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Microsoft Paid $3.1 Billion To Settle Tax Debt

Software maker's quarterly report reveals payment made to satisfy IRS audit.

Paul McDougall

January 23, 2009

2 Min Read

Microsoft paid the federal government $3.1 billion between July and September of last year to settle a tax debt that was discovered during an Internal Revenue Service audit, the company disclosed in a regulatory filing.

As a result of the payment, Microsoft's cash flow from operations for the first half of its current fiscal year declined 1.2% compared with the first six months of its fiscal year 2008, to $9.2 billion, the company said in its second-quarter report.

The report was filed Thursday with the Securities and Exchange Commission.

Microsoft said the tax payment was partly offset by increased cash from customers, including a $2.1 billion increase in accounts receivable conversions. Microsoft's fiscal year runs from July 1 to June 30.

The $3.1 billion payment was made as part of a settlement Microsoft struck with the IRS following an audit of tax returns for the years 2000 to 2003, according to the filing. Microsoft also disclosed the settlement in its first-quarter filing, but the disclosure was not widely reported.

Microsoft's second-quarter report showed that the company has been hit hard by the weak global economy and some bad technology bets.

Total sales at the software maker were up a marginal 1.6% year over year in the quarter, to $16.63 billion, while net income slumped 11% during the period, to $4.17 billion. Earnings per share fell 6% to 47 cents. Analysts surveyed by Thomson Reuters were, on average, expecting the company to post EPS of 49 cents.

Revenue from sales of the Windows operating system, including the widely maligned Vista OS, dropped 8%, to $3.98 billion. Sales of Microsoft's Zune MP3 player plunged 54% in the quarter, and sales of Microsoft Office to consumers dropped 23%.

To deal with the shortfalls, Microsoft on Thursday announced that it would cut 5,000 full-time jobs, or about 5% of its workforce, across the board in departments ranging from IT to human resources.

1,400 of those positions will be eliminated by the end of the month, the company said. Microsoft also said it planned to cut an additional 5,000 contracting positions.

Microsoft, which didn't offer future guidance, also said it would curtail spending on travel, marketing, and other areas, with an eye to saving $1.5 billion annually in operating expenses. It's also eliminating merit raises. Shares of Microsoft were off 2% at one point in pre-market trading Friday, to $16.77.

About the Author(s)

Paul McDougall

Editor At Large, InformationWeek

Paul McDougall is a former editor for InformationWeek.

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