Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

The following is a reconciliation of the tax derived by applying the U.S. federal statutory rate of 35% to the earnings before income taxes and comparing that to the recorded income tax provision:

Year ended December 31,

2001

2000

1999

U.S. federal statutory tax

Foreign Sales Corporation/Extraterritorial Income tax benefit

Research benefit

Nondeductibility of goodwill

State income tax provision, net of effect on U.S. federal tax

Other provision adjustments

$1,247

(222)

(383)

(16)

$1,050

(291)

(5)

$1,163

(230)

(24)

(11)

Income tax provision

$ 738

$ 871

$1,015

The 2001 effective income tax rate of 20.7% includes a one-time benefit of $343 reflecting a settlement with the Internal Revenue Service relating to research credit claims on McDonnell Douglas Corporation fixed-price government contracts applicable to the 1986-1992 federal income tax returns.

At December 31, the deferred tax assets, net of deferred tax liabilities, resulted from temporary differences associated with the following:

2001

2000

Inventory and long-term contract methods of income recognition

In-process research and development related to acquisitions

Pension benefit accruals

Retiree health care accruals

Other employee benefits accruals

Customer and commercial financing

Other comprehensive income provision

$ 1,561

182

(1,798)

1,970

829

(761)

284

$ 1,349

208

(1,491)

1,977

741

(597)

Net deferred tax assets

$ 2,267

$ 2,197

The temporary differences associated with inventory and long-term contract methods of income recognition encompass related costing differences, including timing and depreciation differences.

Valuation allowances were not required due to the nature of and circumstances associated with the temporary tax differences.

Income taxes have been settled with the Internal Revenue Service (IRS) for all years through 1978, and IRS examinations have been completed through 1991. In connection with these examinations, the Company disagrees with IRS proposed adjustments, and the years 1979 through 1987 are in litigation.

In December 1996, The Boeing Company filed suit in the U.S. District Court for the Western District of Washington for the refund of over $400 in federal income taxes and related interest. The suit challenged the IRS method of allocating research and development costs for the purpose of determining tax incentive benefits on export sales through the Company’s Domestic International Sales Corporation (DISC) and its Foreign Sales Corporation (FSC) for the years 1979 through 1987. In September 1998, the District Court granted the Company’s motion for summary judgment. The U.S. Department of Justice appealed this decision. On August 2, 2001, The United States Court of Appeals for the Ninth Circuit reversed the District Court’s summary judgment. The Company filed a petition for rehearing with the Ninth Circuit Court of Appeals and was denied such rehearing. The Company filed a petition for writ of certiorari with the United States Supreme Court and is awaiting the Court’s decision on whether to grant hearing of this case before the Court. The Company has fully provided for any potential earnings impact that may result from this decision. If the Company were to prevail, the refund would include interest computed to the payment date.

Income tax payments, net of tax refunds, were $1,521, $405 and $575 in 2001, 2000 and 1999, respectively.

The Company believes adequate provision for all outstanding issues has been made for all open years.

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24