Cincinnati Bell 2008 Annual Report Download - page 143

examinations for years before 2004. In 2007, the Internal Revenue Service commenced an examination of the
Company’s U.S. federal income tax returns for 2004 to 2006. The IRS has completed its examination of the 2004
and 2005 tax years while 2006 is still under audit.
The Company recognizes accrued penalties related to unrecognized tax benefits in income tax expense. The
Company recognizes accrued interest related to unrecognized tax benefits in interest expense. Accrued interest
and penalties are insignificant at December 31, 2008 and December 31, 2007.
Refer to Note 12 to the Consolidated Financial Statements for further information regarding the Company’s
income taxes.
Operating Taxes
The Company incurs certain operating taxes that are reported as expenses in operating income, such as
property, sales, use and gross receipts taxes. These taxes are not included in income tax expense because the
amounts to be paid are not dependent on the level of income generated by the Company. The Company also
records expense against operating income for the establishment of liabilities related to certain operating tax audit
exposures. These liabilities are established based on the Company’s assessment of the probability of payment.
Upon resolution of an audit, any remaining liability not paid is released and increases operating income. The
Company recognized an expense of $1.5 million in 2008, and income of $2.4 million in 2007 and $1.8 million in
2006 upon resolution of operating tax audits, net of new liabilities established.
The Company incurs federal regulatory taxes on certain revenue producing transactions. The Company is
permitted to recover certain of these taxes by billing the customer; however, collections cannot exceed the
amount due to the federal regulatory agency. These federal regulatory taxes are presented in sales and cost of
services on a gross basis because, while the Company is required to pay the tax, it is not required to collect the
tax from customers and, in fact, does not collect the tax from customers in certain instances. The amount
recorded as revenue for 2008, 2007, and 2006 was $16.6 million, $17.3 million, and $15.3 million, respectively.
Excluding an operating tax settlement gain of $10.2 million in 2008, the amount expensed for 2008, 2007, and
2006 was $17.0 million, $18.2 million, and $20.0 million, respectively. The Company records all other taxes
collected from customers on a net basis.
At December 31, 2006, regulatory tax liabilities, net of expected refunds, related to exposures on past filing
positions totaled $18.0 million. In the fourth quarter of 2008, the Company settled these issues and as a result
recorded $10.2 million of income, which is presented as an “Operating tax settlement” in the Consolidated
Statements of Operations.
Accounting for Pension and Postretirement Expenses — In accounting for pension and postretirement
expenses, the Company applies the accounting requirements of SFAS No. 158, “Employer’s Accounting for
Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106,
and 132(R).” SFAS No. 158 requires the Company to recognize the funded status of its defined benefit pension
and postretirement benefit plans on the consolidated balance sheet and recognize as a component of accumulated
other comprehensive income (loss), net of tax, the gains or losses and prior service costs that arise during the
period, but are not recognized as components of net periodic benefit cost.
The Company sponsors three noncontributory defined benefit pension plans: one for eligible management
employees, one for non-management employees, and one supplemental, nonqualified, unfunded plan for certain
senior executives. The Company also provides health care and group life insurance benefits for eligible retirees.
The Company’s measurement date for its pension and postretirement obligations is as of December 31st of each
year. When changes to the plans occur during interim periods, the Company reviews the changes and determines
if a remeasurement is necessary.
In August 2007, the Company announced changes to its pension and postretirement plans that reduce
medical benefit payments by fixing the annual Company contribution for certain eligible retirees and that reduce
life insurance benefits paid from these plans. Based on these changes, the Company determined that a
remeasurement of its pension and postretirement obligations was necessary. The Company remeasured its
pension and postretirement obligations in August 2007 using revised assumptions, including modified benefit
payment assumptions reflecting the changes and a discount rate of 6.25%. These changes reduced the Company’s
pension
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Form 10-K