McKesson 2006 Annual Report Download - page 81

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
service and interest cost components by approximately $1 million and the postretirement benefit obligation by approximately $12 million to
$14 million.
16. Income Taxes
The provision (benefit) for income taxes related to continuing operations consists of the following:
In March 2006, we made a $960 million payment into an escrow account relating to the Securities Litigation as described in more detail in
Financial Note 18 “Other Commitments and Contingent Liabilities.” This payment will be deducted in our 2006 income tax returns and as a
result, our current tax expense decreased and our deferred tax expense increased in 2006 primarily reflecting the utilization of the deferred tax
assets associated with the Securities Litigation. In 2006, we recorded a $14 million income tax expense which primarily relates to a basis
adjustment in an investment and adjustments with various taxing authorities.
In 2005, we recorded an income tax benefit of $390 million for the Securities Litigation which is described in more detail in Financial Note
18. We believe the settlement of the consolidated securities class action and the ultimate resolution of the lawsuits brought independently by
other shareholders will be tax deductible. However, the tax attributes of the litigation are complex and the Company expects challenges from
the taxing authorities, and accordingly such deductions will not be finalized until all the lawsuits are concluded and an examination of the
Company’s tax returns is completed. Accordingly, as of March 31, 2005, we provided a reserve of $85 million for future resolution of these
uncertain tax matters. This reserve was increased to $88 million in 2006. While we believe the tax reserve is adequate, the ultimate resolution
of these tax matters may exceed or be below the reserve.
In 2005, we recorded a $10 million income tax benefit arising primarily from settlements and adjustments with various taxing authorities
and a $3 million income tax benefit primarily due to a reduction of a valuation allowance related to state income tax net operating loss
carryforwards. We believe that the income tax benefit from a portion of these state net operating loss carryforwards will now be realized.
In 2004, we recorded a $23 million income tax benefit relating to favorable tax settlements and adjustments with the U.S. Internal Revenue
Service and with various other taxing authorities. A large portion of this benefit, which was not previously recognized by the Company,
resulted from the filing of amended tax returns by our subsidiary, McKesson Information Solutions LLC (formerly known as HBO & Company
(“HBOC”)) for the years ended December 31, 1998 and 1997.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining the estimated
worldwide provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the
ultimate tax determination is uncertain. We recognize liabilities for anticipated tax audit issues based on estimates of whether additional
amounts will be due. As of March 31, 2006, approximately $274 million has been accrued for such matters, including our tax reserves for the
Securities Litigation. To the extent that the final tax outcome of these matters is different from the amounts that were initially recorded, such
differences will impact the income tax provision in the period in which such determination is made.
76
Years Ended March 31,
(In millions) 2006 2005 2004
Current
Federal $ (18) $ 232 $154
State and local 18 (6)15
Foreign 16 18 24
Total current 16 244 193
Deferred
Federal 361 (277)74
State and local 38 (53) 2
Foreign 6 1 (6)
Total deferred 405 (329) 70
Income tax provision (benefit) $421 $ (85) $263