The ABCs of systemic healthcare reform - Cerner Corporation

The effective income tax rates for 2008, 2007 and 2006 were 33%, 38% and 34%, respectively. These effective rates differ
from the Federal statutory rate of 35% as follows:
The 2008, 2007 and 2006 tax expense amounts include the recognition of approximately $2,879,000, $3,125,000 and
$1,994,000 respectively of tax benefits for items related to prior periods. The 2008 amount was related to an adjustment of a
foreign tax credit claimed. The adjustments in 2007 were recorded primarily to correct an error in the Company’s 2006 state
income tax rate. These differences have accumulated over several years and the impact to any one of these prior periods is not
material. The 2006 amounts relate to tax credits taken on prior income tax returns and to correct an error in prior years’
effective foreign tax rate, which had accumulated over several years.
On December 31, 2006, the Company adopted the Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48),
“Accounting for Uncertainty in Income Taxes,” an interpretation of the Statement of Financial Accounting Standards (SFAS) No.
109, “Accounting for Income Taxes.” This interpretation clarifies how companies calculate and disclose uncertain tax positions.
The effect of adopting this interpretation did not impact any previously recorded amounts for unrecognized tax benefits.
The 2008 beginning and ending amounts of accrued interest related to the underpayment of taxes was $202,000 and
$925,000, respectively. The Company classifies interest and penalties as income tax expense in its consolidated statement of
earnings, which is consistent with how the Company previously classified interest and penalties related to the underpayment of
income taxes. No accrual for tax penalties was recorded upon adoption of FIN 48 or at the end of the year.
The total amount of unrecognized tax benefits including interest was $8,069,000 as of December 29, 2007. During 2008, the
Company settled IRS examinations for the 2005 to 2006 periods and as a result reversed previously recorded reserves for tax
uncertainties by $1,319,000. The years after 2006 remain open. As of January 3, 2009, the total amount of unrecognized tax
benefits, including interest, was $12,440,000. It is reasonably possible that within the next 12 months the Company will
resolve some of the matters which may decrease unrecognized tax benefits for these open tax years by $1,000,000. Any
settlement of those unrecognized tax benefits will affect the effective tax rate of the Company.
A reconciliation of unrecognized tax benefit as of January 3, 2009, is presented below:
(12) Related Party Transactions
For the first half of 2008 and prior years, the Company leased an airplane from PANDI, Inc. (PANDI), a company owned by Mr.
Neal L. Patterson and Mr. Clifford W. Illig, the Company’s Chairman/CEO and Vice Chairman of the Board, respectively. The
airplane was leased on a per mile basis with no minimum usage guarantee. The lease rate was believed to approximate fair
market value for this type of aircraft. During 2008, 2007 and 2006 the Company paid an aggregate of $423,000, $661,000,
and $670,000 for the rental of the airplane, respectively. The airplane was used principally by Mr. Trace Devanny, President,
and Mr. Mike Valentine, Executive Vice President, to make client visits. On August 14, 2008, the PANDI aircraft was sold by
PANDI to a third party, which had the effect of terminating the lease agreement with the Company.
On February 6, 2007, the Company entered into an Aircraft Service Agreement between Rockcreek Aviation, Inc. (the Company’s
wholly-owned flight operations subsidiary) and PANDI. Under this agreement Rockcreek Aviation provided flight operations
services to PANDI with respect to PANDI’s aircraft. PANDI owned and operated a Beechcraft, BeechJet 400 for the first half of
2008. During 2008, the aircraft services fees paid by PANDI to the Company were $297,000. On August 14, 2008, the PANDI
aircraft was sold by PANDI to a third party, which had the effect of terminating the Aircraft Service Agreement between
Rockcreek Aviation and PANDI.
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