Raytheon 2006 Annual Report Download - page 106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We are actively engaged in discussions with the Appeals Division that could result in a settlement of the claim within the
next 12 months. Such a settlement could have a material effect on our provision for income taxes and the results of
operations in the period in which it occurs. Should no settlement be reached with the Appeals Division, the matter would
proceed to litigation. We believe adequate provisions for all outstanding issues have been made for all open years.
Net amounts accrued for potential tax assessments totaled $230 million at December 31, 2006 which were recorded in
non-current assets and non-current liabilities. Amounts accrued at December 31, 2005 totaled $247 million. Accruals and
matters under consideration by the IRS or other tax authorities relate to U.S. federal tax matters and taxation of foreign
earnings and include items such as the tax benefits from the FSC and Extraterritorial Income (ETI) regimes, the amount
of research tax credits, allocation of income among various tax jurisdictions, issues related to various acquisitions and
divestitures and various other federal and foreign tax issues. Amounts asserted by taxing authorities could be greater than
our accrued position. Accordingly, additional provisions on federal and foreign tax-related matters could be recorded in
the future as revised estimates are made or the underlying matters are settled or otherwise resolved.
The American Jobs Creation Act of 2004 (the “Jobs Creation Act”) repealed and provided transitional relief for the ETI
regime for transactions after December 31, 2004. The Jobs Creation Act also provides a deduction for income derived
from qualifying domestic production activities that is phased in over the 2005 – 2010 period. The deduction is equal to
3% of qualifying income in 2005 and 2006, 6% in 2007, 2008 and 2009, and 9% thereafter. The Jobs Creation Act also
extended the carryover period for foreign tax credits from 5 to 10 years and reinstated the research and development tax
credit. We recorded a tax benefit of $42 million in 2004 primarily related to the extension of the carryover period.
In addition, the Jobs Creation Act created a temporary incentive for U.S. corporations to repatriate accumulated income
earned abroad by providing a deduction for certain dividends from controlled foreign corporations equivalent to 85% of
the dividends received. We recorded a $5 million tax expense in 2005 in connection with a repatriation of $110 million
completed pursuant to the Jobs Creation Act.
In December 2006 the Tax Relief and Health Care Act of 2006 was enacted. This legislation retroactively reinstated the
research tax credit for 2006. As a result we recorded a discrete benefit of $6 million in the fourth quarter representing the
benefit for the full year. The Tax Relief and Health Care Act of 2006 also extended and modified the research tax credit
for 2007.
Deferred federal and foreign income taxes consisted of the following at December 31:
(In millions) 2006 2005
Current deferred tax assets (liabilities)
Other accrued expenses $ 272 $ 290
Accrued salaries and wages 93 140
Contracts in process and inventories (108) (75)
Deferred federal and foreign income taxes—current $ 257 $ 355
Noncurrent deferred tax assets (liabilities)
Net operating loss and tax credit carryforwards $ 160 $ 279
Pension benefits 401 374
Other retiree benefits 510 176
Depreciation and amortization (864) (820)
Revenue on leases and other (18) (68)
Deferred federal and foreign income taxes—noncurrent $ 189 $ (59)
There were $3 million of taxes refundable included in prepaid expenses and other current assets at December 31, 2006
and 2005. Federal tax expense related to discontinued operations was $90 million, $60 million and $30 million in 2006,
2005 and 2004, respectively.
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