AT&T Uverse 2007 Annual Report Download - page 72

Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
70
| 2007 AT&T Annual Report
On January 1, 2007, we adopted FIN 48 (see Note 1) and, as required, we reclassified $6,225 from net deferred tax
liabilities to unrecognized tax benefits. As a result of the implementation of FIN 48, we recognized a $50 increase in
the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of
retained earnings. A reconciliation of the change in our unrecognized tax benefits (UTB) balance from January 1, 2007
to December 31, 2007, is as follows:
Unrecognized
Income
Gross Deferred Tax Benefits,
Federal, Accrued Unrecognized Federal and Net of Deferred
State and Interest Income State Income Federal and
Foreign Tax and Penalties Tax Benefits Tax Benefits State Benefits
Balance at January 1, 2007 $ 4,895 $ 1,380 $ 6,275 $ (846) $ 5,429
Increases for tax positions related to the current year 429 — 429 (30) 399
Increases for tax positions related to prior years 1,324 606 1,930 (315) 1,615
Decreases for tax positions related to prior years (478) (298) (776) 93 (683)
Settlements (269) (10) (279) 17 (262)
Balance at December 31, 2007 5,901 1,678 7,579 (1,081) 6,498
Less: tax attributable to timing items included above (3,911) — (3,911) 189 (3,722)
Less: UTB included above that relate to acquired entities
that would impact goodwill if recognized (623) (174) (797) 216 (581)
Total UTB that, if recognized, would impact the effective
income tax rate as of December 31, 2007 $ 1,367 $1,504 $ 2,871 $ (676) $ 2,195
In the fourth quarter of 2007, we made a deposit of $1,000
related to the AT&T Inc. 2000 – 2002 IRS examination cycle.
This deposit is not included in the reconciliation above but
reduces our unrecognized tax benefits balance. Net of this
deposit, our unrecognized tax benefits balance at
December 31, 2007, was $6,579, of which $5,894 was
included in “Other noncurrent liabilities” and $685 was
included in “Accrued taxes” on our consolidated balance
sheets. We expect to pay $685 within one year, but we
cannot reasonably estimate the timing or amounts of
additional cash payments, if any, at this time.
A portion of our unrecognized tax benefits relates to
pre-acquisition uncertain tax positions of ATTC, BellSouth and
AT&T Mobility. Future adjustments (prior to the effective date
of FAS 141(R)) to these unrecognized tax benefits may be
required to be allocated to goodwill and other purchased
intangibles. After the effective date of FAS 141(R), adjustment
of these unrecognized tax benefits may be reflected in
income tax expense.
We record interest and penalties related to federal, state
and foreign unrecognized tax benefits in income tax expense.
Accrued interest and penalties included in unrecognized tax
benefits were $1,380 and $1,678 as of January 1, 2007 and
December 31, 2007, respectively. Interest and penalties
included in our consolidated statements of income were
$303 for both December 31, 2007 and 2006.
The Company and our subsidiaries file income tax returns
in the U.S. federal jurisdiction and various state and foreign
jurisdictions. Our income tax returns are regularly audited
and reviewed by the IRS as well as by state and foreign
taxing authorities.
The IRS has completed field examinations of AT&T’s
tax returns through 2002, and all audit periods prior to
1998 are closed for federal purposes. We were unable
to reach agreement with the IRS on one issue related to
our 1998 and 1999 tax returns and, as a result, we have filed
a refund suit in U.S. District Court. We are engaged with the
IRS Appeals Division (Appeals) in settling our 2000 – 2002
returns and may reach a resolution of this examination cycle
during the next 12 months. At this time, we are not able to
determine the impact that resolution may have on our
unrecognized tax benefits. The IRS is currently examining the
AT&T 2003 – 2005 tax returns, and we expect their fieldwork
to be completed during 2008.
The IRS has completed the examination of all acquired
entity tax returns through 2003 (ATTC through 2004) and, with
the exception of BellSouth, all years through 2001 are closed.
We expect to settle the ATTC 2005 examination within the next
12 months with an immaterial impact on our unrecognized tax
benefits. Appeals has issued BellSouth an assessment for years
1999 – 2001, which was paid during the second quarter, and
we are reviewing our options with this case.
The components of income tax expense are as follows:
2007 2006 2005
Federal:
Current $5,903 $3,344 $1,385
Deferred – net (413) (139) (681)
Amortization of investment
tax credits (31) (28) (21)
5,459 3,177 683
State, local and foreign:
Current 621 295 226
Deferred – net 173 53 23
794 348 249
Total $6,253 $3,525 $ 932