Expedia 2008 Annual Report Download - page 102

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:
2008 2007 2006
Year Ended December 31,
(In thousands)
Income tax (benefit) expense at the federal statutory rate of 35% . . $(880,146) $173,944 $134,714
Non-deductible goodwill impairment ....................... 855,550 — —
State income taxes, net of effect of federal tax benefit .......... 11,317 9,844 4,813
Unrecognized tax benefits and related interest ................ 12,525 4,211 —
Other, net ........................................... 6,720 15,115 (76)
Income tax expense .................................... $ 5,966 $203,114 $139,451
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 income and 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.
On January 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation
of FASB Statement No. 109. A reconciliation of the beginning and ending amount of gross unrecognized tax
benefits is as follows, in thousands:
Balance at January 1, 2007 ............................................... $ 63,710
Increases to tax positions related to the current year ............................ 104,231
Interest and penalties ................................................... 5,652
Balance at December 31, 2007 ............................................ 173,593
Increases to tax positions related to the current year ............................ 15,883
Decreases to tax positions related to the prior year ............................. (22,520)
Audit settlements paid during 2008 ......................................... (4,911)
Interest and penalties ................................................... 17,794
Balance at December 31, 2008(1) .......................................... $179,839
(1) As of December 31, 2008, we had $180 million of unrecognized tax benefits, of which $190 million is
classified as long-term and included in Other long-term liabilities.
Included in the balance at December 31, 2008 and 2007 were $68 million and $17 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, 2008 were $122 million, of which $3 million and $95 million was added in 2008
and 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 time as it were actually realized by IAC. Therefore, an
unfavorable outcome related to this position would not materially impact our cash flows.
We recognize interest and penalties related to our liabilities for uncertain tax positions in income tax
expense. As of December 31, 2008 and 2007, we had approximately $24 million and $11 million accrued for
the potential payment of estimated interest and penalties. During the years ended December 31, 2008, 2007
F-30
Expedia, Inc.
Notes to Consolidated Financial Statements — (Continued)