VMware 2009 Annual Report Download - page 92

Table of Contents
VMWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
amount equal to the tax benefit generated by VMware that EMC will recognize on its consolidated federal income tax return. During the year
ended December 31, 2009, EMC paid VMware $107.6 million of the income tax receivable. The remainder of the receivable was reclassified to
deferred taxes and equity as a result of comparing the federal tax provision to the final tax return. During the year ended December 31, 2009,
VMware paid EMC $14.2 million for VMware’s portion of EMC’
s consolidated federal and state income taxes for various periods, as well as the
conclusion of the 2005 and 2006 federal income tax audit. The timing of the tax payments due to and from EMC is governed by the tax sharing
agreement with EMC.
The difference between the income taxes payable that is calculated on a separate return basis and the amount actually paid to EMC
pursuant to VMware’s tax sharing agreement is presented as a component of additional paid-in capital. These differences resulted in a decrease
in additional paid-in capital of $8.0 million and $2.5 million in the years ended December 31, 2009 and 2007, respectively, and an increase in
additional paid-in capital of $5.2 million in the year ended December 31, 2008.
As of December 31, 2009, VMware had gross unrecognized tax benefits totaling $80.8 million, which excludes $4.2 million of offsetting
tax benefits. As of December 31, 2008, VMware had gross unrecognized tax benefits totaling $46.1 million, which excludes $2.4 million of
offsetting tax benefits. The net unrecognized tax benefits of $78.0 million as of December 31, 2009 includes $66.4 million that, if recognized,
would benefit VMware’s effective income tax rate, the remaining $11.6 million will be a reduction to goodwill if recognized within the
measurement period in accordance with generally accepted accounting principles. Any portion of the $11.6 million recognized outside the
measurement period will be a reduction to tax expense. VMware cannot reasonably estimate the amounts that would be recorded to goodwill and
the Company’s consolidated statements of income. It is reasonably possible that VMware may pay an immaterial amount of the $78.0 million of
net unrecognized tax benefits within the next 12 months. However, based on the status of audit examinations and the protocol of finalizing
audits, it is not possible to estimate the amount to be paid within the next 12 months. The $78.0 million of net unrecognized tax benefits were
classified as a non-current liability on the consolidated balance sheet.
VMware recognizes interest expense and penalties related to income tax matters in the income tax provision. VMware had accrued $1.2
million of interest as of January 1, 2009 and $3.9 million of interest as of December 31, 2009 associated with net unrecognized tax benefits.
These amounts are included as components of the $78.0 million net unrecognized tax benefits at December 31, 2009 and $45.2 million net
unrecognized tax benefits at December 31, 2008. Income tax expense for the year ended December 31, 2009 included interest of $1.9 million
associated with uncertain tax positions, and goodwill as of December 31, 2009 was increased for interest of $0.8 million associated with
uncertain tax positions related to acquisitions made during 2009.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest associated with unrecognized
tax benefits, is as follows (table in thousands):
89
For the Year Ended
December 31,
2009 2008
Balance, beginning of the year
$
48,407
$
19,198
Tax positions related to current year:
Additions
38,153
30,089
Tax positions related to prior years:
Additions
—
503
Reductions
(3,169
)
—
Foreign currency effects
1,579
(1,383
)
Balance, end of the year
$
84,970
$
48,407