PNC Bank 2007 Annual Report Download - page 111

Upon adoption at January 1, 2007, we had $49 million of
unrecognized tax benefits. The unrecognized tax benefits were
composed of the following three broad categories.
January 1, 2007
In millions
Unrecognized tax benefits related to:
Acquired companies’ tax positions $10
Temporary differences 20
Permanent differences 19
Total $49
Changes in Unrecognized Tax Benefits (in millions):
Balance of Gross Unrecognized Tax Benefits at January 1,
2007 $ 49
Gross amount of increase in unrecognized tax benefits as a
result of tax positions taken during a prior period (a): 52
Gross amount of decrease in unrecognized tax benefits as a
result of tax positions taken during a prior period: (2)
Gross amount of increase in unrecognized tax benefits as a
result of tax positions taken during the current period: 1
Amounts of decrease in the unrecognized tax benefits relating
to settlements with taxing authorities (b): (39)
Reductions to unrecognized tax benefits as a result of a lapse
of the applicable statute of limitations: (4)
Balance of Gross Unrecognized Tax Benefits at December 31,
2007 $57
(a) Increase primarily due to our acquisition of Mercantile.
(b) Decrease primarily due to PNC and Mercantile settlement of IRS audit issues.
December 31, 2007
In millions
Unrecognized tax benefits related to:
Acquired companies’ tax positions $31
Temporary differences 10
Permanent differences 16
Total $57
Under current GAAP, $30 million of any change in the
amount of unrecognized tax benefits related to acquired
companies’ tax positions would result in an adjustment to the
goodwill associated with the particular acquisition. See Note 1
Accounting Policies regarding SFAS 141(R) which will
become effective January 1, 2009 and which will change this
accounting.
Any changes in the amounts of unrecognized tax benefits
related to temporary differences would result in a
reclassification to deferred tax liability; any changes in the
amounts of unrecognized tax benefits related to permanent
differences would result in an adjustment to income tax
expense and therefore our effective tax rate. The unrecognized
tax benefits included above that if recognized would affect the
effective tax rate is $11 million. This is less than the total
amount of unrecognized tax benefit related to permanent
differences because a portion of those unrecognized benefits
relate to state tax matters.
It is difficult to project the positions for which unrecognized
tax benefits will change over the next 12 months, but it is
reasonably possible that they could change significantly due to
events such as completion of taxing authority audits and
expirations of the statutes of limitations. However, we do not
expect that any changes in unrecognized tax benefits would
have a material impact on income tax expense during the next
12 months.
Our consolidated federal income tax returns through 2003
have been audited by the Internal Revenue Service and we
have resolved all disputed matters through the IRS appeals
division. The Internal Revenue Service is currently examining
our 2004 through 2006 consolidated federal income tax
returns.
The states of New York, New Jersey and Maryland (following
our acquisition of Mercantile) and New York City are
principally where we are subject to state and local income tax.
The state of New York is currently auditing our 2002 to 2004
filings. Subsequent years remain subject to examination in that
jurisdiction. New York City is currently auditing 2004 and
2005. However, years 2002 and 2003 remain subject to
examination pending the completion of the New York state
audit. Through 2006 BlackRock is included in our New York
and New York City combined tax filings and constituted most
of the tax liability. Years subsequent to 2002 remain subject to
examination by New Jersey and years subsequent to 2003
remain subject to examination by Maryland.
Our policy is to classify interest and penalties associated with
income taxes as income taxes. Upon adoption at January 1,
2007, we had accrued $72 million of interest related to tax
positions, most of which related to our cross-border leasing
transactions. The total accrued interest at December 31, 2007
was $91 million. The $19 million increase was primarily due
to $11 million accrued during 2007 as a component of income
tax expense on the Consolidated Income Statement. The
remainder resulted from our acquisition of Mercantile. The
accrued liability is a component of Other liabilities on the
Balance Sheet.
106