Note 18: Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Text Block]

NOTE 18:  INCOME TAXES

The components of earnings (loss) from continuing operations before income taxes and the related provision (benefit) for U.S. and other income taxes were as follows:

	For the Year Ended December 31,
(in millions)	2012			2011			2010
(Loss) earnings from continuing operations before income taxes:
U.S.	$	(1,760	)	$	(703	)	$	(343	)
Outside the U.S.		200			4			(82	)
Total	$	(1,560	)	$	(699	)	$	(425	)
U.S. income taxes:
Current benefit	$	(393	)	$	(378	)	$	(2	)
Deferred provision		13			241			2
Income taxes outside the U.S.:
Current provision		58			54			188
Deferred provision (benefit)		65			106			(76	)
State and other income taxes:
Current benefit		-			(22	)		(2	)
Deferred provision		-			7			-
Total (benefit) provision	$	(257	)	$	8		$	110

The differences between income taxes computed using the U.S. federal income tax rate and the provision (benefit) for income taxes for continuing operations were as follows:

	For the Year Ended December 31,
(in millions)	2012			2011			2010
Amount computed using the statutory rate	$	(546	)	$	(245	)	$	(149	)
Increase (reduction) in taxes resulting from:
State and other income taxes, net of federal		1			1			1
Unremitted foreign earnings		35			393			-
Impact of goodwill impairment		-			-			217
Operations outside the U.S.		(129	)		41			131
Legislative rate changes		23			20			10
Valuation allowance		350			(57	)		(98	)
Tax settlements and adjustments, including interest		(11	)		(149	)		3
Other, net		20			4			(5	)
(Benefit) provision for income taxes	$	(257	)	$	8		$	110

In March 2011, Kodak filed a Request for Competent Authority Assistance with the United States Internal Revenue Service (IRS).  The request related to a potential double taxation issue with respect to certain patent licensing royalty payments received by Kodak in 2012 and 2011.  In the twelve months ended December 31, 2012, Kodak received notification that the IRS had reached agreement with the Korean National Tax Service (NTS) with regards to Kodak’s March 2011 request.  As a result of the agreement reached by the IRS and NTS, Kodak was due a partial refund of Korean withholding taxes in the amount of $123 million.  Kodak had previously agreed with the licensees that made the royalty payments that any refunds of the related Korean withholding taxes would be shared equally between Kodak and the licensees.  The licensees’ share ($61 million) of the Korean withholding tax refund has therefore been reported as a licensing revenue reduction in Licensing & royalties in the Consolidated Statement of Operations.

During 2012 and 2011, Kodak determined that it was more likely than not that a portion of the deferred tax assets outside the U.S. would not be realized due to reduced manufacturing volumes negatively impacting profitability in a location outside the U.S. and accordingly, recorded a provision of $30 million and $53 million, respectively, associated with the establishment of a valuation allowance on those deferred tax assets.

During 2010, based on additional positive evidence regarding past earnings and projected future taxable income from operating activities, Kodak determined that it is more likely than not that a portion of the deferred tax assets outside the U.S. would be realized and accordingly, recorded a tax benefit of $154 million associated with the release of the valuation allowance on those deferred tax assets.

Deferred Tax Assets and Liabilities

The significant components of deferred tax assets and liabilities were as follows:

	As of December 31,
(in millions)	2012		2011
Deferred tax assets
Pension and postretirement obligations	$	689	$	925
Allowed Claims		272		-
Restructuring programs		10		5
Foreign tax credit		577		661
Inventories		26		33
Investment tax credit		153		172
Employee deferred compensation		113		69
Depreciation		57		30
Research and development costs		308		232
Tax loss carryforwards		1,409		1,178
Other		415		406
Total deferred tax assets	$	4,029	$	3,711
Deferred tax liabilities
Leasing	$	43	$	37
Other deferred debt		11		16
Unremitted foreign earnings		417		430
Other		181		168
Total deferred tax liabilities		652		651
Net deferred tax assets before valuation allowance		3,377		3,060
Valuation allowance		2,838		2,560
Net deferred tax assets	$	539	$	500

