CSC Reduces Tax Liability By USD900mn After IRS Audit

by Glen Shapiro, LawAndTax-News.com, New York

26 September 2008

Computer Sciences Corp., global consulting, systems integration and outsourcing company, has announced that tax benefits worth some USD900mn will be placed on its balance sheet following the closure of an audit of some of its recent tax returns by the US Internal Revenue Service (IRS).

As a result of the conclusion of the IRS examination and the planned filing of related tax accounting method changes, the company will record reductions of approximately USD900 million in liability for unrecognized tax benefits and related accrued interest and penalties.

The change announced by CSC on September 23 follows the conclusion of an examination of the company's consolidated US tax returns for the fiscal years 2000 through 2004.

The company revealed that, of the reductions in liability for unrecognized tax benefits and related accrued interest and penalties, approximately USD380 million will be reflected as a credit to income tax expense, thereby having a corresponding favorable impact to net income in the current fiscal quarter.

The remainder of the USD900 million of unrecognized tax benefits will be reclassified on the company’s balance sheet from liability for uncertain tax positions to deferred tax liabilities and taxes payable. Partially offsetting this benefit are advisory and related expenses incurred in connection with the IRS examination.

The company disclosed that the net favorable impact of these matters of approximately USD370 million was not included as part of CSC’s previous guidance for the current quarter or fiscal year.

The nature of the significant items subject to examination included depreciation and amortization, research credits and international tax issues. Based on the final resolution reached by the company and the IRS, the company will receive a nominal tax refund for overpayments for the years examined, and due to the utilization of net operating loss carryforwards, the company will have no additional US federal cash tax payments for fiscal years 2000 through 2004. The company expects that the settlement will have no significant impact on the company’s operating cash flows for the current fiscal year.

“We are pleased to conclude all outstanding IRS audits through fiscal year 2004 and to realize the corresponding favorable impact on the effective tax rate as we reduce our related interest accrual,” said CSC Chairman, President and Chief Executive Officer Michael W. Laphen.

“In a period of 10 months, through constructive dialogue, the IRS and CSC were able to resolve a number of complex tax issues covering 10 fiscal years.”

Under the settlement, which is evidenced by a Form 906 representing final resolution, CSC and the IRS have agreed to certain adjustments, the collective effect of which include a net operating loss carryover, research and foreign tax credits and charitable contribution carryovers, and other adjustments relating to amortization and depreciation deductions. The company will not be subject to penalties from matters covered by the settlement.

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