Western Digital 2008 Annual Report Download - page 76

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Income Taxes.” First, the tax position is evaluated for recognition by determining if it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If the tax
position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of
benefit to be recognized in the financial statements. The amount of the benefit that may be recognized is the largest
amount that has a greater than 50% likelihood of being realized upon ultimate settlement.
The adoption of FIN 48 at the beginning of fiscal year 2008 did not result in an adjustment for unrecognized tax
benefits. The total amount of gross unrecognized tax benefits as of the date of adoption was $58 million which had
previously been presented as a reduction to deferred tax assets of $47 million and an inclusion in other long term
liabilities of $11 million as of June 29, 2007. With the exception of certain unrecognized tax benefits that are directly
associated with the tax position taken, unrecognized tax benefits are now presented gross in the Company’s balance sheet.
Interest and penalties related to unrecognized tax benefits are recognized on liabilities recorded for uncertain tax
positions and are recorded in the provision for income taxes. As of the date of adoption of FIN 48, and at June 27, 2008,
such interest and penalties were not material.
As of June 27, 2008 the Company had approximately $107 million of unrecognized tax benefits, which included
$32 million of unrecognized tax benefits related to Komag.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the year:
Unrecognized tax benefit at June 29, 2007 ....................................... $ 58
Gross increases related to prior year tax positions ................................... 35
Gross decreases related to prior year tax positions ................................... —
Gross increases related to current year tax positions ................................. 17
Settlements/lapse of statute of limitations ........................................ (3)
Unrecognized tax benefit at June 27, 2008 ....................................... $107
Gross increases related to prior year tax positions includes $32 million recorded in purchase accounting for the
Komag acquisition.
Included in the balance of unrecognized tax benefits at June 27, 2008 are $75 million of tax benefits that, if
recognized, would affect the effective tax rate.
The Company files U.S. federal, U.S. state, and foreign tax returns. For federal tax returns, the Company is subject
to examination for fiscal years 2004 through 2008. For state returns, with few exceptions, the Company is subject to tax
examinations for 2003 through 2008. In foreign jurisdictions, with few exceptions, the Company is subject to
examination for all years subsequent to fiscal 2000. The Company is no longer subject to examination by the Internal
Revenue Service (“IRS”) for periods prior to 2004 and by the state taxing authorities for periods prior to 2003, although
carry forwards generated prior to those periods may still be adjusted upon examination by the IRS or state taxing
authority if they either have been or will be used in a future period.
The IRS is scheduled to commence an examination of the fiscal years ended 2006 and 2007 for the Company and
calendar years 2005 and 2006 for Komag in August 2008. Additionally, the Company’s French subsidiary is under
examination by the local tax authorities for fiscal years 2003 through 2005.
Due to the risk that audit outcomes and the timing of audit settlements are subject to significant uncertainty, the
Company’s current estimate of the total amounts of unrecognized tax benefits could increase or decrease for all open tax
years. As of June 27, 2008, it is not possible to estimate the amount of change, if any, in the unrecognized tax benefits
that is reasonably possible within the next twelve months. Any significant change in the amount of the Company’s
unrecognized tax benefits would most likely result from additional information or settlements relating to the Company’s
tax examination of uncertain tax positions.
70
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)