Capital One 2007 Annual Report Download - page 115

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No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The Company adopted the provisions of FIN 48 effective January 1, 2007. As a result of adoption, the Company recorded a $29.7
million reduction in retained earnings. The reduction in retained earnings upon adoption is the net impact of a $46.5 million increase
in the liability for unrecognized tax benefits and a $16.8 million increase in deferred tax assets. In addition, the Company reclassified
$471.1 million of unrecognized tax benefits from deferred tax liabilities to current taxes payable to conform to the deferred tax
measurement and balance sheet presentation requirements of FIN 48.
The balance of unrecognized tax benefits at January 1, 2007 was $663.8 million. Included in the balance at January 1, 2007, are $83.5
million of tax positions which, if recognized, would affect the effective tax rate and $58.0 million of tax positions which, if
recognized, would result in a reduction in goodwill. Also included in the balance is $466.4 million of tax positions related to items of
income and expense for which the ultimate taxability or deductibility is highly certain, but for which there is uncertainty about the
timing of recognition. Because of the impact of deferred tax accounting, other than interest and penalties, the acceleration of taxability
or deferral of deductibility of these items would not affect the annual effective tax rate but may accelerate the payment of taxes to an
earlier period.
The Company continues to recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax
expense, consistent with its policy prior to adoption of FIN 48. During 2007, $34.3 million of net interest was included in income tax
expense. The accrued balance of interest and penalties related to unrecognized tax benefits is presented in the table below.
A reconciliation of the change in unrecognized tax benefits from January 1, 2007 to December 31, 2007 is as follows:
Gross
Unrecognized
Tax Benefits
Accrued
Interest
and
Penalties
Gross
Tax,
Interest
and
Penalties
Balance at January 1, 2007 $ 663,779 $ 119,232 $ 783,011
Additions for tax positions related to the current year 29,349  29,349
Additions for tax positions related to prior years 4,054 60,484 64,538
Reductions for tax positions related to prior years due to IRS and other settlements (158,649) (39,891) (198,540)
Additions for tax positions related to acquired entities in prior years, offset to
goodwill 12,049 412 12,461
Reductions resulting from lapsing statutes of limitation (10,080)  (10,080)
Balance at December 31, 2007 $ 540,502 $ 140,237 $ 680,739
Portion of balance at December 31, 2007 that, if recognized, would impact the
effective income tax rate $ 92,610 $ 86,193 $ 178,803
The Company is subject to examination by the IRS and other tax authorities in certain countries and states in which the Company has
significant business operations. The tax years subject to examination vary by jurisdiction. The IRS is currently examining the
Companys federal income tax returns for the years 2005 and 2006 as well as the tax returns of certain acquired subsidiaries for the
years 2004 and 2005. During 2007, the IRS concluded its examination of the Companys federal income tax returns for the years 2003
and 2004, and its examinations of the final separate federal income tax returns for certain acquired subsidiaries. During 2007, the
Company made cash payments to the IRS related to these concluded examinations which resulted in a reduction of approximately
$148.4 million to the balance of net unrecognized tax benefits.
Tax issues for years 1995-1999 are pending in the U.S. Tax Court and the conclusion of those matters could impact tax years after
1999. At issue are proposed adjustments by the IRS with respect to the timing of recognition of items of income and expense derived
from the Companys credit card business in various tax years. The ultimate resolution of these issues is not expected to have a material
effect on the Companys operations or financial condition. It is reasonably possible that a settlement related to these timing issues, as
well as a settlement of the audits of certain acquired subsidiaries, may be made within twelve months of the reporting date. At this
time, an estimate of the potential change to the amount of unrecognized tax benefits resulting from such a settlement cannot be made.
As of December 31, 2007, U.S. income taxes and foreign withholding taxes have not been provided on approximately $358.1 million
of unremitted earnings of subsidiaries operating outside the U.S., in accordance with APB Opinion No. 23, Accounting for Income
TaxesSpecial Areas. These earnings are considered by management to be invested indefinitely. Upon repatriation of these earnings,
the Company could be subject to both U.S. income taxes (subject to possible adjustment for foreign tax credits) and withholding taxes
payable to various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability and foreign