Raytheon 2007 Annual Report Download - page 106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We are subject to income taxes in the U.S. and numerous foreign jurisdictions.
In 2007, 2006 and 2005, domestic income before taxes was $2,115 million, $1,735 million and $1,290 million,
respectively, and foreign income before taxes was $110 million, $56 million and $76 million, respectively. Income
reported for federal and foreign tax purposes differs from pretax income due to differences between U.S. Internal
Revenue Code or foreign tax law requirements and our accounting practices. No provision has been made for deferred
taxes on undistributed earnings of non-U.S. subsidiaries as these earnings have been indefinitely reinvested.
Determination of the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable.
Total federal and foreign cash tax payments were approximately $1,115 million, $375 million and $56 million in 2007,
2006 and 2005, respectively.
During 2007, we settled our federal research credit claim for the years 1984-1990 and certain domestic and Foreign Sales
Corporation issues for the years 1989-1997. IRS examinations of our tax returns have been completed through 2002 and
IRS examinations of our tax returns for 2003-2005 began in March 2007. We have protested to the IRS Appeals Division
certain proposed adjustments primarily involving benefits under the Foreign Sales Corporation and Extraterritorial
Income (ETI) exclusion regimes for 1998-2002. We are under audit by a number of state tax authorities. State tax
liabilities will be adjusted to account for any changes in federal taxable income for 1989-2002, as well as any adjustments
in subsequent years, as those years are ultimately resolved with the IRS.
We apply the principles of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), when
accounting for our various tax positions. While we believe we have adequately provided for all tax positions, amounts
asserted by taxing authorities could be greater than our accrued position. Accordingly, additional provisions on federal,
foreign and state tax-related matters could be recorded in the future as revised estimates are made or the underlying
matters are settled or otherwise resolved. As a result of the implementation of FIN 48 on January 1, 2007, we recognized a
$13 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to retained
earnings. The balance of the unrecognized tax benefits at adoption, exclusive of interest, was $500 million, of which $409
million would affect earnings if recognized. The balance of the unrecognized tax benefits at December 31, 2007, exclusive
of interest, was $342 million, of which $250 million would affect earnings if recognized. We recognize interest accrued
related to unrecognized tax benefits in tax expense. As a result, in 2007 we recorded $32 million of gross interest expense,
$21 million net of the federal tax benefit, in tax expense. Penalties, if incurred, would also be recognized as a component
of tax expense. At December 31, 2007 and 2006, respectively, we had approximately $70 million and $60 million of
interest accrued related to unrecognized tax benefits, which, net of the federal tax benefit, was approximately $45 million
and $39 million.
A reconciliation of the beginning and ending amount of our unrecognized tax benefits is as follows:
(In millions)
Unrecognized tax benefits at January 1, 2007 $ 500
Additions based on current year tax positions 63
Reductions based on current year tax positions (1)
Additions for prior year tax positions 34
Reductions for prior year tax positions (7)
Settlements with taxing authorities (247)
Unrecognized tax benefits at December 31, 2007 $ 342
We do not currently believe it is reasonably possible that the total amount of unrecognized tax benefits will significantly
change within the next 12 months.
The provision for state income tax expense is generally accounted for as a deferred contract cost and included in contracts
in process until allocated to our contracts. These deferred amounts are generally allocated to our contracts when paid or
otherwise when agreed as allocable with the U.S. government. State income taxes allocated to contracts was $81 million,
$29 million and $8 million in 2007, 2006 and 2005, respectively, and was included in administrative and selling expenses.
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