Southwest Airlines 2000 Annual Report Download - page 37

11. INCOME TAXES
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The components of
deferred tax assets and liabilities at December 31, 2000 and
1999, are as follows:
(In thousands)2000 1999
DEFERRED TAX LIABILITIES:
Accelerated depreciation $ 1,049,791 $ 862,620
Scheduled airframe
maintenance 71,519 52,890
Other 23,805 24,637
Total deferred tax liabilities 1,145,115 940,147
DEFERRED TAX ASSETS:
Deferred gains from sale and
leaseback of aircraft 107,686 113,611
Capital and operating leases 77,151 72,554
Other 135,418 82,569
Total deferred tax assets 320,255 268,734
Net deferred tax liability $ 824,860 $ 671,413
The provision for income taxes is composed of the
following:
(In thousands)2000 1999 1998
CURRENT:
Federal $ 197,875 $ 137,393 $ 143,989
State 26,671 18,900 19,357
Total current 224,546 156,293 163,346
DEFERRED:
Federal 151,694 128,984 96,237
State 15,900 13,956 12,098
Total deferred 167,594 142,940 108,335
$ 392,140 $ 299,233 $ 271,681
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 there is no
deficiency in the Company’s tax liability for the taxable years
in issue.
On December 21, 2000, the national office of the IRS
published a revenue ruling in which it concluded that aircraft
inspection and maintenance, substantially the same as that
in issue in the Company’s Tax Court suit, is currently
deductible as an ordinary and necessary business expense.
Counsel for the Company and the IRS soon will engage in
discussions in an attempt to resolve the controversy in
conformity with the IRS revenue ruling and without the
necessity of further litigation. Management believes the final
resolution of this controversy will not have a material adverse
effect upon the financial position or 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)2000 1999 1998
Tax at statutory
U.S. tax rates $ 356,077 $ 270,764 $ 246,789
Nondeductible items 6,801 6,664 5,099
State income taxes, net of
federal benefit 27,671 21,356 20,445
Other, net 1,591 449 (652)
Total income
tax provision $ 392,140 $ 299,233 $ 271,681
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