Entergy 2008 Annual Report Download - page 81

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ENTERGY CORPORATION AND SUBSIDIARIES 2008
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Notes to Consolidated Financial Statements continued
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Significant components of net deferred and noncurrent accrued
tax liabilities for Entergy Corporation and subsidiaries as of
December 31, 2008 and 2007 are as follows (in thousands):
2008 2007
Deferred and noncurrent accrued tax liabilities:
Net regulatory assets/liabilities $ (1,026,203) $ (838,507)
Plant-related basis differences (4,898,373) (4,838,216)
Power purchase agreements (762,576) (935,876)
Nuclear decommissioning trusts (1,297,585) (1,451,676)
Other (311,558) (336,809)
Total (8,296,295) (8,401,084)
Deferred tax assets:
Accumulated deferred investment
tax credit 123,810 130,609
Capital losses 131,690 161,793
Net operating loss carryforwards 387,405 405,640
Sale and leaseback 252,479 248,660
Unbilled/deferred revenues 27,841 24,567
Pension-related items 391,702 378,103
Reserve for regulatory adjustments 106,302 76,252
Customer deposits 76,559 76,317
Nuclear decommissioning liabilities 239,814 240,590
Other 75,732 391,603
Valuation allowance (75,502) (74,612)
Total 1,737,832 2,059,522
- Net deferred and noncurrent accrued
tax liability $(6,558,463) $(6,341,562)
At December 31, 2008, Entergy had federal capital loss carryovers
which, if utilized, would result in tax benefits of $131.7 million
after adjustments for FASB Interpretation No. 48. If the capital loss
carryovers are not utilized, they will expire. The tax benefits on the
capital loss carryovers by year of expiration are as follows: $16.1
million in 2009, $32.6 million in 2011, and $83 million in 2013.
At December 31, 2008, Entergy had an estimated federal net
operating loss carryover of $837.5 million. If the federal net operating
loss carryover is not utilized, it will expire in the year 2025.
At December 31, 2008, Entergy had estimated state net
operating loss carryovers of $1.5 billion. If the state net operating
loss carryovers are not utilized, they will expire in the years 2009
through 2023.
For 2008 and 2007, valuation allowances are provided against
certain federal capital loss and state net operating loss carryovers.
FASB IN T E R P R E T A T I O N NO. 48
FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48) was issued in July 2006. FIN 48 establishes
a “more-likely-than-not” recognition threshold that must be met
before a tax benefit can be recognized in the financial statements.
If a tax deduction is taken on a tax return, but does not meet the
more-likely-than-not recognition threshold, an increase in income
tax liability, above what is payable on the tax return, is required
to be recorded. Entergy and the Registrant Subsidiaries adopted
the provisions of FIN 48, on January 1, 2007. As a result of the
implementation of FIN 48, Entergy recognized an increase in
the liability for unrecognized tax benefits of approximately $5
million, which was accounted for as a reduction to the January
1, 2007 balance of retained earnings. The reconciliation of
unrecognized tax benefits for Entergy for 2008 presents
amounts before consideration of deposits on account with the
IRS. The reconciliation of uncertain tax benefits for 2007 has
been revised to conform to this presentation. The “Amount
to reflect uncertain tax benefits gross of deposits” provides
for comparative presentation. A reconciliation of Entergy’s
beginning and ending amount of unrecognized tax benefits is as
follows (in thousands):
2008 2007
Balance at January 1, as previously disclosed
in the 2007 Form 10-K $1,977,001
Amount to reflect uncertain tax benefits
gross of deposits 288,256
Balance at January 1, adjusted for deposits $ 2,523,794 $2,265,257
Additions based on tax positions related
to the current year 378,189 142,827
Additions for tax positions of prior years 259,434 670,385
Reductions for tax positions of prior years (166,651) (450,252)
Settlements (1,169,319) (102,485)
Lapse of statute of limitations – (1,938)
Balance at December 31 $ 1,825,447 $2,523,794
The balances of unrecognized tax benefits include $543 million and
$242 million as of December 31, 2008 and 2007, respectively, which,
if recognized, would lower the effective income tax rates. Because
of the effect of deferred tax accounting, the remaining balances of
unrecognized tax benefits of $734 million and $1.88 billion as of
December 31, 2008 and 2007, respectively, if disallowed, would not
affect the annual effective income tax rate but would accelerate the
payment of cash to the taxing authority to an earlier period. Entergy
accrues interest and penalties expenses related to unrecognized tax
benefits in income tax expense. Entergy’s December 31, 2008 and
2007 balance of unrecognized tax benefits includes approximately
$55 million and $50 million, respectively, accrued for the possible
payment of interest and penalties.
Entergy and the Registrant Subsidiaries do not expect that total
unrecognized tax benefits will significantly change within the next
twelve months; however, the results of pending litigations and audit
issues, discussed below, could result in significant changes.
IN C O M E TA X LI T I G A T I O N
For tax years 1997 and 1998, a U.S. Tax Court trial was held in April
2008. The issues before the Court are as follows:
nThe ability to credit the U.K. Windfall Tax against U.S. tax as a
foreign tax credit. The U.K. Windfall Tax relates to Entergy’s
former investment in London Electricity.
nThe validity of Entergy’s change in method of tax accounting
for street lighting assets and the related increase in
depreciation deductions.
A decision is anticipated by the second or third quarter of 2009.
On February 21, 2008, the IRS issued a Statutory Notice of
Deficiency for the year 2000. A Tax Court Petition was filed in
the second quarter of 2008. This petition challenges the IRS
assessment on the same two issues described above as well as the
following issue:
nThe allowance of depreciation deductions that resulted from
Entergy’s purchase price allocations on its acquisitions of its
Non-Utility Nuclear plants.
With respect to the U.K. Windfall Tax issue, the total tax included
in IRS Notices of Deficiency is $82 million. The total tax and interest
associated with this issue is $230 million for all years.
With respect to the street lighting issue, the total tax included in IRS
Notices of Deficiency is $22 million. The federal and state tax and interest
associated with this issue total $53 million for all open tax years.
With respect to the depreciation deducted on Non-Utility Nuclear
plant acquisitions, the total tax included in IRS Notices of Deficiency
is $7 million. The federal and state tax and interest associated with
this issue total $45 million for all open tax years.
IN C O M E TA X AU D I T S
Entergy or one of its subsidiaries files U.S. federal and various state and
foreign income tax returns. Other than the matters discussed in the
Income Tax Litigation section above, the IRS’ and substantially all state
taxing authorities’ examinations are completed for years before 2004.