Deferred tax assets (liabilities) are reported in the following components within the Consolidated Statement of Financial Position:

	As of December 31,
(in millions)	2012			2011
Deferred income taxes (current)	$	75		$	81
Other long-term assets		470			429
Accrued income taxes		(5	)		(3	)
Other long-term liabilities		(1	)		(7	)
Net deferred tax assets	$	539		$	500

As of December 31, 2012, Kodak had available domestic and foreign net operating loss carry-forwards for income tax purposes of approximately $4,396 million, of which approximately $519 million have an indefinite carry-forward period.  The remaining $3,877 million expire between the years 2013 and 2032.    As of December 31, 2012, Kodak had unused foreign tax credits and investment tax credits of $577 million and $153 million, respectively, with various expiration dates through 2027.  Utilization of these net operating losses and tax credits may be subject to limitations in the event of significant changes in stock ownership of the Company.

Kodak has been granted a tax holiday in certain jurisdictions in China.  Kodak is eligible for a 50% reduction of the income tax rate as a tax holiday incentive.  The tax rate currently varies by jurisdiction, due to the tax holiday, and will be 25% in all jurisdictions within China in 2013.

During 2011, Kodak concluded that the undistributed earnings of its foreign subsidiaries would no longer be considered permanently reinvested.  After assessing the assets of the subsidiaries relative to specific opportunities for reinvestment, as well as the forecasted uses of cash for both its domestic and foreign operations, Kodak concluded that it was prudent to change its indefinite reinvestment assertion to allow greater flexibility in its cash management. As a result of the change in its assertion Kodak recorded a deferred tax liability (net of related foreign tax credits) of $374 million and $396 million on the foreign subsidiaries’ undistributed earnings during the year ended December 31, 2012 and 2011, respectively.  This deferred tax liability was fully offset by a corresponding decrease in Kodak’s U.S. valuation allowance, which resulted in no net tax provision.  Kodak also recorded a provision of $6 million and $34 million for the potential foreign withholding taxes on the undistributed earnings during the year ended December 31, 2012 and 2011, respectively.

Kodak’s valuation allowance as of December 31, 2012 was $2,838 million.  Of this amount, $403 million was attributable to Kodak’s net deferred tax assets outside the U.S. of $1,001 million, and $2,435 million related to Kodak’s net deferred tax assets in the U.S. of $2,376 million, for which Kodak believes it is not more likely than not that the assets will be realized.  The net deferred tax assets in excess of the valuation allowance of approximately $539 million relate primarily to net operating loss carry-forwards, certain tax credits, and pension related tax benefits for which Kodak believes it is more likely than not that the assets will be realized.

Kodak’s valuation allowance as of December 31, 2011 was $2,560 million.  Of this amount, $417 million was attributable to Kodak’s net deferred tax assets outside the U.S. of $964 million, and $2,143 million related to Kodak’s net deferred tax assets in the U.S. of $2,096 million, for which Kodak believes it is not more likely than not that the assets will be realized.  The net deferred tax assets in excess of the valuation allowance of $500 million relate primarily to net operating loss carry-forwards, certain tax credits, and pension related tax benefits for which Kodak believes it is more likely than not that the assets will be realized.

Accounting for Uncertainty in Income Taxes

A reconciliation of the beginning and ending amount of Kodak’s liability for income taxes associated with unrecognized tax benefits is as follows:

(in millions)

	2012			2011			2010
Balance as of January 1	$	76		$	245		$	256
Tax positions related to the current year:
Additions		4			12			1
Tax positions related to prior years:
Additions		3			2			-
Reductions		(17	)		(183	)		(11	)
Settlements with taxing authorities		(3	)		-			-
Lapses in statutes of limitations		(6	)		-			(1	)
Balance as of December 31	$	57		$	76		$	245

Kodak’s policy regarding interest and/or penalties related to income tax matters is to recognize such items as a component of income tax (benefit) expense.  During the years ended December 31, 2012, 2011 and 2010, Kodak recognized interest and penalties of approximately $2 million, $(60) million and $5 million, respectively, in income tax (benefit) expense.  Additionally, Kodak had approximately $16 million and $14 million of interest and penalties associated with uncertain tax benefits accrued as of December 31, 2012 and 2011, respectively.

