McKesson 2013 Annual Report Download - page 83

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
We have federal, state and foreign income tax net operating loss carryforwards of $106 million, $2,697 million and
$309 million. The federal and state net operating losses will expire at various dates from 2014 through 2033. Substantially all
of our foreign net operating losses have indefinite lives. We believe that it is more likely than not that the benefit from certain
state and foreign net operating loss carryforwards may not be realized. In recognition of this risk, we have provided valuation
allowances of $7 million and $84 million on the deferred tax assets relating to these state and foreign net operating loss
carryforwards. We also have federal and state capital loss carryforwards of $1 million and $30 million, which will expire at
various dates from 2014 through 2018. We have provided valuation allowances of $1 million on the deferred tax assets
relating to the state capital loss carryforwards. Recognition of a deferred tax asset for excess tax benefits due to stock option
exercises that have not yet been realized through a reduction in income taxes payable is prohibited. Such unrecognized
deferred tax benefits totaled $10 million as of March 31, 2013 and will be accounted for as a credit to shareholders' equity, if
and when realized through a reduction in income taxes payable.
We also have federal and state income tax credit carryforwards of $91 million, which are primarily federal alternative
minimum tax credit carryforwards that have an indefinite life. However, we believe that it is more likely than not that the
benefit from certain state tax credits of $12 million may not be fully realized. In recognition of this risk, we have provided a
valuation allowance of $2 million. In addition, we have Canadian research and development credit carryforwards of
$11 million, and we believe it is more likely than not that these credits will be realized. The Canadian research and
development credits will expire at various dates from 2029 to 2032.
The following table summarizes the activity related to our gross unrecognized tax benefits for the last three years:
Years Ended March 31,
(In millions) 2013 2012 2011
Unrecognized tax benefits at beginning of period $ 595 $ 635 $ 619
Additions based on tax positions related to prior years 46 11 32
Reductions based on tax positions related to prior years (108) (72) (60)
Additions based on tax positions related to current year 31 37 50
Reductions based on settlements (2) (1) (6)
Reductions based on the lapse of the applicable statutes of limitations (2) (15)
—
Unrecognized tax benefits at end of period $ 560 $ 595 $ 635
Of the total $560 million in unrecognized tax benefits at March 31, 2013, $402 million would reduce income tax expense
and the effective tax rate if recognized. During the next twelve months, it is reasonably possible that audit resolutions and the
expiration of statutes of limitations could potentially reduce our unrecognized tax benefits by up to $173 million. However,
this amount may change because we continue to have ongoing negotiations with various taxing authorities throughout the
year.
We report interest and penalties on tax deficiencies as income tax expense. We recognized a reduction in income tax
expense of $8 million, before any tax effect, related to interest and penalties in our consolidated statements of operations
during 2013. The income tax benefit for interest recognized during 2013 was primarily due to the reversal of accrued interest
resulting from the reduction of our gross unrecognized tax benefits. At March 31, 2013, before any tax benefits, our accrued
interest and penalties on unrecognized tax benefits amounted to $131 million.
8. Discontinued Operation
In July 2010, our Technology Solutions segment sold its wholly-owned subsidiary, McKesson Asia Pacific Pty Limited
(“MAP”), a provider of phone and web-based healthcare services in Australia and New Zealand, for net sales proceeds of
$109 million. The divestiture generated a pre-tax and after-tax gain of $95 million and $72 million. As a result of the sale, we
were able to utilize capital loss carry-forwards for which we previously recorded a valuation allowance of $15 million. The
release of the valuation allowance is included as a tax benefit in our after-tax gain on the divestiture. The after-tax gain on
disposition was recorded as a discontinued operation in our consolidated statement of operations in 2011. The historical
financial operating results and net assets of MAP were not material to our consolidated financial statements for all periods
presented.