PG&E 2010 Annual Report Download - page 91

The component of unrecognized tax benefits that, if
recognized, would affect the effective tax rate at
December 31, 2010 for PG&E Corporation and the Utility
is $39 million, with the remaining balance representing the
probable deferral of taxes to later years. PG&E Corporation
and the Utility do not expect that the total unrecognized
tax benefits would significantly change within the next 12
months.
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 net of penalties recognized in
income tax expense by PG&E Corporation in 2010, 2009,
and 2008 was $3 million, $19 million, and $24 million,
respectively. Interest income net of penalties recognized in
income tax expense by the Utility in 2010, 2009, and 2008
was $3 million, $14 million, and $11 million, respectively.
As of December 31, 2010, PG&E Corporation and the
Utility had accrued interest income of $8 million. As of
December 31, 2009, PG&E Corporation and the Utility
had accrued interest expense and penalties of $11 million
and $12 million, respectively.
Federal subsidy forMedicarePartD
PG&E Corporation and the Utility receive a federal subsidy
for maintaining a retiree medical benefit plan with
prescription drug benefits that is actuarially equivalent to
Medicare Part D. For federal income tax purposes, the
subsidy was deductible when contributed to the benefit
plan maintained for these benefits. On March 30, 2010,
federal health care legislation was signed eliminating the
deduction for subsidy contributions after 2012. As a result,
PG&E Corporation and the Utility recognized an expense
of $19 million in 2010 to reverse previously recognized
federal tax benefits (recorded as an increase to income tax
provision and a reduction to deferred income tax assets for
subsidy amounts included in the calculation of accrued
retiree medical benefit obligation).
Tax settlements and years that remainsubject to
examination
On September 29, 2010, PG&E Corporation received the
Internal Revenue Service (“IRS”) examination report for the
2005 to 2007 audit years and resolved all matters except for
a few items that will be discussed with the IRS Appeals
office. Included in the 2005 to 2007 audit was the
resolution of the change in accounting method related to
the capitalization of indirect service costs for those years.
As a result, PG&E Corporation recorded a $25 million
reduction to income tax expense during 2010.
In tax year 2008, PG&E Corporation began participating
in the Compliance Assurance Process (“CAP”), a real-time
IRS audit intended to expedite resolution of tax matters.
The CAP audit culminates with a letter from the IRS
indicating their acceptance of the return. The IRS partially
accepted the 2008 return, withholding two issues for
further review. The most significant of these relates to a tax
accounting method change filed by PG&E Corporation to
accelerate the amount of deductible repairs. While the IRS
approved PG&E Corporation’s request for a change in
method, the IRS will audit the methodology to determine
the proper deduction. This audit has not progressed
significantly because the IRS is working with the utility
industry to resolve this matter in a consistent manner for
all utilities before auditing individual companies. On
December 14, 2010 the IRS accepted PG&E Corporation’s
2009 tax return without change.
In 2009, PG&E Corporation recognized an income tax
benefit of $56 million from settling a claim with the 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 California Franchise Tax Board is auditing PG&E
Corporation’s 2004 and 2005 combined California income
tax returns, as well as the 1997-2007 amended income tax
returns reflecting IRS settlements for these years and claim
filings that apply only to California. It is uncertain when
the California Franchise Tax Board will complete the
audits.
PG&E Corporation believes that the final resolution of
the federal and California audits will not have a material
adverse impact on its financial condition or results of
operations. PG&E Corporation is neither under audit nor
subject to any material risk in any other jurisdiction.
Loss carryforwards
As of December 31, 2010 and 2009, PG&E Corporation
has $24 million and $25 million, respectively, of federal
and California capital loss carry forwards based on filed tax
returns, of which approximately $9 million will expire if
not used by December 31, 2011. For all periods presented,
PG&E Corporation has provided a full valuation allowance
against its deferred income tax assets for capital loss carry
forwards.
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