RTN » Topics » 5. Income Taxes

This excerpt taken from the RTN 10-Q filed Apr 23, 2009.

12. Income Taxes

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. IRS examinations of our tax returns have been completed through 2002. We have protested to the IRS Appeals Division certain proposed adjustments primarily involving benefits under the Foreign Sales Corporation (FSC) and Extraterritorial Income (ETI) exclusion regimes for 1998–2002. IRS examination of our tax returns for 2003–2005 began in March 2007. Additionally, we are under audit by a number of state tax authorities. State tax liabilities are routinely adjusted to account for any changes in federal taxable income.

We believe we adequately provide for all tax positions, however, amounts asserted by taxing authorities could be greater than amounts accrued and reflected in our consolidated balance sheet. Accordingly, we could record additional amounts for federal, foreign and state tax-related liabilities in the future as we revise estimates or we settle or otherwise resolve the underlying matters.

The balance of unrecognized tax benefits at March 29, 2009 and March 30, 2008, exclusive of interest, was $415 million and $343 million, respectively, of which $315 million and $251 million, respectively, would affect our earnings if recognized. We accrue interest and penalties related to unrecognized tax benefits in tax expense. As a result, in the three months ended March 29, 2009, we recorded $5 million of gross interest and penalties, $3 million net of the federal tax benefit, in tax expense. In the three months ended March 30, 2008, we recorded $6 million of gross interest and penalties, $4 million net of the federal tax benefit, in tax expense. At March 29, 2009 and March 30, 2008, we had $101 million and $76 million, respectively, of interest and penalties accrued related to unrecognized tax benefits, which, net of the federal tax benefit, was approximately $65 million and $50 million, respectively.

A rollforward of our unrecognized tax benefits was as follows:

 

     Three Months Ended

(In millions)

   March 29, 2009    March 30, 2008

Unrecognized tax benefits at beginning of period

   $ 415    $ 342

Additional tax liability based on prior year tax position

     —        1
             

Unrecognized tax benefits at end of period

   $ 415    $ 343
             

Although the final outcome remains uncertain, we may reach a settlement with the IRS Appeals Division in the next 12 months to resolve certain protested adjustments related to benefits claimed under the FSC and ETI regimes and certain other tax matters related to the years 1998–2002. In the next 12 months, we may also resolve similar FSC and ETI matters along with certain revenue recognition items and the allowability of certain deductions and credits for the 2003 – 2005 tax years. Based on the outcome of exams, appeals proceedings, Joint Committee on Taxation review, and the expiration of the statute of limitations, it is reasonably possible that within the next 12 months our unrecognized tax benefits, exclusive of interest will decrease by approximately $195 million to $225 million, of which approximately $185 million to $200 million could decrease tax expense.

We generally account for our state income tax expense as a deferred contract cost, as we can generally recover these costs through the pricing of our products and services to the U.S. Government. We include this deferred contract cost in Contracts in process until allocated to our contracts, which generally occurs upon payment or when otherwise agreed as allocable with the U.S. Government. State income taxes allocated to our contracts were $18 million and $30 million in the three months ended March 29, 2009 and March 30, 2008, respectively, and were included in Administrative and selling expenses.

During the three months ended March 29, 2009, we received federal tax refunds totaling $337 million.

This excerpt taken from the RTN 10-Q filed Oct 23, 2008.

5. Income Taxes

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Internal Revenue Service (IRS) examinations of our tax returns are complete through 2002. We protested to the IRS Appeals Division certain proposed adjustments primarily involving benefits under the Foreign Sales Corporation and Extraterritorial Income (ETI) exclusion regimes for 1998-2002. IRS examinations of our tax returns for 2003-2005 began in March 2007. Additionally, we are under audit by a number of state tax authorities.

We believe we adequately provide for all tax positions, however, amounts asserted by taxing authorities could be greater than amounts accrued and reflected in our balance sheets. Accordingly, we could record additional amounts for federal, foreign and state tax-related liabilities in the future as we revise estimates or we settle or otherwise resolve the underlying matters.

In the three months ended March 25, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), and recognized a $13 million increase in our liability for unrecognized

 

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tax benefits, which we accounted for as a reduction to retained earnings. The balance of unrecognized tax benefits at September 28, 2008, exclusive of interest, was $347 million, of which $256 million would affect our earnings if recognized. We accrue interest and penalties related to unrecognized tax benefits in tax expense. As a result, in the three months ended September 28, 2008, we recorded $6 million of gross interest and penalties, $4 million net of the federal tax benefit, in tax expense. In the nine months ended September 28, 2008, we recorded $19 million of gross interest and penalties, $13 million net of federal tax benefit, in tax expense. At September 28, 2008, we had approximately $89 million of interest and penalties accrued related to unrecognized tax benefits, which, net of the federal tax benefit, was approximately $58 million.

