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Income Taxes
9 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
As of December 31, 2012, we had $541 million of unrecognized tax benefits, of which $390 million would reduce income tax expense and the effective tax rate, if recognized. During the first nine months of 2013, we recorded an $82 million reduction to our gross unrecognized tax benefits as a result of a change in accounting method for tax purposes, which had no impact to the effective tax rate. During the next twelve months, it is reasonably possible that audit resolutions and the expiration of statutes of limitations could potentially reduce our unrecognized tax benefits by up to $170 million. However, this amount may change because we continue to have ongoing negotiations with various taxing authorities throughout the year.
We have received tax assessments of $98 million from the U.S. Internal Revenue Service (“IRS”) relating to 2003 through 2006. We disagree with a substantial portion of the tax assessments, which primarily relate to transfer pricing. We are pursuing administrative relief through the appeals process. We have also received assessments from the Canada Revenue Agency (“CRA”) for a total of $169 million related to transfer pricing for 2003 through 2007. We have appealed the assessment for 2003 to the Tax Court of Canada and have filed a notice of objection for 2004 through 2007. The trial between McKesson Canada Corporation and the CRA, argued in the Tax Court of Canada, concluded in early February 2012, and we are waiting for the decision. We continue to believe in the merits of our tax positions and that we have adequately provided for any potential adverse results relating to these examinations in our financial statements. However, the final resolution of these issues could result in an increase or decrease to income tax expense.
In November 2011, the IRS began its examination of our 2007 through 2009 federal tax returns. In nearly all jurisdictions, the tax years prior to 2003 are no longer subject to examination. We believe that we have made adequate provision for all income tax uncertainties.
We report interest and penalties on tax deficiencies as income tax expense. At December 31, 2012, before any tax benefits, our accrued interest and penalties on unrecognized tax benefits amounted to $131 million. We recognized an income tax expense of $10 million and a reduction in income tax expense of $8 million, before any tax benefit, in our condensed consolidated statements of operations during the third quarter and first nine months of 2013. The income tax benefit recognized during the first nine months of 2013 was primarily due to the reversal of accrued interest resulting from the reduction of our gross unrecognized tax benefits.