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Notes to Consolidated Financial Statements
Note 11. Income Taxes
The provision (benefit) for income taxes consists of the following:
| 2004 | 2003 | 2002 | ||||||
| (In thousands) | ||||||||
| Federal: | Current | $ (41,633 | ) | $ 46,093 | $ (84,315 | ) | ||
| Deferred | 49,129 | (16,109 | ) | 24,227 | ||||
| 7,496 | 29,984 | (60,088 | ) | |||||
| State: | Current | 2,248 | 7,540 | 3,227 | ||||
| Deferred | 146 | (8,314 | ) | (25,630 | ) | |||
| 2,394 | (774 | ) | (22,403 | ) | ||||
| Foreign: | Current | 37,665 | 14,957 | 3,144 | ||||
| Total | $ 47,555 | $ 44,167 | $ (79,347 | ) | ||||
The tax benefits associated with stock option exercises and the employee stock purchase plan were $109 million, $17 million and $52 million, for fiscal years 2004, 2003 and 2002, respectively. Such benefits are credited to additional paid-in capital when realized. The Company has federal and state tax loss and tax credit carryforwards of approximately $454 million and $83 million, respectively. If unused, these tax loss carryforwards and $61 million of the tax credit carryforwards will expire in 2007 through 2024. Pretax income from foreign operations was $387 million, $185 million and $14 million for fiscal years 2004, 2003 and 2002, respectively. Unremitted foreign earnings that are considered to be permanently invested outside the United States and on which no U.S. taxes have been provided, accumulated to approximately $482 million as of April 3, 2004. The residual U.S. tax liability, if such amounts were remitted, would be approximately $121 million.
The provision (benefit) for income taxes reconciles to the amount obtained by applying the Federal statutory income tax rate to income (loss) before provision (benefit) for taxes as follows:
| 2004 | 2003 | 2002 | ||||
| (In thousands) | ||||||
| Income (loss) before provision (benefit) for taxes | $350,544 | $169,872 | $(192,954 | ) | ||
| Federal statutory tax rate | 35 | % | 35 | % | 35 | % |
| Computed expected tax | $122,690 | $ 59,455 | $ (67,534 | ) | ||
| State taxes net of federal benefit | 1,556 | (503 | ) | (14,562 | ) | |
| Tax exempt interest | (4,005 | ) | (3,628 | ) | (3,667 | ) |
| Foreign earnings at lower tax rates | (32,327 | ) | (3,627 | ) | 8,784 | |
| Effect of IRS Stipulation | (34,418 | ) | — | — | ||
| Amortization of goodwill | — | — | 9,884 | |||
| Tax credits | (5,619 | ) | (8,445 | ) | (13,235 | ) |
| Other | (322 | ) | 915 | 983 | ||
| Provision (benefit) for income taxes | $ 47,555 | $ 44,167 | $ (79,347 | ) | ||
The major components of deferred tax assets and liabilities consist of the following at April 3, 2004 and March 29, 2003:
| 2004 | 2003 | |||
| (In thousands) | ||||
| Deferred tax assets: | ||||
| Inventory valuation differences | $ 6,374 | $ 14,289 | ||
| Deferred income on shipments to distributors | 33,874 | — | ||
| Nondeductible accrued expenses | 33,776 | 29,584 | ||
| Tax loss and tax credit carryforwards | 209,794 | 109,132 | ||
| Current net value of investments | — | 10,485 | ||
| Intangible and fixed assets | 15,873 | 34,981 | ||
| Other | 6,464 | 10,186 | ||
| Total deferred tax assets | 306,155 | 208,657 | ||
| Deferred tax liabilities: | ||||
| Unremitted foreign earnings | (153,978 | ) | (111,279 | ) |
| Deferred income on shipments to distributors | — | (9,513 | ) | |
| Capital gain from merger of USIC with UMC | (57,818 | ) | (57,818 | ) |
| Current net value of investments | (37,000 | ) | — | |
| Other | (4,066 | ) | — | |
| Total deferred tax liabilities | (252,862 | ) | (178,610 | ) |
| Total net deferred tax assets | $ 53,293 | $ 30,047 | ||
The difference between the net deferred taxes per the consolidated balance sheet and the net deferred taxes above, of $36 million and $37 million at April 3, 2004 and March 29, 2003, respectively, is included in other assets on the consolidated balance sheet.
The IRS has audited and issued proposed adjustments to the Company for fiscal years 1996 through 2001. To date, several issues have been settled with the Appeals Office of the IRS. As of April 3, 2004, unresolved issues asserted by the IRS total $19.0 million in additional taxes due, including penalties and a reduction of future net operating losses of $31.2 million.
The Company filed a petition with the U.S. Tax Court on March 26, 2001, in response to assertions by the IRS that the Company owed additional tax for fiscal years 1996 through 1998. Several issues, including the arm's length royalty issue discussed below, have been settled with the Appeals Office of the IRS.
In October 2002, the IRS issued a notice of deficiency for fiscal year 1999. The notice of deficiency was based on issues that were also asserted in the previous notice of deficiency for fiscal years 1996 through 1998. On January 14, 2003, the Company filed a petition with the U.S. Tax Court in response to the October 2002 notice of deficiency.
In October 2003, the IRS issued a notice of deficiency for fiscal year 2000. The notice of deficiency was based on issues that were also asserted in the previous notices of deficiency for fiscal years 1996 through 1999. In addition, the IRS disallowed a carryback of general business credits from fiscal year 2000 to fiscal year 1995. The Company filed a petition with the U.S. Tax Court on January 16, 2004, in response to the October 2003 notice of deficiency.
On April 6, 2004, Xilinx filed a settlement stipulation concerning the arm's length royalty for the license between the Company and Xilinx Ireland for fiscal years 1996 through 1999. On April 29, 2004, the Company filed a settlement stipulation concerning the arm's length royalty for the license between the Company and Xilinx Ireland for fiscal year 2000. The IRS agreed not to increase Xilinx's taxable income for this issue. The IRS had asserted increased taxable income of $242 million for fiscal years 1996 through 1999 and $57 million for fiscal year 2000.
One of the unresolved issues relates to whether the value of compensatory stock options must be included in the cost sharing agreement with Xilinx Ireland. The Company and the IRS filed cross motions for summary judgment in 2002 relating to this stock option cost sharing issue. In March 2003, the IRS changed its position concerning the treatment of stock options in cost sharing agreements. The IRS now excludes stock options granted prior to the beginning of the cost sharing agreement with Xilinx Ireland. The IRS change in position reduced the amount originally at issue on the treatment of stock options in cost sharing agreements, which was the subject of the summary judgment motions. On October 28, 2003, the Tax Court issued an order denying both Xilinx's and the IRS's cross motions for summary judgment on the stock option cost sharing issue. The order stated that evidence is necessary to establish whether the stock options are a cost related to research and development and to determine whether unrelated parties would share the cost of stock options in a cost sharing agreement. The Court has granted an IRS motion to amend its answer to assert an alternative deficiency based on the Black-Scholes value of stock options on grant. The trial for this issue has been set for July 14, 2004, and fiscal year 1999 has been combined with fiscal years 1997 to 1998.
Xilinx is in discussions with the Appeals Office to resolve and settle the remaining issues, other than the stock option cost sharing issue discussed above. It is premature to comment further on the likely outcome of any issues that have not been settled to date. The Company believes it has meritorious defenses to the remaining adjustments and sufficient taxes have been provided.
