Dominion Power 2007 Annual Report Download - page 85

amounts resulting from our evaluation of tax positions for recog-
nition and measurement under FIN 48 in the charge to begin-
ning retained earnings at January 1, 2007, representing the
cumulative effect of the change in accounting principle.
If we take or expect to take a tax return position and any por-
tion of the related tax benefit is not recognized in the financial
statements, we disclose such amount as an unrecognized tax bene-
fit. These unrecognized tax benefits impact the financial state-
ments by increasing taxes payable, reducing tax refund receivables,
increasing deferred tax liabilities or decreasing deferred tax assets.
Also, when uncertainty about the deductibility of an amount is
limited to the timing of such deductibility, the increase in taxes
payable (or reduction in tax refund receivable) is accompanied by
a decrease in deferred tax liabilities.
A reconciliation of changes in our unrecognized tax benefits
during 2007 follows:
Amount
(millions)
Balance at January 1, 2007 $ 625
Increases—prior period positions 64
Decreases—prior period positions (40)
Current period positions 70
Prior period positions becoming otherwise deductible in
current period (252)
Settlements with tax authorities (60)
Balance at December 31, 2007 $ 407
Unrecognized tax benefits, that, if recognized, would affect
the effective tax rate, increased from $76 million at January 1,
2007 to $101 million at December 31, 2007. Due to this increase
(excluding the effects of a $1 million increase in unrecognized tax
benefits related to refund claims and $1 million paid to tax
authorities for settlements), total income tax expense for 2007
increased by $25 million.
For the majority of our unrecognized tax benefits, the ulti-
mate deductibility is highly certain, but there is uncertainty about
the timing of such deductibility. Some unrecognized tax benefits
reflect uncertainty as to whether the amounts are deductible as
ordinary deductions or capital losses. With the realization of gains
from the non-Appalachian E&P sales (see Note 6), these prior
year amounts, if ultimately determined to be capital losses, would
be deductible in 2007. When uncertainty about the deductibility
of amounts is limited to the timing of such deductibility, any tax
liabilities recognized for prior periods would be subject to offset
with the availability of refundable amounts from later periods
when such deductions could otherwise be taken. Pending reso-
lution of these timing uncertainties, interest is being accrued until
the period in which the amounts would become deductible.
For Dominion and its subsidiaries, the U.S. federal statute of
limitations has expired for years prior to 1999, except that we
have reserved the right to pursue refunds related to certain
deductions for the years 1995 through 1998 and tax credits for
1997 and 1998 based on United Kingdom Windfall Profits taxes
paid. Other parties are currently engaged in litigation to
determine whether United Kingdom Windfall Profits taxes qual-
ify for the U.S. federal foreign tax credit. Depending on the prog-
ress of those proceedings, we may file a refund claim for these
credits in 2008. At this time, we cannot estimate the amount of
the change, if any, that could possibly result to our unrecognized
tax benefits.
For CNG and its former subsidiaries, tax years prior to
Dominion’s acquisition of CNG in January 2000 are no longer
subject to examination, except with respect to amended returns
filed in June 2007 for tax years 1996, 1997 and 1998, claiming
refunds for certain tax credits.
In 2007, the U.S. Congressional Joint Committee on Tax-
ation completed its review of our settlement with the Appellate
Division of the Internal Revenue Service (IRS Appeals) for tax
years 1993 through 1997. In October of 2007, we received a tax
refund of $34 million for those years. Due to carryback adjust-
ments, we will not receive the refund for 1998 until issues for
later tax years, pending at IRS Appeals, are settled.
We are currently engaged in settlement negotiations with IRS
Appeals regarding certain adjustments proposed during the
examination of tax years 1999 through 2001. We have reached
tentative settlement on substantially all of the issues, except we are
reserving the right to pursue refunds related to certain deductions.
Negotiations are expected to conclude in 2008 without any
impact to our results of operations.
In 2007, the Internal Revenue Service (IRS) completed its
examination of our 2002 and 2003 consolidated returns and the
2002 and 2003 returns of certain affiliated partnerships. We filed
protests for certain proposed adjustments with IRS Appeals in
July and October 2007. In addition, the IRS began its audit of
tax years 2004 and 2005 in November 2007.
With our appeals of assessments received from tax authorities,
including amounts related to our settlement negotiations with
IRS Appeals for 1999 through 2001, we believe that it is reason-
ably possible, based on settlement negotiations and risks of liti-
gation, that unrecognized tax benefits could decrease by up to $47
million over the next twelve months. In addition, unrecognized
tax benefits could be reduced by $18 million to recognize prior
period amounts becoming otherwise deductible in the current
period. With regard to tax years 2002 through 2005, we cannot
estimate the range of reasonably possible changes to unrecognized
tax benefits that may occur during the next twelve months.
For major states in which we operate, the earliest tax year
remaining open for examination is as follows:
State
Earliest
Open Tax
Year
Pennsylvania 2000
Connecticut 2001
Massachusetts 2005
Virginia 2004
West Virginia 2004
We are also obligated to report adjustments resulting from
IRS settlements to state tax authorities. In addition, if we utilize
state net operating losses or tax credits generated in years for
which the statute of limitations has expired, such amounts are
subject to examination.
In February 2008, the President of the U.S. signed into law
the Economic Stimulus Act of 2008 (the Act). The Act includes
provisions to stimulate economic growth, including incentives for
increased capital investment by businesses. We are currently
Dominion 2007 Annual Report 83