American Airlines 2003 Annual Report Download - page 67

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65
8. Income Taxes (Continued)
The income tax benefit includes a federal income tax benefit of $76 million, $1,235 million and $911 million and a
state income tax benefit of $4 million, $107 million and $90 million for the years ended December 31, 2003, 2002
and 2001, respectively.
In the fourth quarter of 2003, the Company reached an agreement with the IRS covering tax years 1990 through
1995 and, as a result, recorded an $80 million tax benefit to reduce previously accrued income tax liabilities.
The income tax benefit for loss before cumulative effect of accounting change differed from amounts computed at
the statutory federal income tax rate as follows (in millions):
Year Ended December 31,
2003 2002 2001
Statutory income tax benefit $ (458) $ (1,351) $ (965)
State income tax benefit, net of federal tax effect (31) (103) (58)
IRS audit settlement (80) - -
Meal expense 11 16 18
Expiration of foreign tax credits 9 39 -
Foreign tax credit carryforwards - - (7)
Deferred tax assets not benefited 465 50 7
Other, net 4 12 11
Income tax benefit $ (80) $ (1,337) $ (994)
The deferred tax assets not benefited in 2003 relate primarily to net operating loss carryforwards. The deferred tax
assets not benefited in 2002 related to the Company’s uncertainty regarding the realization of the foreign tax credit
carryforwards and state net operating losses, and in 2001 related to the Company’s uncertainty regarding the
realization of the foreign tax credit carryforwards.
Additionally, as of December 31, 2003, the recording of other comprehensive income items, primarily the minimum
pension liability, resulted in a decrease to the net deferred tax asset. The Company recorded a $111 million
reduction to the valuation allowance as a component of Accumulated other comprehensive income related to such
net deferred tax asset. As of December 31, 2002, the recording of other comprehensive income items, primarily
the minimum pension liability, resulted in a net deferred tax asset. The Company recorded a $313 million valuation
allowance as a component of Accumulated other comprehensive income related to such net deferred tax asset.
The total change in the valuation allowance was $293 million and $363 million in 2003 and 2002, respectively.
The Company provides a valuation allowance for deferred tax assets when it is more likely than not that some
portion, or all of its deferred tax assets, will not be realized. In assessing the realizability of the deferred tax assets,
management considers whether it is more likely than not that some portion, or all of the deferred tax assets, will be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
(including reversals of deferred tax liabilities) during the periods in which those temporary differences will become
deductible.