Income Taxes

3 Months Ended

Jul. 05, 2019

The following table summarizes our effective tax rate for the periods presented:



	Three Months Ended
(In millions, except percentages)	July 5, 2019			June 29, 2018
Income (loss) before income taxes	$	108		$	(69	)
Income tax expense (benefit)	$	82		$	(4	)
Effective tax rate	76		%	6		%

Our effective tax rate for the three months ended July 5, 2019 differs from the federal statutory income tax rate primarily due to tax expense related to the Ninth Circuit's recent holding in Altera Corp. v. Commissioner, various permanent differences, and state taxes, partially offset by the benefits of lower-taxed international earnings, the research and development tax credit and foreign derived intangible income deduction.

Our effective tax rate for the three months ended June 29, 2018 differs from the federal statutory income tax rate primarily due to the benefits of lower-taxed international earnings, the research and development tax credit, and foreign derived intangible income deduction, partially offset by tax expense from certain intercompany transactions and various permanent differences.

On July 27, 2015, the United States Tax Court (Tax Court) issued its opinion in Altera Corp. v. Commissioner and concluded that related parties in a cost sharing arrangement are not required to share expenses related to stock-based compensation. The Commissioner of the Internal Revenue Service appealed the Tax Court decision to the Ninth Circuit Court of Appeals (Ninth Circuit). In June 2019, the U.S. Court of Appeals for the Ninth Circuit reversed the July 2015 decision of the U.S. Tax Court. As a result of this decision, we recorded a cumulative income tax expense of $62 million in three months ended July 5, 2019. On July 22, 2019, the taxpayer requested a rehearing before the full Ninth Circuit and may subsequently appeal from the Ninth Circuit to the Supreme Court. As a result, the final outcome of the case is uncertain. If the Altera Ninth Circuit Panel Opinion is reversed, we would anticipate recording an income tax benefit at that time.

The aggregate changes in the balance of gross unrecognized tax benefits for the three months ended July 5, 2019 were as follows:



	Three Months Ended
(In millions)	July 5, 2019
Balance at beginning of year	$	446
Lapse of statute of limitations	(13		)
Increase related to prior period tax positions	62
Increase related to current year tax positions	16
Net increase	65
Balance at end of quarter	$	511

As of July 5, 2019, $94 million of the gross unrecognized tax benefit was recorded in Deferred income tax liabilities and $417 million was recorded in Long-term income taxes payable.

The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although potential resolution of uncertain tax positions involves multiple tax periods and jurisdictions, it is reasonably possible that the gross unrecognized tax benefits related to these audits could decrease, whether by payment, release, or a combination of both, in the next 12 months by $30 million, which could reduce our income tax provision and therefore benefit the resulting effective tax rate.

We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions.