Income Taxes

3 Months Ended

Jul. 01, 2011

Income Taxes

Income Taxes

Note 12. Income Taxes

The effective tax rate was approximately 25% and (2) % for the three months ended July 1, 2011 and July 2, 2010, respectively.

For the three months ended July 1, 2011, the tax expense was reduced by a $7 million tax benefit primarily related to lapses of statutes of limitations.  For the three months ended July 2, 2010, the tax expense was significantly reduced by the following benefits recognized in the first quarter of fiscal 2011: (1) $39 million tax benefit arising from the Veritas v. Commissioner Tax Court decision (see further discussion below) and (2) $11 million tax benefit primarily related to tax settlements and lapses of statutes of limitations.

The provision for both three-month periods ended July 1, 2011 and July 2, 2010 otherwise reflects a forecast tax rate of 28% (excluding the tax benefit from our joint venture with Huawei). We include the tax benefit associated with the loss from our joint venture with Huawei in income tax expense rather than netting the tax benefit against our joint venture loss with Huawei.  However, the effective rate applied to our joint venture loss with Huawei for purposes of determining the tax benefit is based only on our joint venture loss and its tax impact.  The forecast tax rates for both periods presented reflect the benefits of lower-taxed foreign earnings, domestic manufacturing incentives, and research and development credits ( the U.S. federal R&D tax credit is currently set to expire on December 31, 2011), partially offset by state income taxes.

On December 10, 2009, the U.S. Tax Court issued its opinion in Veritas v. Commissioner, finding that our transfer pricing methodology, with appropriate adjustments, was the best method for assessing the value of the transaction at issue between Veritas and its international subsidiary in the 2000 to 2001 tax years. The Tax Court judge provided guidance as to how adjustments would be made to correct the application of the method used by Veritas. In June 2010, we reached an agreement with the IRS concerning the amount of the adjustment related to the U.S. Tax Court decision.  As a result of the agreement, we reduced our liability for unrecognized tax benefits, resulting in a $39 million tax benefit in the first quarter of fiscal 2011.  This matter has now been closed and no further adjustments to the accrued liability are expected. 

On December 2, 2009, we received a Revenue Agent's Report from the IRS for the Veritas 2002 through 2005 tax years assessing additional taxes due.  We have contested $80 million of the tax assessed and all penalties.  The unresolved amounts concern a transfer pricing matter comparable to the one that was resolved in our favor in the Veritas v. Commissioner Tax Court decision.  The matter is being addressed within the IRS Appeals process and remains outstanding with no scheduled date for completion.  It is reasonably possible that a reduction of the reserves for unrecognized tax benefits primarily related to the matters associated with this IRS examination cycle may occur within the next 12 months.

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