The net increase in the liability for unrecognized tax benefits during the nine months ended September 28, 2008 was as follows:

 

(In millions)      

Balance at December 31, 2007

   $ 342

Additional tax liability based on prior year tax position

     5

Balance at September 28, 2008

   $ 347

We generally account for our state income tax expense as a deferred contract cost, as we can generally recover these costs through the pricing of our products and services to the U.S. Government. We include this deferred contract cost in contracts in process until allocated to our contracts, which generally occurs upon payment or when otherwise agreed as allocable with the U.S. Government. State income taxes allocated to our contracts were $92 million and $60 million in the nine months ended September 28, 2008 and September 23, 2007, respectively, and we included these amounts in administrative and selling expenses.

On October 3, 2008, the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 was enacted. This legislation retroactively reinstated the research and development tax credit, which had expired in 2007, for 2008. As a result, we will record a benefit of approximately $18 million in the three months ending December 31, 2008 representing the benefit of the research and development tax credit for the full year.

This excerpt taken from the RTN 10-Q filed Jul 24, 2008.

5. Income Taxes

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. IRS examinations of our tax returns are complete through 2002. We protested to the IRS Appeals Division certain proposed adjustments primarily involving benefits under the Foreign Sales Corporation and Extraterritorial Income (ETI) exclusion regimes for 1998-2002. IRS examinations of our tax returns for 2003-2005 began in March 2007. Additionally, we are under audit by a number of state tax authorities.

We believe we adequately provide for all tax positions, however, amounts asserted by taxing authorities could be greater than our accrued position. Accordingly, we could record additional provisions on federal, foreign and state tax-related matters in the future as we revise estimates or we settle or otherwise resolve the underlying matters.

In the three months ended March 25, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), and recognized a $13 million increase in our liability for unrecognized tax benefits, which we accounted for as a reduction to retained earnings. The balance of unrecognized tax benefits at June 29, 2008, exclusive of interest, was $343 million, of which $251 million would affect our earnings if recognized. We recognize accrued interest and penalties related to unrecognized tax benefits in tax expense. As a result, in the six months ended June 29, 2008, we recorded

 

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$6 million of gross interest and penalties, $4 million net of the federal tax benefit, in tax expense. At June 29, 2008, we had approximately $83 million of interest and penalties accrued related to unrecognized tax benefits, which, net of the federal tax benefit, was approximately $54 million. The net increase in the liability for unrecognized tax benefits during the six months ended June 29, 2008 was as follows:

 

(In millions)      

Balance at December 31, 2007

   $ 342

Addition based on prior year tax position

     1

Balance at June 29, 2008

   $ 343

We generally account for our state income tax expense as a deferred contract cost, as we can generally recover these costs through the pricing of our products and services to the U.S. Government. We included this deferred contract cost in contracts in process until allocated to our contracts, which generally occurs upon payment or when otherwise agreed as allocable with the U.S. Government. State income taxes allocated to our contracts were $62 million and $40 million in the six months ended June 29, 2008 and June 24, 2007, respectively, and we include these amounts in administrative and selling expenses.

This excerpt taken from the RTN 10-Q filed Apr 24, 2008.

5. Income Taxes

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. IRS examinations of our tax returns have been completed through 2002. We have protested to the IRS Appeals Division certain proposed adjustments primarily involving benefits under the Foreign Sales Corporation and Extraterritorial Income (ETI) exclusion regimes for 1998-2002. IRS examinations of our tax returns for 2003-2005 began in March 2007. Additionally, we are under audit by a number of state tax authorities.

We believe we have adequately provided for all tax positions, however, amounts asserted by taxing authorities could be greater than our accrued position. Accordingly, additional provisions on federal, foreign and state tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.

In the three months ended March 25, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), and recognized a $13 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to retained earnings. The balance of unrecognized tax benefits at March 30, 2008, exclusive of interest, was $343 million, of which $251 million would affect earnings if recognized. We recognize interest accrued related to unrecognized tax benefits in tax expense. As a result, in the three months ended March 30, 2008, we recorded $6 million of gross interest expense, or $4 million net of the federal tax benefit, in tax expense. Penalties, if incurred, would also be recognized as a component of tax expense. At March 30, 2008, we had approximately $76 million of interest accrued related to unrecognized tax benefits, which, net of the federal tax benefit, was approximately $50 million. The net increase in the liability during the three months ended March 30, 2008 was as follows:

 

(In millions)     
 

Balance at December 31, 2007

   $ 342

Addition based on prior year tax position

     1
 

Balance at March 30, 2008

   $ 343
 

 

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The provision for state income tax expense is generally accounted for as a deferred contract cost as these costs can generally be recovered through the pricing of our products and services to the U.S. government and are included in contracts in process until allocated to our contracts. These deferred amounts are generally allocated to our contracts when paid or otherwise agreed as allocable with the U.S. government. State income taxes allocated to our contracts was $30 million and $12 million in the three months ended March 30, 2008 and March 25, 2007, respectively, and was included in administrative and selling expenses.

