Seagate 2007 Annual Report Download - page 54

Table of Contents
fiscal year 2008 was $34 million. In fiscal years 2007 and 2006, the valuation allowance decreased by $580 million and increased by $327
million respectively. The fiscal year 2007 valuation allowance release was largely due to the completion during 2007 of the restructuring of the
Company’s intercompany arrangements, which enables the Company to forecast future U.S. taxable income with greater certainty and U.S.
taxable income from the intercompany sale of certain Maxtor assets.
As of June 27, 2008, we recorded net deferred tax assets of $890 million. The realization of $808 million of these deferred tax assets is
primarily dependent on our ability to generate sufficient U.S. and certain foreign taxable income in future periods. Although realization is not
assured, we believe that it is more likely than not that these deferred tax assets will be realized. The amount of deferred tax assets considered
realizable, however, may increase or decrease, when we reevaluate the underlying basis for our estimates of future U.S. and certain foreign
taxable income.
As a result of the Maxtor acquisition, Maxtor underwent a change in ownership within the meaning of IRC Section 382 on May 19, 2006.
In general, IRC Section 382 places annual limitations on the use of certain tax attributes such as net operating losses and tax credit carryovers in
existence at the ownership change date. As of June 27, 2008, $ 1.3 billion and $337 million of U.S. federal and state net operating losses,
respectively, and $36 million of tax credit carryovers acquired from Maxtor are generally subject to an annual limitation of approximately $110
million. Certain amounts may be accelerated into the first five years following the acquisition pursuant to IRC Section 382 and published
notices.
On January 3, 2005, we underwent a change in ownership under IRC Section 382 due to the sale of common shares to the public by our
then largest shareholder, New SAC. Based on an independent valuation as of January 3, 2005, the annual limitation for this change is $44.8
million. As of June 27, 2008, there were $453 million of U.S. net operating loss carryforwards and $110 million of U.S. tax credit carryforwards
subject to IRC Section 382 limitation associated with the January 3, 2005 change. To the extent we believe it is more likely than not that the
deferred tax assets associated with tax attributes subject to this IRC Section 382 limitation will not be realized, a valuation allowance has been
provided.
Effective at the beginning of the first quarter of fiscal year 2008, we adopted the provisions of Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 contains a two-step approach to recognizing and
measuring uncertain tax positions accounted for in accordance with FASB Statement (SFAS) No. 109, Accounting for Income Taxes (SFAS
No. 109). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more
likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step
is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
As a result of the implementation of FIN 48, we increased our liability for net unrecognized tax benefits at the date of adoption. We
accounted for the increase primarily as a cumulative effect of a change in accounting principle that resulted in a decrease to retained earnings of
$3 million and an increase to goodwill of $25 million. The total amount of gross unrecognized tax benefits as of the date of adoption was $385
million excluding interest and penalties. At June 27, 2008, we had approximately $374 million in total unrecognized tax benefits excluding
interest and penalties. The total unrecognized tax benefits that, if recognized, would impact the effective tax rate were $63 million and $75
million as of June 29, 2007 and June 27, 2008, respectively.
Our policy to include interest and penalties related to unrecognized tax benefits in the provision for taxes on the Condensed Consolidated
Statements of Operations did not change as a result of implementing the provisions of FIN 48. As of the date of adoption of FIN 48, we had
accrued approximately $19 million for the payment of interest and penalties relating to unrecognized tax benefits. This accrual increased by $3
million to approximately $22 million as of June 27, 2008.
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