This excerpt taken from the IPG 10-K filed Feb 28, 2007.
Valuation and Qualifying Accounts Valuation Allowance
As required by SFAS No. 109, Accounting for Income Tax (SFAS No. 109), we evaluate on a quarterly basis the realizability of our deferred tax assets. SFAS No. 109 requires a valuation allowance to be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence, establishment of a valuation allowance must be considered. We believe that cumulative losses in the most recent three-year period represent sufficient negative evidence under the provisions of SFAS No. 109, and as a result, we determined that certain of our deferred tax assets required the establishment of a valuation allowance. The deferred tax assets for which an allowance was recognized relate primarily to tax credit carryforwards, foreign tax loss and U.S. capital loss carryforwards.
The valuation allowance is $504.0 and $501.0 at December 31, 2006 and 2005, respectively. The change during 2006 in the deferred tax valuation allowance relates to uncertainties regarding future utilization of tax loss carryforwards, offset primarily by reversals of $45.0 of valuation allowances in two European countries where we believe that it is now more likely than not that those tax loss carryforwards will be utilized. In addition, we believe that it is more likely than not that approximately $29.0 of U.S. capital loss carryforwards and $17.0 of foreign tax credits will not be utilized. We also wrote off previously reserved for deferred tax assets that were deemed to be permanently unrealizable due to the expiration of tax loss carryforwards and sales of certain businesses.
At December 31, 2006, there are $68.6 of tax credit carryforwards with expiration periods beginning in 2009 and ending in 2013. There are also $1,521.8 of loss carryforwards, of which $571.9 are U.S. capital and tax loss carryforwards that expire in the years 2007 through 2024. The remaining $949.9 are non-U.S. tax loss carryforwards of which $718.6 have unlimited carry forward periods and $231.3 have expiration periods from 2007 through 2022
As of December 31, 2006 and December 31, 2005, we had approximately $991.8 and $825.9 of undistributed earnings attributable to foreign subsidiaries, respectively. It is our intention to reinvest undistributed earnings of our
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in Millions, Except Per Share Amounts)
foreign subsidiaries and thereby postpone their remittance. We have not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences resulting from earnings for certain foreign subsidiaries which are permanently reinvested outside the United States. It is not practicable to determine the amount of unrecognized deferred tax liability associated with these temporary differences.
In 2006 we finalized the 1994-1996 IRS audit cycle. We agreed to an IRS adjustment to move a tax deduction into later years. The deferral of this deduction has not impacted our tax provision in 2006.
In addition, in 2006 the IRS completed their field audit of the years 1997 through 2002 and has proposed additions to our taxable income. We have appealed a number of these proposed additions. Further, during the second quarter of 2006, the IRS commenced the audit of the 2003 and 2004 income tax returns.
In 2006, we presented the IRS with an adjustment to our taxable loss for 2004 to claim a deduction for a worthlessness loss of an acquired business which we originally claimed on our 2002 tax return but which the IRS disallowed. We had previously received a refund of approximately $45.0 from the carryback of the 2002 loss to a previous year. In 2006, we paid $52.7, including interest, as a result of the disallowance of this loss deduction for 2002. This loss claim is currently being reviewed by the IRS in conjunction with their audit of the 2003-2004 income tax return.
Also in 2006, a decision was reached to carryback our loss generated in 2005 to 2003. The taxable income in 2003 would be reduced, with the corollary effect of previously claimed foreign tax credits being displaced. The displaced foreign tax credits will become part of our foreign tax credit carryforward, on which a full valuation allowance has been recorded. Accordingly, we have recorded a charge to tax expense in 2006 for this item.
We have various tax years under examination by tax authorities in various countries, such as the United Kingdom, and in various states, such as New York, in which we have significant business operations. It is not yet known whether these examinations will, in the aggregate, result in our paying additional taxes. We have established tax reserves that we believe to be adequate in relation to the potential for additional assessments in each of the jurisdictions in which we are subject to taxation. We regularly assess the likelihood of additional tax assessments in those jurisdictions and adjust our reserves as additional information or events require. See Note 19 for further information.