Entergy 2011 Annual Report Download - page 82

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
beginning and ending amount of unrecognized tax benefits is as
follows (in thousands):
2011 2010 2009
Gross balance at January 1 $ 4,949,788 $ 4,050,491 $ 1,825,447
Additions based on tax
positions related to the
current year 211,966 480,843 2,286,759
Additions for tax positions
of prior years 332,744 871,682 697,615
Reductions for tax positions
of prior years (259,895) (438,460) (372,862)
Settlements (841,528) (10,462) (385,321)
Lapse of statute of limitations (5,295) (4,306) (1,147)
Gross balance at December 31 4,387,780 4,949,788 4,050,491
Offsets to gross unrecognized
tax benefits:
Credit and loss carryovers (3,212,397) (3,771,301) (3,349,589)
Cash paid to taxing
authorities (363,266) (373,000) (373,000)
Unrecognized tax benefits net
of unused tax attributes
and payments(1) $ 812,117 $ 805,487 $ 327,902
(1) Potential tax liability above what is payable on tax returns
The balances of unrecognized tax benefits include $521 million,
$605 million, and $522 million as of December 31, 2011, 2010, and
2009, 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 $3.867 billion,
$4.345 billion, and $3.528 billion as of December 31, 2011, 2010, and
2009, 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, 2011, Entergy has deposits of $363 million on account
with the IRS to cover its uncertain tax positions.
Entergy accrues interest expense, if any, related to unrecognized
tax benefits in income tax expense. Entergy’s December 31, 2011,
2010, and 2009 accrued balance for the possible payment of interest is
approximately $99 million, $45 million, and $48 million, respectively.
Income Tax Litigation
In October 2010 the United States Tax Court entered a decision in
favor of Entergy for tax years 1997 and 1998. The issues decided by the
Tax 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.
The IRS did not appeal street lighting depreciation, and that matter
is considered final. The IRS filed an appeal of the U.K. Windfall Tax
decision, however, with the United States Court of Appeals for the Fifth
Circuit in December 2010. Oral arguments were heard in November
2011, and a decision is pending.
Concurrent with the Tax Court’s issuance of a favorable decision
regarding the above issues, the Tax Court issued a favorable decision
in a separate proceeding, PPL Corp. v. Commissioner, regarding the
creditability of the U.K. Windfall Tax. The IRS appealed the PPL
decision to the United States Court of Appeals for the Third Circuit. In
December 2011, the Third Circuit reversed the Tax Court’s holding in
PPL Corp. v. Commissioner, stating that the U.K. tax was not eligible for
the foreign tax credit. Entergy is awaiting a decision in its proceeding
before the Fifth Circuit Court of Appeals. Although Entergy believes
that the Third Circuit opinion is incorrect, its decision constitutes
adverse, although not controlling authority. After considering the
Third Circuit decision, in the fourth quarter 2011, Entergy revised its
provision for uncertain tax positions associated with this issue.
The total tax included in IRS Notices of Deficiency relating to the
U.K. Windfall Tax credit issue is $82 million. The total tax and interest
associated with this issue for all years is approximately $239 million. This
assumes that Entergy would utilize a portion of its cash deposits discussed
in “Unrecognized tax benefits” above to offset underpayment interest.
In February 2008 the IRS issued a Statutory Notice of Deficiency for
the year 2000. The deficiency resulted from a disallowance of the same
two 1997-1998 issues discussed above as well as one additional issue.
That issue is 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 in May 2008 challenging the
three issues in dispute. In June 2010 a trial on these issues was held in
Washington, D.C. In February 2011 a joint stipulation of settled issues
was filed addressing the depreciation issue in the 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.
Income Tax Audits
Entergy and its subsidiaries file 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 depreciation issues
as they relate to 2002. As discussed above, the IRS did not appeal the
Tax Court ruling on the street lighting depreciation. Therefore, the
U.K. Windfall tax credit issue will be governed by the decision by
the Fifth Circuit Court of Appeals for the tax years 1997 and 1998.
2004-2005 IRS AUDIT
The IRS issued its 2004-2005 Revenue Agent’s Report (RAR) in May 2009.
In June 2009, Entergy filed a formal protest with the IRS Appeals
Division indicating disagreement with certain issues contained in the
2004-2005 RAR. The major issues in dispute are:
n Depreciation of street lighting assets (Because the IRS did not
appeal the Tax Court’s 2010 decision on this issue, it will be fully
allowed in the final Appeals Division calculations for this audit).
n Qualified research expenditures for purposes of the research credit.
n Inclusion of nuclear decommissioning liabilities in cost of
goods sold.
The initial IRS appeals conference to discuss these disputed issues
occurred in September 2010. Negotiations are ongoing.
2006-2007 IRS AUDIT
The IRS issued its 2006-2007 RAR in October 2011. In connection
with the 2006-2007 IRS audit and resulting RAR, Entergy resolved the
significant issues discussed below.
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