3M 2008 Annual Report Download - page 74

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In addition to the U.S. federal examination, there is also limited audit activity in several U.S. state and foreign
jurisdictions. Currently, the Company expects the liability for unrecognized tax benefits will change by an insignificant
amount during the next 12 months.
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,”
on January 1, 2007. As a result of the implementation of Interpretation 48, the Company recognized an immaterial
increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007,
balance of retained earnings. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits
(“UTB”) is as follows:
Federal, State and Foreign Tax
(Millions) 2008 2007
Gross UTB Balance at January 1...................................................................... $ 680 $ 691
Additions based on tax positions related to the current year ............................ 126 79
Additions for tax positions of prior years ........................................................... 98 143
Reductions for tax positions of prior years........................................................ (180 ) (189 )
Settlements ....................................................................................................... (101 ) (24 )
Reductions due to lapse of applicable statute of limitations ............................. (66 ) (20 )
Gross UTB Balance at December 31................................................................ $ 557 $ 680
Net UTB impacting the effective tax rate at December 31................................ $ 334 $ 334
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of both
December 31, 2008 and December 31, 2007 is $334 million. The ending net UTB results from adjusting the gross
balance for items such as Federal, State, and non-U.S. deferred items, interest and penalties, and deductible taxes.
The net UTB is included as components of Accrued Income Taxes and Other Liabilities within the Consolidated
Balance Sheet.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. During
the years ended December 31, 2008 and 2007, the Company recognized in the consolidated statement of income on
a gross basis approximately $8 million and $9 million in interest and penalties, respectively. At December 31, 2008
and December 31, 2007, accrued interest and penalties in the consolidated balance sheet on a gross basis were $47
million and $69 million, respectively. Included in these interest and penalty amounts are interest and penalties related
to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing
of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the
disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the
payment of cash to the taxing authority to an earlier period.
In 2008 and 2007, the Company completed the preparation and filing of its U.S. federal and state income tax returns
for 2007 and 2006, respectively, which did not result in any material changes to the Company’s financial position. In
2006, considering the developments noted below and other factors, including the impact on open audit years of the
resolution of issues in various audits, reassessments resulted in a reduction of the reserves in 2006 by $149 million,
inclusive of the expected amount of certain refund claims. In 2006, an audit of the Company’s U.S. tax returns for
years through 2001 was completed. The Company and the Internal Revenue Service reached a final settlement for
these years, including an agreement on the amount of a refund claim to be filed by the Company. The Company also
substantially resolved audits in certain European countries. In addition, the Company completed the preparation and
filing of its 2005 U.S. federal income tax return and the corresponding 2005 state income tax returns. The
adjustments from amounts previously estimated in the U.S. federal and state income tax returns (both positive and
negative) included lower U.S. taxes on dividends received from the Company’s foreign subsidiaries. The Company
also made quarterly adjustments (both positive and negative) to its reserves for tax contingencies.
The Company made discretionary contributions to its U.S. qualified pension plan of $200 million in 2008, $200 million
in 2007, and $200 million in 2006. The current income tax provision includes a benefit for the pension contributions;
the deferred tax provision includes a cost for the related temporary difference.
As a result of certain employment commitments and capital investments made by 3M, income from manufacturing
activities in certain countries is subject to reduced tax rates or, in some cases, is exempt from tax for years through
2014. The income tax benefits attributable to the tax status of these subsidiaries are estimated to be $44 million