This excerpt taken from the AN 10-K filed Feb 24, 2005.
Other Income (Expense), Net
Other income in 2003 primarily relates to the sale of our interest in an equity-method investment in LKQ Corporation, an auto parts recycling business, for $38.3 million, resulting in a pre-tax gain of $16.5 million.
In September 2002, one of our captive insurance companies terminated a reinsurance agreement with a third-party insurance company and transferred our risk pertaining to certain extended warranty products under the reinsurance agreement back to such insurance company. As a result of the transaction, we liquidated related restricted assets, realizing a $3.1 million gain on the sale. Additionally, in 2002, we converted our remaining restricted investments to restricted cash, realizing a $2.7 million gain on the sale.
Provision for Income Taxes
Income taxes have been provided based upon our anticipated underlying annual effective income tax rate. The effective income tax rate was 34.7%, 15.0% and 38.3% for the years ended December 31, 2004, 2003 and 2002, respectively.
In March 2003, we entered into a settlement agreement with the IRS with respect to the tax treatment of certain transactions we entered into in 1997 and 1999. As a result of the settlement, during 2003, we recognized an income tax benefit of $127.5 million from the reduction of previously recorded deferred tax liabilities. In 2003, we made a $366.0 million prepayment of the initial installment due March 2004, including interest. Additionally, in 2004, we prepaid the remaining balance due related to the IRS settlement totaling $128.9 million, including accrued interest.
During 2004 and 2003, we recorded net income tax benefits in continuing operations totaling $25.8 million and $140.9 million (which includes $127.5 million recognized as a result of the IRS settlement discussed above), respectively, primarily related to the resolution of various income tax matters. We also recognized a $52.2 million gain included in Discontinued Operations related to the settlement of various income tax matters. Our underlying base effective tax rate for 2004 before adjustments was 39%.
We substantially completed the federal income tax audit for the years 1997 through 2001 and a federal income tax audit for 2002 and 2003 was recently initiated by the IRS. We are routinely audited by the states in which we do business and remain under examination by various states for the tax years discussed above. We expect additional state and federal tax adjustments over the next eighteen months as we continue to work through various tax matters. Once we resolve our open tax matters, we expect our base effective tax rate to be approximately 39%.
See Note 12, Income Taxes, of the Notes to Consolidated Financial Statements for further information.