3M 2011 Annual Report Download - page 77

71
The IRS completed its field examination of the Company’s U.S. federal income tax returns for the years 2005 through
2007 in the fourth quarter of 2009. The Company protested certain IRS positions within these tax years and entered
into the administrative appeals process with the IRS during the first quarter of 2010. During the first quarter of 2010,
the IRS completed its field examination of the Company’s U.S. federal income tax return for the 2008 year. The
Company protested certain IRS positions for 2008 and entered into the administrative appeals process with the IRS
during the second quarter of 2010. During the first quarter of 2011, the IRS completed its field examination of the
Company’s U.S. federal income tax return for the 2009 year. The Company protested certain IRS positions for 2009
and entered into the administrative appeals process with the IRS during the second quarter of 2011. Currently, the
Company is under examination by the IRS for its U.S. federal income tax returns for the years 2010 and 2011. It is
anticipated that the IRS will complete its examination of the Company for 2010 by the end of the first quarter of 2012,
and for 2011 by the end of the first quarter of 2013. As of December 31, 2011, the IRS has not proposed any
significant adjustments to the Company’s tax positions for which the Company is not adequately reserved.
During the first quarter of 2010, the Company paid the agreed upon assessments for the 2005 tax year. During the
second quarter of 2010, the Company paid the agreed upon assessments for the 2008 tax year. During the second
quarter of 2011, the Company received a refund from the IRS for the 2004 tax year. Payments relating to other
proposed assessments arising from the 2005 through 2011 examinations may not be made until a final agreement is
reached between the Company and the IRS on such assessments or upon a final resolution resulting from the
administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also limited
audit activity in several U.S. state and foreign jurisdictions.
3M anticipates changes to the Company’s uncertain tax positions due to the closing of various audit years in the next
12 months that include material unrecognized tax benefits. The Company believes that the closing of those years will
result in a decrease in the Company’s uncertain tax positions as a result of both cash payments and adjustments to
previously recorded income tax reserves. Currently, the Company is not able to reasonably estimate the amount by
which the liability for unrecognized tax benefits will increase or decrease during the next 12 months as a result of the
ongoing income tax authority examinations.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (UTB) is as follows:
Federal, State and Foreign Tax
(Millions) 2011 2010 2009
Gross UTB Balance at January 1 ............................................ $ 622 $ 618 $ 557
A
dditions based on tax positions related to the current year .. 92 128 121
A
dditions for tax positions of prior years ................................. 69 142 164
Reductions for tax positions of prior years .............................. (123 ) (161) (177 )
Settlements ............................................................................. 9 (51) —
Reductions due to lapse of applicable statute of limitations ... (75 ) (54) (47 )
Gross UTB Balance at December 31 ...................................... $ 594 $ 622 $ 618
Net UTB impacting the effective tax rate at December 31 ...... $ 295 $ 394 $ 425
The total amount of unrecognized tax benefits, if recognized, would affect the effective tax rate by $295 million as of
December 31, 2011, $394 million as of December 31, 2010, and $425 million as of December 31, 2009. 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 Other Current Assets, Other
Assets, and Other Liabilities within the Consolidated Balance Sheet.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The
Company recognized in the consolidated statement of income on a gross basis approximately $1 million of benefit,
$9 million of benefit, and $6 million of expense in 2011, 2010, and 2009, respectively. At December 31, 2011 and
December 31, 2010, accrued interest and penalties in the consolidated balance sheet on a gross basis were $56
million and $52 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.