Notes to Consolidated Financial Statements 6

Note 6 — Taxes on Earnings

Taxes on earnings from continuing operations reflect the annual effective rates, including charges for interest and penalties. Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. U.S. income taxes are provided on those earnings of foreign subsidiaries which are intended to be remitted to the parent company. Abbott does not record deferred income taxes on earnings reinvested indefinitely in foreign subsidiaries. Undistributed earnings reinvested indefinitely in foreign subsidiaries as working capital and plant and equipment aggregated $14.9 billion at December 31, 2008. It is not practicable to determine the amount of deferred income taxes not provided on these earnings. In the U.S., Abbott’s federal income tax returns through 2005 are settled, and the income tax returns for years after 2005 are open. There are numerous other income tax jurisdictions for which tax returns are not yet settled, none of which are individually significant. Reserves for interest and penalties are not significant.

Earnings from continuing operations before taxes, and the related provisions for taxes on earnings from continuing operations, were as follows:

(dollars in millions)
Earnings From Continuing
Operations Before Taxes:	2008	2007	2006
Domestic	$    (81)	$    670	$  (869)
Foreign	5,937	3,800	3,145
Total	$5,856	$4,470	$2,276

Taxes on Earnings From
Continuing Operations:	2008	2007	2006
Current:
U.S. Federal, State and Possessions	$1,188	$  564	$  509
Foreign	782	675	634
Total current	1,970	1,239	1,143
Deferred:
Domestic	(845)	(304)	(545)
Foreign	(3)	(72)	(38)
Total deferred	(848)	(376)	(583)
Total	$1,122	$  863	$  560

Differences between the effective income tax rate and the U.S. statutory tax rate were as follows:

	2008	2007	2006
Statutory tax rate on earnings from continuing operations	35.0%	35.0%	35.0%
Benefit of lower foreign tax rates and tax exemptions	(16.7)	(12.6)	(18.4)
Effect of non-deductible acquired in-process research and development	—	—	19.4
State taxes, net of federal benefit	0.2	0.4	0.3
Adjustments primarily related to resolution of prior years' accrual requirements	(0.5)	—	(5.8)
Domestic dividend exclusion	(0.6)	(3.1)	(5.9)
All other, net	1.8	(0.4)	—
Effective tax rate on earnings from continuing operations	19.2%	19.3%	24.6%

As of December 31, 2008, 2007 and 2006, total deferred tax assets were $5.4 billion, $3.6 billion and $3.2 billion, respectively, and total deferred tax liabilities were $1.4 billion, $1.4 billion and $1.1 billion, respectively. Valuation allowances for deferred tax assets were not significant. The tax effect of the differences that give rise to deferred tax assets and liabilities were as follows:

(dollars in millions)	2008	2007	2006
Compensation and employee benefits	$1,496	$862	$921
Trade receivable reserves	434	337	236
Inventory reserves	261	220	163
Deferred intercompany profit	248	262	390
State income taxes	137	84	52
Depreciation	(64)	(105)	(135)
Acquired in-process research and development and other accruals and reserves not currently deductible	2,771	1,751	1,269
Other, primarily the excess of book basis over tax basis of intangible assets	(1,293)	(1,197)	(872)
Total	$3,990	$2,214	$2,024

On January 1, 2007, Abbott adopted the provisions of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes.” Under this Interpretation, in order to recognize an uncertain tax benefit, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. Adoption of this Interpretation did not have a material impact on Abbott’s financial position. The following table summarizes the gross amounts of unrecognized tax benefits without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such unrecognized tax benefits were settled.

(dollars in millions)	2008	2007
January 1	$1,126	$ 713
Increase due to current year tax positions	385	339
Increase due to prior year tax positions	418	147
Decrease due to current year tax positions	(25)	—
Decrease due to prior year tax positions	(240)	(11)
Settlements	(121)	(62)
Lapse of statute	(20)	—
December 31	$1,523	$1,126

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $1.4 billion. Abbott believes that it is reasonably possible that unrecognized tax benefits will be settled within the next twelve months as a result of concluding various tax matters. Abbott expects the range of the decrease in the recorded amounts of unrecognized tax benefits, primarily as a result of cash adjustments, to range from $400 million to $650 million, arising from the conclusion of these tax matters.