INCOME TAXES

Tax Rate

The following table provides a summary of our reported tax rate:



	Three Months Ended June 30,				Percentage Point
	2011		2010		Increase (Decrease)
Reported tax rate	7.6	%	17.6	%	(10.0	)%
Impact of certain receipts/charges*	9.8	%	6.2	%	3.6	%
	17.4	%	23.8	%	(6.4	)%



	Six Months Ended June 30,				Percentage Point
	2011		2010		Increase (Decrease)
Reported tax rate	55.5	%	(2.4	)%	57.9	%
Impact of certain receipts/charges*	(40.0	)%	24.8	%	(64.8	)%
	15.5	%	22.4	%	(6.9	)%

*These receipts/charges are taxed at different rates than our effective tax rate.

The change in our reported tax rate for the second quarter and first half of 2011, as compared to the same periods in 2010, relates primarily to the impact of certain receipts and charges that are taxed at different rates than our effective tax rate. In the first half of 2011, these receipts and charges included a gain on our divestiture of the Neurovascular business, goodwill and intangible asset impairment charges and restructuring- and acquisition-related charges and credits. Our reported tax rate was also affected by discrete tax items, related primarily to a release of valuation allowances resulting from a change in our expected ability to realize certain deferred tax assets and changes in various state tax laws. In the first half of 2010, these receipts and charges included goodwill and intangible asset impairment charges, a gain associated with the receipt of an acquisition-related milestone payment, and restructuring-related charges, as well as discrete tax items related primarily to the re-measurement of an uncertain tax position resulting from a favorable court ruling issued in a similar third-party case.

As of June 30, 2011, we had $988 million of gross unrecognized tax benefits, of which a net $882 million, if recognized, would affect our effective tax rate. As of December 31, 2010, we had $965 million of gross unrecognized tax benefits, of which a net $859 million, if recognized, would affect our effective tax rate.

We are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. We have concluded all U.S. federal income tax matters through 2000 and substantially all material state, local, and foreign income tax matters through 2001.

On December 17, 2010, we received Notices of Deficiency from the Internal Revenue Service (IRS) reflecting proposed audit adjustments for Guidant Corporation for the 2001-2003 tax years. The incremental tax liability asserted by the IRS for these periods is $525 million plus interest. The primary issue in dispute is the transfer pricing in connection with the technology license agreements between domestic and foreign subsidiaries of Guidant. We believe we have meritorious defenses for our tax filings and, on March 11, 2011, we filed petitions with the U.S. Tax Court contesting these Notices of Deficiency. On May 20, 2011, the IRS filed their answer to our petition.

We received Revenue Agent's Reports from the IRS reflecting proposed adjustments in April 2011 for the Guidant 2004-2006 tax years and in July 2011 for Boston Scientific Corporation's 2006-2007 tax years. The reports propose transfer pricing adjustments based on substantially similar positions to those subject to our Tax Court petitions and we disagree with the proposed adjustments.

We do not expect that we will be able to resolve these proposed adjustments through applicable IRS administrative procedures. The statute of limitations for Guidant Corporation's 2004-2006 tax years expires in December 2011 and for Boston Scientific Corporation's 2006-2007 tax years in September 2011. Accordingly, we anticipate receiving Notices of Deficiency for these tax years prior to the expiration of the relevant statute of limitations. We believe we have meritorious defenses for our tax filings and will petition the Tax Court to contest the proposed IRS adjustments relating to these periods as well.

We believe that our income tax reserves associated with these matters are adequate and the final resolution will not have a material impact on our financial condition or results of operations. However, final resolution is uncertain and could have a material impact on our financial condition or results of operations.

We recognize interest and penalties related to income taxes as a component of income tax expense. We recognized interest expense related to income taxes of $10 million in the second quarter of 2011, $11 million in the second quarter of 2010, $17 million in the first half of 2011, and $21 million in the first half of 2010. We had $311 million accrued for gross interest and penalties as of June 30, 2011 and $285 million as of December 31, 2010.

It is reasonably possible that within the next 12 months we will resolve multiple issues including transfer pricing, research and development credit and transactional related issues with foreign, federal and state taxing authorities, in which case we could record a reduction in our balance of unrecognized tax benefits of up to approximately $30 million.