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Annual Report 1996


4. Income Taxes
An analysis of income tax expense/(benefit) follows:
(In millions)      
1996

Current

Deferred

Total


Federal

$2.8

$(19.2)

$(16.4)

State

.4

.8

1.2

Foreign

25.7

5.7

31.4

Total

$28.9

$(12.7)

$16.2

       
1995      

Federal

$.9

$(68.4)

$(67.5)

State

.3

(7.5)

(7.2)

Foreign

17.7

(4.2)

13.5

Total

$18.9

$(80.1)

$(61.2)

       
1994      

Federal

$3.3

$2.6

$5.9

State

1.7

.5

2.2

Foreign

35.6

(.2)

35.4

Total

$40.6

$2.9

$43.5

Prepaid income taxes and deferred income taxes result from future tax benefits and expenses related to the difference between the tax basis of assets and liabilities and the amounts reported in the financial statements. These differences predominately relate to U.S. operations. Carryforwards, tax overpayments and refunds due are also included in prepaid income taxes. The net of deferred income tax assets and deferred income tax liabilities reflected on the consolidated balance sheet was a net asset of $243.7 million and $249.2 million as of December 31, 1996 and 1995, respectively. Significant components of those amounts shown on the balance sheet as of December 31 were as follows:

(In millions)

1996

1995


Deferred tax assets:    
Property, plant and equipment and trademarks

$(22.0)

$(11.3)

Inventory

43.0

53.1

Compensation and benefits

59.4

52.7

Postretirement and postemployment benefits

124.8

125.4

Loss and credit carryforwards

54.1

40.1

All other

17.6

21.5

Subtotal

276.9

281.5

Valuation allowance

(21.5)

(23.2)

Total deferred tax assets

$255.4

$258.3

     
Deferred tax liabilities:    
Property, plant and equipment and trademarks

$4.4

$3.4

Inventory

3.1

2.2

Compensation and benefits

3.9

4.7

All other

.3

(1.2)

Total deferred tax liability

11.7

9.1

     
Net deferred tax asset

$243.7

$249.2

Valuation allowances of $21.5 million and $23.2 million as of December 31, 1996 and 1995, respectively, were established for the prepaid taxes related to foreign tax credits and to capital losses. Foreign tax credits may be used to offset the U.S. income taxes due on income earned from foreign sources. However, the credit is limited by the total income included on the U.S. income tax return as well as the ratio of foreign source income to total income. Excess foreign tax credits may be carried back two years and forward five years. As of December 31, 1996, the Company did not believe it was more likely than not that it would generate sufficient U.S. sourced income within the appropriate period to utilize all the foreign tax credits.

Capital losses may be used only to offset capital gains. Capital losses may be carried back three years and forward five years. As of December 31, 1995, the Company had a capital loss carryforward. However during 1996, the Company realized sufficient capital gains from the sale of real estate to utilize fully the capital loss carryforward. In addition, those temporary differences which most likely will produce capital losses upon reversal have been treated as capital losses. Historically, the Company has generated limited capital gains. Therefore, as of December 31, 1996, Company did not believe it was more likely than not that it would generate sufficient capital gains within the appropriate time period to offset those future capital losses.

Management believes the Company will obtain the full benefit of other deferred tax assets on the basis of its evaluation of the Company's anticipated profitability over the period of years that the temporary differences are expected to become tax deductions. It believes that sufficient book and taxable income will be generated to realize the benefit of these tax assets. This assessment of profitability takes into account the Company's present and anticipated split of domestic and international earnings and the fact that the temporary differences related to postretirement and other postemployment benefits are deductible over a period of 30 to 40 years.

Management also considered that as of December 31, 1996, the Company elected to carryforward the current net operating loss of $46.7 million in the U.S. which expires in 2011. The Company has an additional net operating loss carryforward of $37.8 million which expires in 2010. The Company also has a foreign tax credit carryforward of $20.1 million (against which, there is a full valuation allowance) and an alternative minimum tax credit carryforward of $2.8 million as of December 31, 1996. $16.3 million of the foreign tax credit expires in 2000 and $3.8 million expires in 2001. The alternative minimum tax credit does not expire. Finally, management considered that historically the Company has not had net operating losses in the U.S. Of course, there can be no assurance that the Company will generate any specific level of continuing earnings or where earnings will be generated.

For alternative minimum tax purposes, the Company had a foreign tax credit carryforward at the end of 1996 of $56.4 million; $6.6 million expires in 1997, $21.5 million expires in 1998, $6.1 million expires in 1999, $18.4 million expires in 2000, and $3.8 million expires in 2001.

An analysis of earnings/(loss) before income tax expense/(benefit) and extraordinary loss follows:

(In millions)

1996

1995

1994


Domestic

$(3.7)

$(236.8)

$44.6

Foreign

34.9

35.4

116.1

Total

$31.2

$(201.4)

$160.7

A reconciliation of differences between the statutory U.S. federal income tax rate and the Company's effective tax rate follows:

 

1996

1995

1994


U.S. statutory rate

35.0%

35.0%

35.0%

State taxes

3.3

2.3

.4

Benefit plan deductions

(3.3)

-

-

Loss carryforwards

(2.9)

-

-

Nondeductible expenses

2.7

-

-

Valuation allowance change

(5.5)

(7.8)

(.5)

Tax effect resulting from foreign activities

21.9

.5

(4.8)

Other

.8

.4

(3.0)

Effective tax rate

52.0%

30.4%

27.1%

The tax effect resulting from foreign activities includes the effect of remeasuring foreign currency. The impact on the tax rate for 1996 was an increase of 28.7 percentage points, an increase of 2.1 percentage points for 1995, and a decrease of 5.2 percentage points for 1994.

Undistributed earnings of foreign subsidiaries held for reinvestment in overseas operations amounted to $442.3 million at December 31, 1996. Additional U.S. income taxes may be due upon remittance of those earnings (net of foreign tax reductions because of the distribution), but it is impractical to determine the amount of any such additional taxes. If all those earnings were distributed as dividends, foreign withholding taxes of approximately $23.7 million would be payable.

Federal income tax returns of the Company for all years through 1988 have been closed and all matters have been resolved. The Federal income tax returns for 1989 through 1993 have been audited. Certain proposed adjustments for the 1989-1991 tax returns have been appealed by the Company. Regardless of the outcome of the appeal, it will not have a material adverse impact upon the financial statements of the Company.




Polaroid Corporation Annual Report 1996
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