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CSC Settles IRS Examination


WEBWIRE

Settlement Terms and Related Matters Expected to Favorably Impact Net Income

FALLS CHURCH, Va.- CSC (NYSE: CSC) today announced that the U.S. Internal Revenue Service (“IRS”) has concluded its examination of CSC’s consolidated U.S. tax returns for the fiscal years 2000 through 2004. As previously disclosed, 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 U.S. federal cash tax payments for fiscal years 2000 through 2004. Accordingly, the settlement will have no significant impact on the company’s operating cash flows for the current fiscal year.

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 $900 million in the liability for unrecognized tax benefits and related accrued interest and penalties. Of the reductions in liability for unrecognized tax benefits and related accrued interest and penalties, approximately $380 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 $900 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 net favorable impact of the above matters of approximately $370 million was not included as part of CSC’s previous guidance for the current quarter or fiscal year.

The $900 million reduction of the company’s liability for unrecognized tax benefits will reduce the interest expense component of tax expense. The company has not yet completed its analysis regarding the magnitude of this improvement and will provide further information on its second quarter earnings conference call in November.

“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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