Southwest Airlines 1998 Annual Report Download - page 60

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60
SOUTHWEST AIRLINES CO. ¤ SIX STORIES OF FREEDOM
The Company received a statutory notice of deficiency from the Internal Revenue
Service (IRS) in July 1995 in which the IRS proposed to disallow deductions claimed by
the Company on its federal income tax returns for the taxable years 1989 through 1991
for the costs of certain aircraft inspection and maintenance procedures. The IRS has
proposed similar adjustments to the tax returns of numerous other members of the
airline industry. In response to the statutory notice of deficiency, the Company filed a
petition in the United States Tax Court on October 30, 1997, seeking a determination
that the IRS erred in disallowing the deductions claimed by the Company and that there
is no deficiency in the Company’s tax liability for the taxable years in issue. It is
expected that the Tax Court’s decision will not be entered for several years.
Management believes the final resolution of this controversy will not have a material
adverse effect upon the results of operations of the Company.
The effective tax rate on income before income taxes differed from the federal income
tax statutory rate for the following reasons:
(In thousands) 1998 1997 1996
Tax at statutory
U.S. tax rates $246,789 $180,935 $119,477
Nondeductible items 5,099 5,893 5,168
State income taxes, net of federal benefit 20,445 13,166 9,072
Other, net (652) (810) 308
Total income
tax provision $271,681 $199,184 $134,025