IHOP 2008 Annual Report Download - page 139

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
20. Income Taxes (Continued)
liability for unrecognized tax benefits, excluding related income tax benefits, which was accounted for as
a reduction of retained earnings at January 1, 2007. At December 31, 2008, the Company had a liability
for unrecognized tax benefit including potential interest and penalties, net of related tax benefit,
totaling $23.5 million, of which approximately $1.7 million is expected to be paid within one year. For
the remaining liability, due to the uncertainties related to these tax matters, the Company is unable to
make a reasonably reliable estimate when cash settlement with a taxing authority will occur.
The total unrecognized tax benefit as of December 31, 2008 and 2007 was $18.6 million and
$13.8 million, respectively, excluding interest, penalties and related income tax benefits. The increase of
$4.8 million is primarily related to adjustments to Applebee’s reserves as a result of ongoing state
audits. The entire $18.6 million will be included in the effective tax rate if recognized. The Company
estimates the unrecognized tax benefits may decrease in 2009 by an amount up to $2.3 million related
to the settlement with taxing authorities and the lapse of the statute of limitations. A reconciliation of
the beginning and ending amount of unrecognized tax benefits is as follows:
(in thousands)
Unrecognized tax benefit as of December 31, 2006 ............... $ 4,408
Applebee’s beginning balance .............................. 10,823
Change as a result of prior year tax positions ................... 495
Change as a result of current year tax positions ................. 255
Decreases relating to settlements with taxing authorities ........... (361)
Decreases as a result of a lapse of the statute of limitations ........ (1,828)
Unrecognized tax benefit as of December 31, 2007 ............... 13,792
Change as a result of prior year tax positions ................... 4,327
Change as a result of current year tax positions ................. 888
Decreases relating to settlements with taxing authorities ........... (361)
Decreases as a result of a lapse of the statute of limitations ........ (72)
Unrecognized tax benefit as of December 31, 2008 ............... $18,574
As of December 31, 2008, the accrued interest and penalties were $13.7 million and $2.9 million,
respectively, excluding any related income tax benefits. As of December 31, 2007, the accrued interest
and penalties were $8.0 million and $2.6 million, respectively, excluding any related income tax benefits.
The increase of $5.7 million and $0.3 million of accrued interest and penalties, respectfully, is primarily
related to additional interest and penalties accrued for Applebee’s state tax reserves as a result of
ongoing state audits. The Company recognizes interest accrued related to unrecognized tax benefits and
penalties as a component of income tax expense which is recognized in the statement of operations.
The Company has various state net operating loss carryovers representing $1.5 million of state
taxes. The net operating loss carryovers will expire, if unused, during the period from 2009 through
2027.
The Company has recorded a deferred tax asset related to a change in the enacted tax law for the
state of Michigan. The Company cannot assert on a more than likely basis that the asset will be
realized. Therefore, a valuation allowance of $7.0 million has been recorded to offset the entire asset.
Of the $7.0 million, $0.7 million was recorded in the year ended December 31, 2007 and $6.3 million
was recorded as part of the purchase price allocation of Applebee’s.
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