If the unrecognized tax benefits were recognized, they would favorably affect the effective income tax rate in the period recognized.  Kodak has classified certain income tax liabilities as current or noncurrent based on management’s estimate of when these liabilities will be settled.  The current liabilities are recorded in Accrued income and other taxes in the Consolidated Statement of Financial Position.  Noncurrent income tax liabilities are recorded in Other long-term liabilities in the Consolidated Statement of Financial Position.

It is reasonably possible that the liability associated with Kodak’s unrecognized tax benefits will increase or decrease within the next twelve months.  These changes may be the result of settling ongoing audits or the expiration of statutes of limitations.  Such changes to the unrecognized tax benefits could range from $0 to $40 million based on current estimates.  Audit outcomes and the timing of audit settlements are subject to significant uncertainty.  Although management believes that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on the earnings of Kodak.  Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a positive impact on earnings.

During 2012, Kodak agreed to terms with a tax authority outside of the U.S. and settled audits for calendar years 2002 through 2007. For these years, Kodak originally recorded liabilities for uncertain tax positions (“UTPs”) totaling $12 million (plus interest of approximately $4 million). The settlement resulted in a reduction in Accrued income and other taxes and the recognition of a $16 million tax benefit.

During 2011, Kodak agreed to terms with the U.S. Internal Revenue Service and settled the federal audits for calendar years 2001 through 2005.  For these years, Kodak originally recorded federal and related state liabilities for UTPs totaling $115 million (plus interest of approximately $25 million).  The settlement resulted in a reduction in Accrued income and other taxes of $296 million, the recognition of a $50 million tax benefit, and a reduction in net deferred tax assets of $246 million.

During 2011, Kodak agreed to terms with a tax authority outside of the U.S. and settled audits for calendar years 2001 and 2002. For these years, Kodak originally recorded liabilities for UTPs totaling $56 million (plus interest of approximately $43 million). The settlement resulted in a reduction in Accrued income and other taxes and the recognition of a $94 million tax benefit.

Kodak files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions.  Kodak has substantially concluded all U.S. federal income tax matters for years through 2006.  Kodak’s U.S. tax matters for the years 2007 through 2012 remain subject to examination by the IRS.  Substantially all material state, local, and foreign income tax matters have been concluded for years through 2006.  Kodak’s tax matters for the years 2007 through 2012 remain subject to examination by the respective state, local, and foreign tax jurisdiction authorities.

Net Operating Loss Rights Agreement

On August 1, 2011, the Company entered into a Net Operating Loss (NOL) Rights Agreement (NOL Rights Agreement) designed to preserve stockholder value and tax assets.  The Company’s ability to use its tax attributes to offset tax on U.S. taxable income would be substantially limited if there were an "ownership change" as defined under Section 382 of the U.S. Internal Revenue Code.  In general, an ownership change would occur if "5-percent shareholders," as defined under Section 382, collectively increase their ownership in the Company by more than 50 percentage points over a rolling three-year period.

In connection with the adoption of the NOL Rights Agreement, the Company’s Board of Directors declared a dividend of one preferred share purchase right for each outstanding share of the Company’s common stock.  The preferred share purchase rights were distributed to stockholders of record as of August 11, 2011, but would only be activated if triggered by the NOL Rights Agreement.

Under the NOL Rights Agreement, preferred share purchase rights will work to impose significant dilution upon any person or group which acquires beneficial ownership of 4.9% or more of the outstanding common stock, without the approval of the Company’s Board of Directors, from and after August 1, 2011.  Stockholders that own 4.9% or more of the outstanding common stock as of the opening of business on August 1, 2011, will not trigger the preferred share purchase rights so long as they do not (i) acquire additional shares of common stock representing one one-thousandth of one percent (0.001%) or more of the shares of common stock then outstanding or (ii) fall under 4.9% ownership of common stock and then re-acquire shares that in the aggregate equal 4.9% or more of the common stock.

The NOL Rights Agreement has a three-year term, although the Company’s Board of Directors will review the plan periodically.