9. [Basis for and change in valuation allowance] Silicon Graphics reported the following components of (loss) income before income taxes Years ended June 30 $ in thousands 1998 1999 2000 United States $(601.962) $ 10,699 $(367,033) Foreign 5,043 115.022 (14,851) Total pretax inconic $(596,919) $125.721 $(38 .884) Provision for (137,292) 71.892 447,660 (benefit from) income taxes Net income $(459,627) $ 53.829 $(829,544) 1999 income includes $272 milion of pretax gain on the partial sale of its interest in MIPS Technologies. At June 30, 1999, the company retained a 65% interest in MIPS. The company reported the following deferred tax assets and liabilities:($ in thousands) 1998 Years ended June 30 1999 2000 Deferred tax assets: Net operating loss carry forwards $103.705 $191,145 $423,047 General business 53,449 63.000 63,000 credit carry forwards All others combined 486,153 339,820 257,869 Subtotal $643.307 $593,965 $743.916 Valuation allowance (90.705) (105,364) (632,324) Net deferred tax assets $552.602 5488,601 $111.592 Total deferred tax (23,665) (38,191) (129,622) liabilities Net deferred tax $528,937 5450,410 $ (18,030) At June 30, 1999 Silicon Graphics stated that the realization of net deferred tax assets depended on its ability to generate ap- proximately $900 million of future taxable income. Silicon Graphics believed that it was more likely than not that the de- ferred tax asset will be realized based on forecasted income. in- cluding income from its planned divestiture of MIPS

a. Given facts as of June 30, 1999, discuss whether the valua- tion allowance of $105.3 million was adequate.

b. Assume that SGI maintained a valuation allowance sufficient to offset all of its deferred tax asset in every year. Compute the effect of this assumption on each of the following for all three years. (i) Income tax expense (ii) Income tax paid (ii) Effective tax rate (iv) Net income Dunng the fourth quarter of fiscal 2000, Silicon Graphics made a tax-free distribution of its remaining shares of MIPS to shareholders, eliminating the sale of MIPS as an e ement of forecasted income.

c. Discuss the impact of that distribution on the fiscal 2000 change in SGI's valuation allowance