This excerpt taken from the RTN 10-Q filed Oct 25, 2007.

5. Income Taxes

We are subject to income taxes in the U.S. and numerous foreign jurisdictions.

IRS examinations of our tax returns have been completed through 2002 and IRS examinations of our tax returns for 2003-2005 began in March 2007. Reports by the IRS Appeals Division (Appeals) involving various domestic and Foreign Sales Corporation issues for 1989-1997 are being reviewed by the Joint Committee on Taxation. We have protested to Appeals certain proposed adjustments primarily involving benefits under the Foreign Sales Corporation and Extraterritorial Income export regimes for 1998-2002. The Appeals report on our 1984-1990 federal research credit refund claim is now under review by the Joint Committee on Taxation. We are under audit by a number of state tax authorities but do not expect any significant amounts to be asserted from such audits. State tax liabilities will be adjusted to account for any changes in federal taxable income for 1989-2002, as well as any adjustments in subsequent years, as those years are ultimately resolved with the IRS.

We apply the principles of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), when accounting for our various tax positions. As a result of the implementation of FIN 48 on January 1, 2007, we recognized a $13 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to retained earnings. The balance of the unrecognized tax benefits at adoption, exclusive of interest, was $500 million, of which $409 million would affect earnings if recognized. While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than our accrued position. Accordingly, additional provisions on federal, foreign and state tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved. We recognize interest accrued related to unrecognized tax benefits in tax expense. Penalties, if incurred, would also be recognized as a component of tax expense. As of January 1, 2007, we had approximately $60 million of interest accrued related to unrecognized tax benefits, which, net of the federal tax benefit, is approximately $39 million.

It is reasonably possible that within the next 12 months the matters presently under consideration at Appeals or the Joint Committee on Taxation, including the federal research credit refund claim and Foreign Sales Corporation/Extraterritorial Income regime issues, will be resolved and certain tax periods in various tax jurisdictions will effectively be closed to further examination, in which case we could record a reduction in our balance of unrecognized tax benefits of up to $280 million and a reduction in our tax expense of up to $180 million.

 

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The provision for state income taxes is generally accounted for as deferred contract costs and are included in contracts in process until allocated to our contracts, as these costs can generally be recovered through the pricing of products and services to the U.S. government.

This excerpt taken from the RTN 10-Q filed Jul 26, 2007.

5. Income Taxes

We are subject to income taxes in the U.S. and numerous foreign jurisdictions.

IRS examinations of our tax returns have been completed through 2002, and IRS examinations of our tax returns for 2003-2005 began in March 2007. Reports by the IRS Appeals Division (Appeals) involving various domestic and Foreign Sales Corporation issues for 1989-1997 are being reviewed by the Joint Committee on Taxation. We have protested to Appeals certain proposed adjustments primarily involving benefits under the Foreign Sales Corporation and Extraterritorial Income export regimes for 1998-2002. Our 1984-1990 federal research credit refund claim also remains under consideration at Appeals. We are under audit by a number of state tax authorities but do not expect any significant amounts to be asserted from such audits. State tax liabilities will be adjusted to account for changes in federal taxable income for 1989-2002, as well as any adjustments in subsequent years, as those years are ultimately resolved with the IRS.

We apply the principles of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), when accounting for our various tax positions. As a result of the implementation of FIN 48 on January 1, 2007, we recognized a $13 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to retained earnings. The balance of the unrecognized tax benefits at adoption, exclusive of interest, was $500 million, of which $409 million would affect earnings if recognized. During the quarter, we recorded a gross liability of $55 million offset by the associated federal tax benefit of $19 million, related to various state tax positions associated with our discontinued operations. While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than our accrued position. Accordingly, additional provisions on federal, foreign and state tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved. We recognize interest accrued related to unrecognized tax benefits in tax expense. Penalties, if incurred, would also be recognized as a component of tax expense. As of January 1, 2007, we had approximately $60 million of interest accrued related to unrecognized tax benefits, which, net of the federal tax benefit, is approximately $39 million.

 

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It is reasonably possible that within the next 12 months the matters presently under consideration at Appeals or the Joint Committee on Taxation, including the federal research credit refund claim and Foreign Sales Corporation/Extraterritorial Income regime issues, will be resolved and certain tax periods in various tax jurisdictions will effectively be closed to further examination, in which case we could record a reduction in our balance of unrecognized tax benefits of up to $280 million and a reduction in our tax expense of up to $180 million.

The provision for state income taxes is generally accounted for as deferred contract costs and are included in contracts in process until allocated to our contracts, as these costs can generally be recovered through the pricing of products and services to the U.S. government.

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