NOTE 7.  INCOME TAXES

Our tax rate is generally less than the 35 percent U.S. income tax rate primarily due to lower tax rates on foreign income and research tax credits.  The tax rates for the three and nine month periods ended September 25, 2011, were 25.0 percent and 28.2 percent, respectively.  The tax rate for the three and nine month periods ended September 25, 2011, includes a net discrete income tax benefit of $29 million (net of additional reserves for uncertain tax positions of $39 million) related to prior year  refund claims filed for additional research tax credits, partially offset by additional foreign income net of foreign tax credits, as well as other adjustments.    This benefit also includes discrete income tax charges of $2 million for prior year tax return true-up adjustments and $3 million related to the third quarter enactment of U.K. tax law changes in the three and nine month periods ended September 25, 2011.   Additionally, the tax rate for the nine month period includes a second quarter discrete income tax charge of $4 million related to the enactment of state tax law changes in Indiana.

The balance of “unrecognized tax benefits,” the amount of related interest we have provided and what we believe to be the range of reasonably possible changes in the next 12 months were the following:

It is reasonably possible that the liability associated with the unrecognized tax benefits will increase or decrease within the next 12 months.  These changes may be the result of the expiration of statutes of limitations or audits and could range from $0 to $60 million based on current estimates.  Audit outcomes and the timing of audit settlements are subject to significant uncertainty.  Although we believe that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings.  Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a positive impact on earnings.  It is anticipated that the expiration of statutes of limitations during the next 12 months could have a significant earnings impact.  Due to the uncertainty of amounts and in accordance with our accounting policies, we have not recorded any potential impact of these settlements.

Our effective tax rates for the comparable prior year periods were 29.5 percent and 31.1 percent, respectively.  In July 2010, the U.K. passed legislation which reduced our U.K. tax rate from 28 percent to 27 percent in 2011.  We had an additional charge to our third quarter tax provision of approximately $2 million to reduce the value of our U.K. deferred tax assets.  The tax rate for the nine month period included a discrete income tax charge of $7 million related to the enactment of the “Patient Protection and Affordable Care Act.”  The lower rate in 2011 compared to 2010 is a result of the geographic mix of earnings.