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Author: Ryan68 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1933  
Subject: Re: HealthSouth Date: 4/20/2003 10:46 PM
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For an investor the question I guess is how to defend against situations like HealthSouth.

(sorry for formatting, couldn't figure out how to fix it)

I really like to rely upon the Income Tax Footnote here. With most of the blow-ups (Enron, Worldcom, etc.) that I've looked at ex post facto this Note would have been helpful.

After reading this thread I looked at Healthsouth's Tax Footnote (from 1999-2001):

---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal .................................................. $ 61,156 $ 74,243 $ (46,534)
State .................................................... 11,623 11,117 (6,225)
-------- ----------- ----------
72,779 85,360 (52,759)
Deferred:
Federal .................................................. (4,916) 83,886 169,557
State ................................................... (934) 12,562 22,669
-------- ----------- ----------
(5,850) 96,448 192,226
-------- ----------- ----------
$ 66,929 $ 181,808 $ 139,467
======== =========== ==========

In 2001 Healthsouth reported $433.7 million in pre-tax income to its shareholder's. The tax provision was $139.5 million; for a seemingly adequate Effective Tax Rate of 32.1%.

However, the Current portion of the tax provision is negative ($52,759 in the table above for those playing the home version). That's a pretty good indicator that Healthsouth didn't report any taxable income to the various taxing authorities (and this is before taking account of any credits or employee stock options).

The deferred portion of the provision is 138% of the total provision ($192,226/$139,467).

Assuming a 35% Federal tax rate one can surmise (roughly, and again sans credits and ESO's) that over the three year period above Healthsouth reported $253.9 million in total taxable income.

To their shareholder's over the same three year period they reported $1,223.0 million in pretax income.

I avoid company's that over three year periods exhibit wide discrepencies between income reported to the IRS and income reported to shareholder's. Last time I did this with Berkshire Hathaway, the three year difference was zero.

-Ryan
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