Management’s Discussion and Analysis
of Financial Condition and Results of Operations

CONSOLIDATED RESULTS OF OPERATIONS (4 OF 4)

Provision for Income Taxes

(dollars in millions)

Years Ended December 31,

2009

 

2008

 

% Change

 

2008

 

2007

 

% Change

 

Provision for income taxes

$

1,210

 

$

3,331

 

 

(63.7

)

$

3,331

 

$

3,982

 

 

(16.3

)

Effective income tax rate

 

10.5%

 

 

20.9%

 

 

 

 

 

20.9%

 

 

27.4%

 

 

 

 

The effective income tax rate is calculated by dividing the provision for income taxes by income before the provision for income taxes. Our effective tax rate is significantly lower than the statutory federal income tax rate for all years presented due to the inclusion of income attributable to Vodafone Group Plc.’s (Vodafone) noncontrolling interest in the Verizon Wireless partnership within our Income before the provision for income taxes.

The effective income tax rate in 2009 decreased to 10.5% from 20.9% in 2008. The decrease was primarily driven by higher earnings attributable to the noncontrolling interest.

The state and local income tax rate in 2009 was lower than 2008 due to reductions in unrecognized tax benefits after statutes of limitations in multiple jurisdictions lapsed and the impact of earnings attributable to the noncontrolling interest.

The effective income tax rate in 2008 decreased to 20.9% from 27.4% in 2007. The decrease was primarily due to recording $610 million of foreign and domestic taxes and expenses in 2007 relating to our share of Vodafone Omnitel’s distributable earnings. This expense, which increased the effective tax rate by 3.9 percentage points in 2007 compared to 2008, was primarily comprised of $300 million of Italian withholding taxes and $260 million of U.S. federal income taxes. Verizon received net distributions from Vodafone Omnitel in April 2008 and December 2007 of approximately $670 million and $2,100 million, respectively.

The state and local income tax rate in 2008 was higher than 2007 primarily due to an increase in earnings at Verizon Wireless apportioned to states with higher state income tax rates than the remainder of the Company’s operations. This increase was partially offset by lower expenses recorded for unrecognized tax benefits in 2008 compared to 2007.

A reconciliation of the statutory federal income tax rate to the effective income tax rate for each period is included in Note 13 to the consolidated financial statements.

The Company projects its 2010 effective tax rate to be in the range of 18% to 20% excluding the impact of integration and similar costs incurred in connection with the Alltel acquisition, divestiture of Alltel overlapping properties, and divestiture of access lines. As a global commercial enterprise, it is difficult to forecast the Company’s full-year effective tax rate with any further precision due to the numerous factors that could occur and impact the rate. Examples of these factors include possible changes in federal, state and foreign income tax laws or rates, developments with respect to open tax years and income tax audits requiring adjustments to unrecognized tax benefits, acquisitions and dispositions, and changes in operating results that would require increases or decreases to valuation allowances. For 2010, excluding earnings attributable to the noncontrolling interest in Verizon Wireless would result in a projected effective tax rate of 33% to 35% attributable to Verizon.

Discontinued Operations

On March 30, 2007, after receiving Federal Communications Commission (FCC) approval, we completed the sale of our 52% interest in TELPRI and received gross proceeds of approximately $980 million. The sale resulted in a pretax gain of $120 million ($70 million after-tax, or $.02 per diluted share). Additionally, $100 million of the proceeds were contributed to the Verizon Foundation.

We have classified the financial information of TELPRI as discontinued operations in the consolidated financial statements for all periods presented through the date of the divestiture.

Extraordinary Item

In January 2007, the Bolivarian Republic of Venezuela (the Republic) declared its intent to nationalize certain companies, including CANTV. On February 12, 2007, we entered into a Memorandum of Understanding (MOU) with the Republic, which provided that the Republic offer to purchase all of the equity securities of CANTV, including our 28.5% interest, through public tender offers in Venezuela and the United States.

Under the terms of the MOU, the prices in the tender offers would be adjusted downward to reflect any dividends declared and paid subsequent to February 12, 2007. During 2007, the tender offers were completed and Verizon received an aggregate amount of approximately $572 million, which included $476 million from the tender offers as well as $96 million of dividends declared and paid subsequent to the MOU. During 2007, based upon our investment balance in CANTV, we recorded an extraordinary loss of $131 million, including taxes of $38 million, or $.05 per diluted share.

Net Income Attributable to Noncontrolling Interest

(dollars in millions)

Years Ended December 31,

2009

 

2008

 

% Change

 

2008

 

2007

 

% Change

 

Net income attributable

to noncontrolling interest

$

6,707

 

$

6,155

 

 

9.0

 

$

6,155

 

$

5,053

 

 

21.8

 

The increase in Net income attributable to noncontrolling interest in 2009 compared to 2008, and in 2008 compared to 2007, was due to the higher earnings in our Domestic Wireless segment, which has a 45% noncontrolling interest attributable to Vodafone.