Apple 2005 Annual Report Download - page 84

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6—Income Taxes (Continued)
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (35% in 2005,
2004, and 2003) to income before provision for income taxes, is as follows (in millions):
During 2005, the Company reversed certain tax contingency reserves and recorded a corresponding benefit to income tax expense primarily as
a result of a change in the estimated outcome of certain tax disputes. Additionally, during the fourth quarter of 2005, the Company recorded a
benefit to tax expense to adjust its net deferred tax assets as a result of the Company’s year-end review of its deferred tax accounts, the impact
of which was not material to the current or prior periods’ results of operations. The total benefit to income tax expense from the reversal of
these tax contingency reserves and adjustments to net deferred tax assets was $67 million. The Company also recorded a $14 million credit to
income tax expense resulting from a reduction of the valuation allowance.
The Internal Revenue Service (IRS) has completed its field audit of the Company’s federal income tax returns for all years prior to 2002 and
proposed certain adjustments. Certain of these adjustments are being contested through the IRS Appeals Office. Substantially all IRS audit
issues for these years have been resolved. In addition, the Company is also subject to audits by state, local, and foreign tax authorities.
Management believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the
outcome of tax audits cannot be predicted with certainty. Should any issues addressed in the Company’s tax audits be resolved in a manner not
consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution
occurs.
Note 7—Shareholders’ Equity
Preferred Stock
The Company has 5 million shares of authorized preferred stock, none of which is outstanding. Under the terms of the Company’s Restated
Articles of Incorporation, the Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions of the
Company’s authorized but unissued shares of preferred stock.
82
2005
2004
2003
Computed expected tax
$
636
$
134
$
32
State taxes, net of federal effect
(19
)
(5
)
(4
)
Indefinitely invested earnings of foreign subsidiaries
(98
)
(31
)
(13
)
Nondeductible executive compensation
11
10
5
Research and development credit, net
(26
)
(5
)
(7
)
Other items
(24
)
4
11
Provision for income taxes
$
480
$
107
$
24
Effective tax rate
26
%
28
%
26
%