Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.3.0.15
Income Taxes
 12 Months Ended
Sep. 25, 2011
Notes to Financial Statements [Abstract]  
Note 6 - Income Taxes
Note 6. Income Taxes
The components of the income tax provision were as follows (in millions):
 
2011
 
2010
 
2009
Current provision:
 
 
 
 
 
Federal
$
179

 
$
1,514

 
$
268

State
57

 
242

 
71

Foreign
670

 
389

 
291

 
906

 
2,145

 
630

Deferred provision:
 
 
 
 
 
Federal
170

 
(1,139
)
 
(72
)
State
62

 
(26
)
 
72

Foreign
(6
)
 
(7
)
 
(19
)
 
226

 
(1,172
)
 
(19
)
 
$
1,132

 
$
973

 
$
611


The foreign component of the income tax provision consists primarily of foreign withholding taxes on royalty income included in United States earnings.
The components of income from continuing operations before income taxes by United States and foreign jurisdictions were as follows (in millions):
 
2011
 
2010
 
2009
United States
$
2,984

 
$
2,195

 
$
1,368

Foreign
2,703

 
2,298

 
1,035

 
$
5,687

 
$
4,493

 
$
2,403


The following is a reconciliation of the expected statutory federal income tax provision to the Company’s actual income tax provision for continuing operations (in millions):
 
2011
 
2010
 
2009
Expected income tax provision at federal statutory tax rate
$
1,991

 
$
1,573

 
$
841

State income tax provision, net of federal benefit
283

 
226

 
113

Foreign income taxed at other than U.S. rates
(1,074
)
 
(897
)
 
(407
)
Tax audit impacts, net
1

 
3

 
(155
)
Tax credits
(151
)
 
(55
)
 
(112
)
Valuation allowance
42

 
(40
)
 
227

Revaluation of deferred taxes
69

 
152

 
74

Other
(29
)
 
11

 
30

 
$
1,132

 
$
973

 
$
611


The revaluation of deferred taxes represents the impact of paying current taxes at a higher state effective tax rate than the effective tax rate that will be in effect when the resulting deferred tax asset or liability is scheduled to reverse. The Company has not recorded a deferred tax liability of approximately $4.7 billion related to the United States federal and state income taxes and foreign withholding taxes on approximately $13.5 billion of undistributed earnings of certain non-United States subsidiaries indefinitely invested outside the United States. Should the Company decide to repatriate the foreign earnings, the Company would have to adjust the income tax provision in the period management determined that the earnings will no longer be indefinitely invested outside the United States.
The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. Tax audit impacts, net reflects adjustments to the Company’s prior year estimates of uncertain tax positions as a result of various federal, state and foreign tax audits. The Company is currently a participant in the Internal Revenue Service (IRS) Compliance Assurance Process, whereby the IRS and the Company endeavor to agree on the treatment of all tax issues prior to the tax return being filed. The IRS completed its examination of the Company’s tax return for fiscal 2008 and issued a full acceptance letter for fiscal 2009 during the third quarter of fiscal 2010, resulting in an increase to the tax provision of $20 million. The Company is no longer subject to United States federal income tax examinations for years prior to fiscal 2010. The Company is subject to examination by the California Franchise Tax Board for fiscal years after 2004 and is currently under examination for fiscal 2005 through 2008. The Company is also subject to income taxes in other taxing jurisdictions in the United States and around the world, many of which are open to tax examinations for periods after fiscal 2000.
The Company had deferred tax assets and deferred tax liabilities as follows (in millions):
 
September 25, 2011
 
September 26, 2010
Accrued liabilities, reserves and other
$
205

 
$
287

Share-based compensation
592

 
615

Capitalized start-up and organizational costs
91

 
102

Unearned revenues
1,269

 
1,311

Unrealized losses on marketable securities
309

 
341

Unrealized losses on other investments
28

 
27

Capital loss carryover
40

 
37

Tax credits
145

 
54

Unused net operating losses
97

 
64

Other basis differences
30

 
10

Total gross deferred assets
2,806

 
2,848

Valuation allowance
(98
)
 
