Entergy 2010 Annual Report Download - page 83

ENTERGY CORPORATION AND SUBSIDIARIES 2010
Notes to Consolidated Financial Statements continued
Unrecognized Tax Benefits
Accounting standards establish a “more-likely-than-not” recogni-
tion 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.
A reconciliation of Entergy’s beginning and ending amount of
unrecognized tax benefits is as follows (in thousands):
2010 2009 2008
Gross balance at January 1 $ 4,050,491 $ 1,825,447 $ 2,523,794
Additions based on tax
positions related to the
current year 480,843 2,286,759 378,189
Additions for tax positions
of prior years 871,682 697,615 259,434
Reductions for tax positions
of prior years (438,460) (372,862) (166,651)
Settlements (10,462) (385,321) (1,169,319)
Lapse of statute of limitations (4,306) (1,147) –
Gross balance at December 31 4,949,788 4,050,491 1,825,447
Offsets to gross unrecognized
tax benefits:
Credit and loss carryovers (3,771,301) (3,349,589) (1,265,734)
Cash paid to taxing
authorities (373,000) (373,000) (548,000)
Unrecognized tax benefits net
of unused tax attributes
and payments(1) $ 805,487 $ 327,902 $ 11,713
(1) Potential tax liability above what is payable on tax returns
The balances of unrecognized tax benefits include $605 million,
$522 million, and $543 million as of December 31, 2010, 2009,
and 2008, 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 $4.34 billion, $3.53 billion, and $1.28 billion as of December 31,
2010, 2009, and 2008, 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 has made deposits, with the IRS against its potential
liabilities arising from audit adjustments and settlements related
to its uncertain tax positions. Deposits are expected to be made
to the IRS as the cash tax benefits of uncertain tax positions
are realized. As of December 31, 2010, Entergy has deposits of
$373 million on account with the IRS to cover its uncertain
tax positions.
Entergy accrues interest and penalties expenses, if any, related
to unrecognized tax benefits in income tax expense. Entergy’s
December 31, 2010, 2009, and 2008 accrued balance for the
possible payment of interest and penalties is approximately
$45 million, $48 million, and $55 million, respectively.
Income Tax Litigation
On October 4, 2010 the United States Tax Court entered its
decision in favor of Entergy for tax years 1997 and 1998. The
issues decided by 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.
On December 20, 2010, the IRS filed notice that it will appeal the
decision of the Tax Court to the United States Court of Appeals
for the Fifth Circuit.
On February 21, 2008, the IRS issued a Statutory Notice of
Deficiency for the year 2000. The deficiency resulted from a
disallowance of the same two issues discussed above as well as
the issue discussed below.
n Depreciation deductions that resulted from Entergy’s
purchase price allocations on its acquisitions of its non-utility
nuclear plants.
Entergy filed a Tax Court Petition on May 5, 2008 challenging
the three issues in dispute. On June 28, 2010, trial was held in
Washington, D.C. On February 7, 2011 a joint stipulation of settled
issues was filed addressing the depreciation issue in the above Tax
Court case. As a result, the IRS agreed that Entergy was entitled
to allocate all of the cash consideration to plant and equipment
rather than to nuclear decommissioning trusts thereby entitling
Entergy to its claimed depreciation. However, the case has been
left open for administrative purposes pending the appeal by the
IRS of the U.K. Windfall Tax foreign tax credit and street lighting
issues to the United States Court of Appeals for the Fifth Circuit.
Additionally, with respect to Entergy’s acquisition of all of its non-
utility nuclear power plants, Entergy and the IRS entered into a
closing agreement on January 31, 2011 that entitles Entergy to
allocate all of its cash consideration to plant and equipment.
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 for all years is approximately
$275 million.
With respect to the street lighting issue, the total tax included
in IRS Notices of Deficiency is $22 million. The total federal and
state tax and interest associated with this issue for all open tax
years is approximately $75 million.
Income Tax Audits
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’s
and substantially all state taxing authorities’ examinations are
completed for years before 2004.
2002-2003 IRS AUDIT
In September 2009, Entergy entered into a partial agreement
with the IRS for the years 2002 and 2003. It is a partial agreement
because Entergy did not agree to the IRS’s disallowance of foreign
tax credits for the U.K. Windfall Tax and the street lighting issues.
These issues will be governed by the outcome of the decision by
the 5th Circuit for the tax years 1997 and 1998.
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