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NOTE 22: INCOME TAXES This note provides details about our income taxes applicable to continuing operations: • earnings before income taxes; • provisions for income taxes; • effective income tax rate; • deferred tax assets and liabilities; and • unrecognized tax benefits. Income taxes related to discontinued operations are discussed in Note 3: Discontinued Operations. EARNINGS BEFORE INCOME TAXES Our pretax earnings from continuing operations in 2007 were $59 million. Domestic and Foreign Earnings from Continuing Operations Before Income Taxes  PROVISIONS FOR INCOME TAXES Our provision for income taxes from continuing operations in 2007 was $8 million. Provisions for Current and Deferred Federal, State and Foreign Income Taxes from Continuing Operations  EFFECTIVE INCOME TAX RATE Our effective income tax rate applicable to continuing operations for 2007 was 12.1 percent. Items Determining Our Effective Income Tax Rate Applicable to Continuing Operations  One-Time Deferred Tax Benefits/Charges We recognized these one-time deferred tax benefits/charges during 2007: • $22 million benefit related to a reduction in the Canadian federal income tax rate; and • $9 million charge related to the Flat Rate Business Tax Reform in Mexico. We recognized these one-time deferred tax benefits during 2006: • $12 million benefit related to a change in Texas state income tax law; • $18 million benefit related to a reduction in the Canadian federal income tax rate; and • $18 million benefit related to a deferred tax adjustment associated with the Medicare Part D subsidy. We recognized these one-time deferred tax benefits/charges during 2005: • $14 million benefit related to a change in Ohio state income tax law; • $7 million benefit related to a one-time reduction in the British Columbia provincial corporate income tax rate; and • $44 million charge related to repatriation of $1.1 billion of foreign earnings pursuant to the American Jobs Creation Act. DEFERRED TAX ASSETS (LIABILITIES) Deferred tax assets and liabilities relate to temporary differences between pretax book income and taxable income. Deferred tax assets represent tax benefits that have already been recognized for book purposes, but that will be recognized for tax purposes in the future. Deferred tax liabilities represent income that has been recognized for book purposes, but that will be reported as taxable income in the future. Our net deferred tax liabilities were approximately $3.0 billion at the end of our fiscal year 2007. Deferred Income Tax Assets (Liabilities) Related to Continuing Operations by Category  Items Included in Our Deferred Income Tax Assets (Liabilities)  OTHER INFORMATION ABOUT OUR DEFERRED INCOME TAX ASSETS (LIABILITIES) Other information about our deferred income tax assets (liabilities) include: • implementation of Statement 158; • net operating loss carryforwards; • changes in tax rates and tax laws; and • valuation allowances. Implementation of Statement 158 Our deferred tax asset related to postretirement benefits increased by $182 million in 2006 due to our implementation of Statement 158. Net Operating Loss Carryforwards Our net operating loss carryforwards as of the end of our fiscal year 2007 are primarily foreign and are as follows: • $199 million, which expire from 2008 through 2027; and • $119 million, which do not expire. Changes in Tax Rates and Tax Laws Deferred tax assets and liabilities are based on tax rates that are expected to be in effect in future periods when deferred items reverse. Changes in tax rates or tax laws affect the expected future tax benefit or expense. The effect of such changes that occurred during each of the last three fiscal years is included in “Tax Law Changes” disclosed under “Effective Income Tax Rate” above. Valuation Allowances With the exception of the valuation allowance discussed below, we believe it is more likely than not that we will have sufficient future taxable income to realize our deferred tax assets. Our valuation allowance on our deferred tax assets was $102 million as of the end of our fiscal year 2007. Changes in our valuation allowance over the last three years were: • $5 million net decrease in 2007. This net decrease resulted primarily from: - $16 million decrease due to the sale of certain New Zealand operations; - $3 million decrease due to the expectation of future use of state credits; and - $14 million increase due to additional foreign losses. Reinvestment of Undistributed Earnings We have $357 million in undistributed earnings from our foreign subsidiaries as of the end of our fiscal year 2007. We have reinvested our foreign undistributed earnings, therefore they are not subject to U.S. income taxes. It is not practical to determine the income tax liability that would result from repatriation. HOW WE ACCOUNT FOR INCOME TAXES The Income Taxes section of Note 1: Summary of Significant Accounting Policies provides details about how we handle and account for our income taxes. UNRECOGNIZED TAX BENEFITS The company adopted Interpretation 48 on January 1, 2007. Subsequent to adoption, we recognized income tax expense of $25 million in accordance with Interpretation 48, of which $20 million was recognized in discontinued operations during 2007. Under Interpretation 48, unrecognized tax benefits represent potential future funding obligations to taxing authorities if uncertain tax positions the company has taken on previously filed tax returns are not sustained. The total amount of unrecognized tax benefits as of December 30, 2007, and January 1, 2007, are $193 million and $175 million, respectively, which includes interest related to such positions of $25 million and $17 million, respectively. These amounts represent the gross amount of exposure in individual jurisdictions and does not reflect any additional benefits expected to be realized if such positions were not sustained, such as the federal deduction that could be realized if an unrecognized state deduction was not sustained. Reconciliation of the Beginning and Ending Amount of Unrecognized Tax Benefits  The net liability recognized in our Consolidated Balance Sheet under Interpretation 48 was $98 million as of December 30, 2007, and $94 million as of January 1, 2007, which includes interest of $25 million and $15 million, respectively. These amounts represent tax positions across all jurisdictions that, if sustained, would affect our effective tax rate. In accordance with our accounting policy, we accrue interest and penalties related to unrecognized tax benefits as a component of income tax expense and current taxes payable. This policy did not change as a result of Interpretation 48. As of December 30, 2007, we are undergoing examination in the U.S. federal tax jurisdiction for the 2005-2006 tax years. Our 2007 federal income tax return is being examined under the IRS Compliance Assurance Process (“CAP”). This program accelerates the examination of key issues in an attempt to resolve them before the tax return is filed. We are also undergoing examination in various state and foreign jurisdictions for the 2000-2006 tax years. We expect that the outcome of any examination will not have a material effect on our financial statements; however, audit outcomes and the timing of audit settlements are subject to significant uncertainty. In the next 12 months, we estimate a decrease of up to $18 million in unrecognized tax benefits on several individually insignificant tax positions due to the lapse of applicable statutes of limitation in multiple jurisdictions. |