Xcel Energy 2011 Annual Report Download - page 105

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6. Income Taxes
COLI — In 2007, Xcel Energy Inc., PSCo and the U.S. government settled an ongoing dispute regarding PSCo’s right to deduct
interest expense on policy loans related to its COLI program that insured lives of certain PSCo employees. These COLI policies
were owned and managed by PSRI. Xcel Energy Inc. and PSCo paid the U.S. government a total of $64.4 million in settlement of
the U.S. government’s claims for tax, penalty and interest for tax years 1993 through 2007. Xcel Energy Inc. and PSCo
surrendered the policies to its insurer on Oct. 31, 2007, without recognizing a taxable gain. As a result of the settlement, the
lawsuit filed by Xcel Energy Inc. and PSCo in the U.S. District Court was dismissed and the Tax Court proceedings were
dismissed in December 2010 and January 2011.
As part of the Tax Court proceedings, during 2010, an agreement in principle of Xcel Energy Inc.’s and PSCo’s statements of
account was reached, dating back to tax year 1993. Upon completion of this review, PSRI recorded a net non-recurring tax and
interest charge of approximately $9.4 million. Upon final cash settlement in 2011, Xcel Energy received $0.7 million and
recognized a further reduction of expense of $0.3 million. A closing agreement covering tax years 2003 through 2007 was
finalized with the IRS in January 2012.
In 2010, Xcel Energy Inc., PSCo and PSRI entered into a settlement agreement with Provident related to all claims asserted by
Xcel Energy Inc., PSCo and PSRI against Provident in a lawsuit associated with the discontinued COLI program. Under the terms
of the settlement, Xcel Energy Inc., PSCo and PSRI were paid $25 million by Provident and Reassure America Life Insurance
Company in 2010. The $25 million proceeds were not subject to income taxes.
Medicare Part D Subsidy Reimbursements — In March 2010, the Patient Protection and Affordable Care Act was signed into
law. The law includes provisions to generate tax revenue to help offset the cost of the new legislation. One of these provisions
reduces the deductibility of retiree health care costs to the extent of federal subsidies received by plan sponsors that provide
retiree prescription drug benefits equivalent to Medicare Part D coverage, beginning in 2013. Based on this provision, Xcel
Energy became subject to additional taxes and was required to reverse previously recorded tax benefits in the period of
enactment. Xcel Energy expensed approximately $17 million of previously recognized tax benefits relating to Medicare Part D
subsidies during the first quarter of 2010. Xcel Energy does not expect the $17 million of additional tax expense to recur in future
periods.
Federal Audit — Xcel Energy files a consolidated federal income tax return. The statute of limitations applicable to
Xcel Energy’s 2007 federal income tax return expired in September 2011. The statute of limitations applicable to Xcel Energy’s
2008 federal income tax return expires in September 2012. The IRS commenced an examination of tax years 2008 and 2009 in
the third quarter of 2010. In December 2011, Xcel Energy finalized the Revenue Agent Report and signed the Waiver of
Assessment for tax years 2008 and 2009. The total assessment for these tax years was $1.4 million, including tax and interest.
State Audits — Xcel Energy files consolidated state tax returns based on income in its major operating jurisdictions of Colorado,
Minnesota, Texas, and Wisconsin, and various other state income-based tax returns. As of Dec. 31, 2011, Xcel Energy’s earliest
open tax years that are subject to examination by state taxing authorities in its major operating jurisdictions were as follows:
State Year
Colorado................................................................
................................
2006
Minnesota ................................................................
...............................
2007
Texas................................................................................................
....
2007
Wisconsin ................................................................
...............................
2007
As of Dec. 31, 2011, there were no state income tax audits in progress.
Unrecognized Tax Benefits —The unrecognized tax benefit balance includes permanent tax positions, which if recognized would
affect the annual ETR. In addition, the unrecognized tax benefit balance includes temporary tax positions for which the ultimate
deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. A change in the period of
deductibility would not affect the ETR but would accelerate the payment of cash to the taxing authority to an earlier period.
A reconciliation of the amount of unrecognized tax benefit is as follows:
(Millions of Dollars) Dec. 31, 2011
Dec. 31, 2010
Unrecognized tax benefit - Permanent tax positions................................
...........
$ 4.3 $ 5.9
Unrecognized tax benefit - Temporary tax positions ................................
..........
30.4 34.6
Unrecognized tax benefit balance ................................
...........................
$ 34.7 $ 40.5