Health Net 2007 Annual Report Download - page 133

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In 2007, 2006 and 2005, income tax benefits attributable to employee stock option and restricted stock
transactions of $26.2 million, $21.3 million and $21.3 million, respectively, were allocated to stockholders’
equity.
As of December 31, 2007, we had federal and state net operating loss carryforwards of approximately
$110.9 million and $284.9 million, respectively. The net operating loss carryforwards expire at various dates
through 2027.
Limitations on utilization may apply to approximately $92 million and $110.3 million of the federal and
state net operating loss carryforwards, respectively. Accordingly, valuation allowances have been provided to
account for the potential limitations on utilization of these tax benefits. Of the $51.5 million total valuation
allowance, $13.1 million is related to the prior acquisition of a subsidiary. In the event the deferred tax assets for
the net operating loss carryforwards of this subsidiary are realized, the future tax benefits will be allocated to
reduce the associated goodwill.
Our tax provision for 2007 includes the impact of a $30.3 million increase to valuation allowances
established against primarily net operating loss carryforwards and tax credits of a subsidiary for which the future
realizability of these deferred tax assets has become improbable.
Included in our tax provision for 2006 is a $31.8 million tax benefit from the sale of a subsidiary primarily
due to the difference in the amount of goodwill included in the carrying value of the stock prior to sale. The
difference in carrying value and resulting loss on sale has been reported as a permanent difference in accordance
with SFAS No. 109, “Accounting for Income Taxes.” This practice has been consistently applied with respect to
prior, substantially similar transactions.
We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we
increased the liability for unrecognized tax benefits by $77.2 million. Approximately $65.7 million of this
increase also increased deferred tax assets, as the amount relates to tax benefits that we expect will be recognized
but for which there exists uncertainty as to the timing of the benefits. Also included in the $77.2 million increase
is a reclassification of $13.4 million from federal and state taxes payable to the liability for unrecognized
benefits. The reclassification was necessary to properly encompass the potential impact of all uncertain tax
positions within the liability for unrecognized tax benefits. The remaining impact of adopting FIN 48 was $1.9
million increase to retained earnings, recorded as a cumulative-effect adjustment as of January 1, 2007.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, exclusive of related
interest, is as follows:
(Dollars in
millions)
Gross unrecognized tax benefits at January 1, 2007 ................................ $105.5
Decreases in unrecognized tax benefits related to a prior year ....................... (38.4)
Increases in unrecognized tax benefits related to the current year ..................... 7.9
Settlements with taxing authorities ............................................. (16.2)
Lapse in statute of limitations for assessment .................................... (3.7)
Gross unrecognized tax benefits at December 31, 2007 ............................. $ 55.1
Of the $59.8 million total liability at December 31, 2007 for unrecognized tax benefits, approximately $20.5
million would, if recognized, impact the company’s effective tax rate. The remaining $39.3 million would impact
deferred tax assets.
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