currently estimate that gross uncertain tax positions may be reduced up to an
estimated $400 million within the next 12 months. Additionally, our consolidated results of operations could benefit
up to $250 million through a reduction in income tax expense, and we anticipate up to $200 million of cash payments
will be due upon resolution of the 2005-2006 tax years. Resolution of the IRS examination of 2007 and certain
matters related to tax years 2008-2009 is still dependent upon a number of factors, including the potential for formal
administrative and legal proceedings. As a result, it is not possible to estimate the range of the reasonably possible
changes in unrecognized tax benefits that could occur within the next 12 months related to these years, nor is it
possible to estimate the total future cash flows related to these unrecognized tax benefits.
The new U.S. health care legislation (both the primary “Patient Protection and Affordable Care Act” and the “Health
Care and Education Reconciliation Act”) eliminated the tax-free nature of the subsidy we receive for sponsoring
retiree drug coverage that is “actuarially equivalent” to Medicare Part D. This provision is effective January 1, 2013.
While this change has a future impact on our net tax deductions related to retiree health benefits, we were required
to record a one-time charge to adjust our deferred tax asset for this change in the law in the quarter of enactment.
Accordingly, we recorded a non-cash charge of $85.1 million in the first quarter of 2010.
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