Yahoo 2010 Annual Report Download - page 46

(2) Certain reclassifications have been made to prior year amounts in order to conform to the current year
presentation.
The 2010 differences above are further explained as follows:
• State taxes are higher in 2010 than in prior years due to a reduction of deferred tax assets associated with an
effective tax rate reduction in California starting in 2011.
• Stock-based compensation increases our effective tax rate to the extent that stock-based compensation expense
recorded in our financial statements is non-deductible for tax purposes. This primarily occurs with regard to
options granted outside the U.S. The 2010 effective tax rate increase is lower than in prior years due to
recently granted stock-based compensation awards having a lower grant date fair value than stock-based
compensation awards from prior years. That effect results in a lower non-deductible expense for financial
statement purposes and a lower increase to our effective tax rate. Additionally, in 2010 there is a lower
effective tax rate impact associated with non-deductible stock-based compensation awards related to prior year
acquisitions to the extent such awards became vested or forfeited in 2010.
• Our effective tax rate in all periods is the result of the mix of income earned in various tax jurisdictions that
apply a broad range of income tax rates. Operating losses in some non-U.S. jurisdictions cannot be used to
offset profits and thus increase the overall effective tax rate. The impact of those losses in 2010 was lower than
in prior years. Additionally, in 2010, we benefited from increased profit in lower tax jurisdictions, primarily in
Asia.
• In 2010 we had a favorable resolution of certain issues in an IRS examination of our 2005 and 2006 U.S.
federal income tax returns resulting in a reduction of reserves for tax uncertainties and the availability of
capital loss carryforwards to offset the tax on the gain from the sales of Zimbra, Inc. and HotJobs.
• During 2010, in connection with tax restructuring activities, we reached a formal agreement with the IRS
through a pre-filing agreement to treat certain intercompany bad debts as deductible business expenses on the
2009 federal income tax return.
Our gross amount of unrecognized tax benefits as of December 31, 2010 is $597 million, of which $420 million
is recorded on the consolidated balance sheets. The agreements reached in 2010 with the IRS resulted in a
reduction to our gross unrecognized tax benefits of $357 million. Of this $357 million reduction in unrecognized
tax benefits, $202 million resulted in an effective tax rate benefit. The reduction to the gross unrecognized tax
benefits has been partially offset by increases from current year tax positions. In total, the gross unrecognized tax
benefits as of December 31, 2010 decreased by $296 million from the recorded balance as of December 31, 2009.
During the year ended December 31, 2010, the IRS completed its field examination of our 2005 and 2006 tax
returns and issued notices of proposed adjustment. We reached an agreement with the IRS in connection with
several of the adjustments and adjusted our reserves accordingly. There are other proposed adjustments,
including an intercompany transfer pricing matter which could have a significant impact on our tax liability in
future years if not resolved favorably. We have not agreed to these other proposed adjustments and are contesting
them through the administrative process. In the third quarter of 2010, we completed a Fast Track Settlement
process with the IRS related to certain capital losses that became available for use. During the fourth quarter of
2010, we reached a formal agreement with the IRS through a pre-filing agreement to treat certain bad debt
expense as a deductible business expense on the 2009 federal income tax return. We have recognized a benefit in
2010 for both capital loss and bad debt expense as a result of our resolution with the IRS.
During the year ended December 31, 2010, the IRS commenced an examination of our 2007 and 2008 tax
returns. We are also under audit by the California Franchise Tax Board for our 2005 and 2006 tax returns. We
believe our existing reserves for all tax matters are adequate. We also filed with the IRS amended federal tax
returns for our fiscal years 2000 to 2008, to elect foreign tax credits for foreign taxes paid versus the previous
election to deduct foreign taxes from taxable income, reducing income taxes payable by $102 million. Our tax
provisions for all years had been computed on the basis of foreign tax credits, and differences between book and
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