Office Depot 2008 Annual Report Download - page 68

67
The following is a reconciliation of income taxes at the Federal statutory rate to the provision (benefit) for income
taxes:
(Dollars in thousands) 2008 2007 2006
Federal tax computed at the statutory rate .................................................. $ (552,154) $ 160,522 $ 247,462
State taxes, net of Federal benefit............................................................... (3,838) 8,217 14,166
Foreign income taxed at rates other than Federal ....................................... (29,684) (62,393) (53,762)
Non-deductible goodwill and other impairments ....................................... 356,138 — —
Increase (reduction) in valuation allowance ............................................... 47,151 (34,514) 2,010
Settlement of tax audits .............................................................................. — (941) (3,875)
Non-deductible foreign interest .................................................................. 40,166 2,392 783
Change in accrual estimates relating to uncertain tax positions ................. 3,661 (9,097) (923)
Other items, net .......................................................................................... 39,915 (1,168) (2,297)
Income tax expense (benefit)...................................................................... $ (98,645) $ 63,018 $ 203,564
The following table summarizes the activity related to our unrecognized tax benefits during 2008 and 2007:
(Dollars in thousands) 2008 2007
Beginning Balance.......................................................................................................... $ 110,407 $ 89,762
Additions based on tax positions related to the current year .......................................... 10,767 15,463
Additions for tax positions of prior years ....................................................................... 17,720 19,651
Reductions for tax positions of prior years..................................................................... (19,035) (11,279)
Statute expirations .......................................................................................................... (233) (2,497)
Settlements ..................................................................................................................... — (693)
Ending Balance............................................................................................................... $ 119,626 $ 110,407
Included in the balance of $119.6 million at December 27, 2008, are $104.7 million of net unrecognized tax benefits
that, if recognized, would affect the effective tax rate. The difference of $14.9 million primarily results from federal
tax impacts on state tax issues and positions which if sustained would be fully offset by a valuation allowance.
We file a U.S. federal income tax return and other income tax returns in various states and foreign jurisdictions.
With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations
for years before 2000. Our U.S. federal filings for the years 2000 and 2002 through 2007 are under routine
examination, and it is not anticipated that these audits will be closed prior to the end of 2009. Additionally, the U.S.
federal tax return for 2008 is under concurrent year review. Significant international tax jurisdictions include the
UK, the Netherlands, France and Germany. Generally, we are subject to routine examination for years 2001 and
forward in these jurisdictions. It is reasonably possible that certain of these audits will close within the next 12
months, which could result in a decrease of as much as $22 million or an increase of as much as $19 million to our
accrued uncertain tax positions. Additionally, we anticipate that it is reasonably possible that new issues will be
raised or resolved by tax authorities that may require changes to the balance of unrecognized tax benefits, however,
an estimate of such changes cannot reasonably be made.
We recognize interest related to unrecognized tax benefits in interest expense and penalties in the provision for
income taxes. We recognized interest and penalties of approximately $11.5 million and $8 million in 2008 and 2007,
respectively. We had approximately $47.4 million accrued for the payment of interest and penalties as of December
27, 2008.
In connection with the adoption of FAS 123R, we have elected to calculate our pool of excess tax benefits under the
alternative, or “short-cut” method. At adoption, this pool of benefits was approximately $55.3 million and was
approximately $103.3 million as of December 27, 2008. This pool may increase in future periods if tax benefits
realized are in excess of those based on grant date fair values or may decrease if used to absorb future tax
deficiencies determined for financial reporting purposes under provisions of FAS 123R.