PG&E 2008 Annual Report Download - page 116

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$2 million, respectively, at December 31, 2008, and $55 mil-
lion and $22 million, respectively, at December 31, 2007.
PG&E Corporation and the Utility do not expect the
company’s total amount of unrecognized tax benefi ts to
change signifi cantly within the next 12 months.
On July 9, 2008, PG&E Corporation was notifi ed
that the U.S. Congress’ Joint Committee on Taxation
(“Joint Committee”) had approved a settlement reached
with the IRS appellate division in the fi rst quarter of 2007
for tax years 1997 through 2000. As a result of the settlement,
PG&E Corporation received a $16 million refund from
the IRS in October 2008. This settlement did not result in
material changes to the amount of unrecognized tax benefi ts
that PG&E Corporation recorded under FIN 48.
On June 20, 2008, PG&E Corporation reached an agree-
ment with the IRS regarding a change in accounting method
related to the capitalization of indirect service costs for
tax years 2001 through 2004. This agreement resulted in
a $29 million benefi t from a reduction in interest expense
accrued on unrecognized tax benefi ts partially offset by a
$15 million liability associated with unrecognized state tax
benefi ts, for a net tax benefi t of approximately $14 million.
In addition, on June 27, 2008, PG&E Corporation agreed
to the revenue agent reports (“RARs”) from the IRS that
refl ected this agreement and resolved 2001 through 2004
audit issues. The RARs for the 2001 through 2004 audit
years were submitted to the Joint Committee for approval.
On October 28, 2008, the IRS executed a closing
agreement for the 2001 through 2004 audit years after
the Joint Committee indicated it took no exception to the
settlement. As a result of the settlement, PG&E Corporation
recognized after-tax income of approximately $257 million,
including interest, in the fourth quarter of 2008, of which
approximately $154 million was related to NEGT and recorded
as income from discontinued operations, and approximately
$60 million was attributable to the Utility. PG&E Corporation
expects to receive a tax refund from the IRS of approximately
$310 million, plus interest, as a result of the settlement,
of which approximately $170 million will be allocated to
the Utility. The after-tax income of $257 million includes
approximately $204 million, primarily related to a reduction
in PG&E Corporation’s unrecognized tax benefi ts and
additional claims allowed, and approximately $53 million
related to the utilization of federal capital loss carry forwards.
On January 1, 2007, PG&E Corporation and the Utility
adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”).
Under FIN 48, a tax benefi t can be recognized only if it is
more likely than not that a tax position taken or expected to
be taken in a tax return will be sustained upon examination
by taxing authorities based on the merits of the position. The
tax benefi t recognized in the fi nancial statements is measured
based on the largest amount of benefi t that is greater than
50% likely of being realized upon settlement. The difference
between a tax position taken or expected to be taken in a
tax return and the benefi t recognized and measured pursuant
to FIN 48 represents an unrecognized tax benefi t. An unrec-
ognized tax benefi t is a liability that represents a potential
future obligation to the taxing authority.
The following table reconciles the changes in unrecognized
tax benefi ts during 2008 and 2007:
PG&E
(in millions) Corporation Utility
Balance at January 1, 2007 $ 212 $ 90
Additions for tax position of prior years 15 4
Reductions for tax position of prior years (18) —
Balance at December 31, 2007 209 94
Additions for tax position of prior years 43 20
Decreases as a result of settlements
with the IRS (177) (77)
Balance at December 31, 2008 $ 75 $ 37
The component of unrecognized tax benefi ts that, if recog-
nized, would affect the effective tax rate at December 31, 2008
for PG&E Corporation and the Utility is $46 million and
$24 million, respectively.
PG&E Corporation and the Utility recognized a reduc-
tion in interest and penalties expense on unrecognized tax
benefi ts by $44 million and $21 million, respectively, as
of December 31, 2008. PG&E Corporation and the Utility
recognized interest and penalties expense on unrecognized
tax benefi ts of $7 million and $2 million, respectively, as of
December 31, 2007. Interest and penalties expense is classifi ed
as Income tax provision in the Consolidated Statements
of Income. Interest and penalties expense included in the
liability for uncertain tax position was $11 million and