(39
)
Total net deferred assets
2,708

 
2,809

Purchased intangible assets
(174
)
 
(108
)
Deferred contract costs
(7
)
 
(6
)
Unrealized gains on marketable securities
(206
)
 
(352
)
Property, plant and equipment
(85
)
 
(100
)
Total deferred liabilities
(472
)
 
(566
)
Net deferred assets
$
2,236

 
$
2,243

Reported as:
 
 
 
Current deferred tax assets
$
537

 
$
321

Non-current deferred tax assets
1,703

 
1,922

Current deferred tax liabilities (1)
(2
)
 
—

Non-current deferred tax liabilities(1)
(2
)
 
—

 
$
2,236

 
$
2,243

(1) Current deferred tax liabilities and non-current deferred tax liabilities are included in other current liabilities and other liabilities, respectively, in the consolidated balance sheets.
At September 25, 2011, the Company had unused federal net operating loss carryforwards of $167 million expiring from 2021 through 2029, unused state net operating loss carryforwards of $352 million expiring from 2012 through 2031, and unused foreign net operating loss carryforwards of $76 million, which expire from 2012 through 2020. At September 25, 2011, the Company had unused tax credits of $20 million in foreign jurisdictions, which expire in 2013. The Company does not expect its federal net operating loss carryforwards and its state income tax credits to expire unused.
The Company believes, more likely than not, that it will have sufficient taxable income after stock option related deductions to utilize the majority of its deferred tax assets. At September 25, 2011, the Company has provided a valuation allowance on certain foreign deferred tax assets, state net operating losses and net capital losses of $76 million, $10 million and $12 million, respectively. The valuation allowances reflect the uncertainties surrounding the Company’s ability to generate sufficient future taxable income in certain foreign and state tax jurisdictions to utilize its net operating losses and the Company’s ability to generate sufficient capital gains to utilize all capital losses.
A summary of the changes in the amount of unrecognized tax benefits for fiscal 2011, 2010 and 2009 follows (in millions):
 
2011
 
2010
 
2009
Beginning balance of unrecognized tax benefits
$
353

 
$
84

 
$
244

Additions based on prior year tax positions
64

 
223

 
39

Reductions for prior year tax positions
(10
)
 
(58
)
 
(202
)
Additions for current year tax positions
12

 
165

 
3

Settlements with taxing authorities
(323
)
 
(61
)
 
—

Ending balance of unrecognized tax benefits
$
96

 
$
353

 
$
84


At September 25, 2011, the Company does not expect any unrecognized tax benefits to result in cash payment in fiscal 2012. Unrecognized tax benefits at September 25, 2011 include $88 million for tax positions that, if recognized, would impact the effective tax rate. The unrecognized tax benefits differ from the amount that would affect the Company’s effective tax rate primarily because the unrecognized tax benefits are included on a gross basis and do not reflect secondary impacts such as the federal deduction for state taxes, adjustments to deferred tax assets and the valuation allowance that might be required if the Company’s tax positions are sustained. The decrease in unrecognized tax benefits in fiscal 2011 was primarily due to an agreement reached on a component of the Company’s fiscal 2006 through fiscal 2010 state tax returns related to the method used by the Company to apportion income to states for such periods, which is partially offset by an increase resulting from the acquisition of Atheros (Note 12). The Company does not believe that it is reasonably possible that the total amounts of unrecognized tax benefits at September 25, 2011 will significantly increase or decrease in fiscal 2012. Interest expense related to uncertain tax positions was negligible in fiscal 2011, 2010 and 2009. The amount of accrued interest and penalties was negligible at September 25, 2011 and September 26, 2010.
Cash amounts paid for income taxes, net of refunds received, were $2.1 billion, $671 million and $516 million for fiscal 2011, 2010 and 2009, respectively.