PG&E 2009 Annual Report Download - page 85

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PG&E Corporation and the Utility recognize a tax
benefit 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 benefit recognized in the
financial statements is measured based on the largest
amount of benefit 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 benefit recognized and measured pursuant to this
guidance represents an unrecognized tax benefit.
The following table reconciles the changes in
unrecognized tax benefits:
PG&E
Corporation Utility
(in millions)
Balance at January 1, 2007 $ 212 $ 90
Additions for tax position taken during a
prior year 15 4
Reductions for tax position taken during
a prior year (18) –
Balance at December 31, 2007 $ 209 $ 94
Additions for tax position taken during
the current year 43 20
Settlements (177) (77)
Balance at December 31, 2008 $75 $37
Additions for tax position taken during a
prior year 4 4
Additions of tax position taken during
the current year 624 623
Settlements (27) (12)
Reductions for tax position taken during
a prior year (3) –
Balance at December 31, 2009 $ 673 $652
The component of unrecognized tax benefits that, if
recognized, would affect the effective tax rate at
December 31, 2009 for PG&E Corporation and the Utility
is $36 million and $22 million, respectively, with the
remaining balance representing the probable deferral of
taxes to later years. It is reasonably possible that
unrecognized tax benefits could decrease in the next 12
months by an amount ranging from $0 to $30 million.
PG&E Corporation and the Utility recognize accrued
interest and penalties related to unrecognized tax benefits
as income tax expense in the Consolidated Statements of
Income. Interest income and penalties recognized in
income tax expense by PG&E Corporation in 2009 and
2008 was $19 million and $24 million, respectively. In
2007, interest expense recognized by PG&E Corporation
was $4 million. Interest income and penalties recognized in
income tax expense by the Utility in 2009 and 2008 was
$14 million and $11 million, respectively. In 2007, interest
expense recognized by the Utility was $1 million.
As of December 31, 2009, PG&E Corporation and the
Utility had accrued interest income and penalties of $11
million and $12 million, respectively. As of December 31,
2008, PG&E Corporation and the Utility had accrued
interest expense and penalties of $8 million and $3 million,
respectively.
In 2009, PG&E Corporation recognized an income tax
benefit of $56 million from settling a claim with the
Internal Revenue Service (“IRS”) related to 1998 and 1999.
Additionally during 2009, PG&E Corporation recognized
$12 million in California benefits, of which $10 million
was attributable to this settlement and $2 million was
attributable to the 2001–2004 IRS settlement. (The 2001–
2004 IRS settlement resulted in a $154 million tax benefit
related to National Energy & Gas Transmission, Inc.
(“NEGT”) and was recorded as discontinued operations in
2008.) PG&E Corporation received total cash refunds of
$605 million in 2009 related to these settlements.
The IRS is currently auditing PG&E Corporation’s
consolidated 2005–2007 income tax returns. The IRS has
not proposed any material adjustments. In September
2009, the IRS released standards related to the treatment of
indirect service costs for the 2005–2007 audit period,
enabling PG&E Corporation to recognize a net tax benefit
of $17 million.
PG&E Corporation also participates in the Compliance
Assurance Process (“CAP”), a real-time IRS audit intended
to expedite the resolution of tax years. PG&E Corporation
is under CAP for 2008 and 2009. In 2009, the IRS signed a
Partial Acceptance Letter accepting the 2008 tax return
except for several issues to be resolved in appeals or
through a field audit. The reserved items included a tax
accounting method change request related to the
deduction of repairs submitted by PG&E Corporation in
2008 that was approved in 2009 and resulted in the
recording of a $2 million benefit, including interest. The
IRS is conducting a field audit to examine the size of the
adjustment resulting from the method change. The IRS has
proposed no material adjustments for either 2008 or 2009.
The primary impact to PG&E Corporation’s and the
Utility’s balance sheets from the events described above is
an increase in regulatory assets of $37 million, an increase
in noncurrent income tax receivables of $624 million, and
an increase in noncurrent deferred tax liabilities of $803
million in 2009.
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