Analyzing Business Earnings 61The benefit from the tax redetermination is clearly a nonrecurring item.
The tax reductions due to the foreign sales corporation feature of the tax law may
or may not be sustainable. Any profit component that relies on a specific feature
of the current tax law should be viewed as somewhat vulnerable. That is, its con-
tinuance requires that (1) this feature of the tax law be preserved and (2) that
ADM continues to take the actions necessary to earn these tax benefits.
The ADM disclosures provide one example of a nonrecurring tax benefit
plus at least one example of a benefit that may be somewhat more vulnerable
than other sources of operating profit. Exhibit 2.19 provides a sampling of
other nonrecurring tax benefits and tax charges that were found in recent com-
pany tax notes.
The tax benefits of both Biogen and Dana result from utilizing loss carry-
for wards whose benefits had not previously been recognized. The losses that
produced the tax savings originated in earlier periods. Because the likelihood
of their realization was not sufficiently high, the potential tax savings of the
losses were not recognized in the income statements in the years in which
these losses were incurred. The subsequent realization of these benefits occurs
when the operating and capital loss carryfor wards are used to shield operating
earnings and capital gains, respectively, from taxation. These benefits should
be treated as nonrecurring in analyzing earnings performance for the year in
which the benefits are realized.
Gerber Scientific’s effective tax rate was reduced as a result of its recog-
nizing benefits from research and development tax credits. This feature of the
tax law is designed to encourage R&D spending. As with all other tax credits,
continuation of this source of tax reduction requires that the feature continue
to be part of the tax law and that Gerber make the R&D expenditures neces-
sary to earn future benefits.
The nonrecurring items of First Aviation Services and Micron Technol-
ogy both result from adjustments of their tax valuation allowances. The al-
lowance balances represent the portion of tax benefits that have been judged
unlikely to be realized.^29 Increasing this balance will create a nonrecurring tax
EXHIBIT 2.19 Examples of nonrecurring income tax charges
and benefits.
Company Nonrecurring Charge or Benefit
Biogen Inc. (1999) Benefits from net operating loss utilization
Dana Corporation (1999) Capital loss utilization tax benefit
Detection Systems Inc. (2000) Benefit from lower foreign tax rates
First Aviation Services Inc. (1999) Benefit from valuation allowance decrease
The Fairchild Corporation (2000) Benefit from revision of estimate for tax accruals
Gerber Scientific Inc. (2000) Research and development tax credit
M.A. Hanna Company (1999) Benefit from reversal of tax liability—tax settlement
Micron Technology Inc. (2000) Charge for valuation allowance increase
Pall Corporation (2000) Tax benefit of Puerto Rico operations
SOURCES: Companies’ annual reports. The year following each company name designates the annual re-
port from which the example was drawn.