Expedia 2007 Annual Report Download - page 94

A reconciliation of total income tax expense to the amounts computed by applying the statutory federal
income tax rate to income before income taxes and minority interest is as follows:
2007 2006 2005
(In thousands)
Income tax expense at the federal statutory rate of 35% ...... $173,944 $134,714 $144,855
State income taxes, net of effect of federal tax benefit ........ 9,844 4,813 8,302
Non-deductible stock compensation ..................... 831 13 15,030
Unrealized (gain) loss on derivative ..................... 2,012 (2,848) 2,115
Change in valuation allowance ......................... 2,031 2,537 9,681
Foreign taxes ...................................... 4,878 1,475 3,811
Other, net ........................................ 9,574 (1,253) 2,183
Income tax expense ................................. $203,114 $139,451 $185,977
By virtue of the previously filed separate company and consolidated income tax returns filed with IAC,
we are routinely under audit by federal, state, local and foreign authorities. These audits include questioning
the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Annual
tax provisions include amounts considered sufficient to pay assessments that may result from the examination
of prior year returns. We are no longer subject to tax examinations by tax authorities for years prior to 1998.
In addition, we have a tax allocation agreement with Microsoft Corporation (“Microsoft”) as well as the
Tax Sharing Agreement with IAC. For additional information about these agreements, see Note 15 — Related
Party Transactions.
On January 1, 2007, we adopted FIN 48 Accounting for Uncertainty in Income Taxes — an interpretation
of FASB Statement No. 109. As a result of the adoption of FIN 48, we recognized an approximately
$18.6 million increase in the liability for uncertain tax positions, of which $14.4 million of the increase was
accounted for as an increase to the January 1, 2007 balance of goodwill as the underlying tax positions related
to business combinations and $4.2 million as a reduction to the January 1, 2007 balance of retained earnings.
These amounts do not include the federal tax benefits associated with these positions, which are immaterial. A
reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows, in
thousands:
Balance at January 1, 2007(1) ............................................. $ 63,710
Additions based on tax positions related to the current year ....................... 104,231
Interest ............................................................. 5,652
Balance at December 31, 2007(2) .......................................... $173,593
(1) As of January 1, 2007, we had $63.7 million of unrecognized tax benefits, of which $45.1 million existed
prior to the adoption of FIN 48 and were classified as taxes payable in current liabilities, net of a $2.0 mil-
lion federal benefit.
(2) As of December 31, 2007, we had $173.6 million of unrecognized tax benefits, of which $172.1 million is
classified as long-term and included in Other long-term liabilities on our consolidated balance sheet.
Included in the balance at December 31, 2007 were $17.0 million of liabilities for uncertain tax positions
that, if recognized, would decrease our provision for income taxes. Also included in the balance at December
31, 2007 were $118.9 million, of which $94.6 million was added in 2007, of excess tax benefits that resulted
from our Chairman and Senior Executive’s exercises of stock options during 2007 and 2005. If the IRS were
to make a final determination that IAC and not Expedia were entitled to such deductions, then under the terms
of our Tax Sharing Agreement, IAC would pay to Expedia an amount equal to any such tax benefit at such
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Expedia, Inc.
Notes to Consolidated Financial Statements — (Continued)