Morgan Stanley 2010 Annual Report Download - page 244

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company recognizes the accrual of interest related to unrecognized tax benefits in provision for income
taxes in the consolidated statements of income. The Company recognized $93 million and $(53) million of
interest income (expense) (net of federal and state income tax benefits) in the consolidated statements of income
for the year ended December 31, 2010 and December 31, 2009, respectively. Interest expense accrued as of
December 31, 2010 and December 31, 2009 was approximately $274 million and $367 million, respectively, net
of federal and state income tax benefits.
The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits
for 2010 and 2009 (dollars in millions):
Unrecognized Tax Benefits
Balance at December 31, 2008 ........................................................... $3,466
Increase based on tax positions related to the current period .................................... 688
Increase based on tax positions related to prior periods ....................................... 33
Decreases based on tax positions related to prior periods ...................................... (74)
Decreases related to a lapse of applicable statute of limitations ................................. (61)
Balance at December 31, 2009 ........................................................... $4,052
Increase based on tax positions related to the current period .................................... 478
Increase based on tax positions related to prior periods ....................................... 479
Decreases based on tax positions related to prior periods ...................................... (881)
Decreases related to settlements with taxing authorities ....................................... (356)
Decreases related to a lapse of applicable statute of limitations ................................. (61)
Balance at December 31, 2010 ........................................................... $3,711
The Company is under continuous examination by the Internal Revenue Service (the “IRS”) and other tax
authorities in certain countries, such as Japan and the U.K., and states in which the Company has significant
business operations, such as New York. During 2010, the IRS concluded the field work portion of its
examinations on issues covering tax years 1999 – 2005. Also during 2010, the Company reached a conclusion
with the New York State and New York City tax authorities on issues covering tax years 2002 – 2006. The
impact of the settlement was immaterial. During 2011, the Company expects to reach a conclusion with the U.K.
tax authorities on substantially all issues through tax year 2008, including those in appeals. During 2012, the
Company expects to reach a conclusion with the Japanese tax authorities on substantially all issues covering tax
years 2007 – 2008. The Company periodically evaluates the likelihood of assessments in each taxing jurisdiction
resulting from current and subsequent years’ examinations.
As part of the Company’s periodic review of unrecognized tax benefits, and based on new information regarding
the status of federal and state examinations, the Company’s unrecognized tax benefits were remeasured. As a
result of this remeasurement, the income tax provision for the year ended December 31, 2010 included a benefit
of $345 million.
The Company believes that the resolution of tax matters will not have a material effect on the consolidated
statements of financial condition of the Company, although a resolution could have a material impact on the
Company’s consolidated statements of income for a particular future period and on the Company’s effective
income tax rate for any period in which such resolution occurs. The Company has established a liability for
unrecognized tax benefits that the Company believes is adequate in relation to the potential for additional
assessments. Once established, the Company adjusts unrecognized tax benefits only when more information is
available or when an event occurs necessitating a change.
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