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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
Table of Contents
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.
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