Entergy 2012 Annual Report Download - page 79

Entergy Corporation and Subsidiaries 2012
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
beginning and ending amount of unrecognized tax benefits is as
follows (in thousands):
2012 2011 2010
Gross balance at January 1 $ 4,387,780 $ 4,949,788 $ 4,050,491
Additions based on tax
positions related to the
current year 163,612 211,966 480,843
Additions for tax positions
of prior years 1,517,797 332,744 871,682
Reductions for tax positions
of prior years (476,873) (259,895) (438,460)
Settlements (1,421,913) (841,528) (10,462)
Lapse of statute of limitations – (5,295) (4,306)
Gross balance at December 31 4,170,403 4,387,780 4,949,788
Offsets to gross unrecognized
tax benefits:
Credit and loss carryovers (4,022,535) (3,212,397) (3,771,301)
Cash paid to taxing
authorities – (363,266) (373,000)
Unrecognized tax benefits net
of unused tax attributes
and payments(1) $ 147,868 $ 812,117 $ 805,487
(1) Potential tax liability above what is payable on tax returns.
The balances of unrecognized tax benefits include $203 million,
$521 million, and $605 million as of December 31, 2012, 2011, and
2010, 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 $3.968 billion,
$3.867 billion, and $4.345 billion as of December 31, 2012, 2011,
and 2010, 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. The
total amount of cash deposits shown for 2011 has been fully offset
against settled liabilities which arose in 2012.
Entergy accrues interest expense, if any, related to unrecog-
nized tax benefits in income tax expense. Entergy’s December 31,
2012, 2011, and 2010 accrued balance for the possible payment
of interest is approximately $146.3 million, $99 million, and $45
million, respectively.
Income Tax Litigation
In October 2010 the U.S. 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 final. The IRS filed an appeal of the U.K. Windfall Tax decision,
however, with the U.S. Court of Appeals for the Fifth Circuit in
December 2010. Oral arguments were heard in November 2011. In
June 2012, the U.S. Court of Appeals for the Fifth Circuit unanimously
affirmed the U.S. Tax Court decision. As a result of this decision,
Entergy reversed its liability for uncertain tax positions associated with
this issue. On September 4, 2012, the U.S. Solicitor General, on behalf
of the Commissioner of Internal Revenue, petitioned the U.S. Supreme
Court for a writ of certiorari to review the Fifth Circuit judgment.
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. PPL Corp. petitioned the U.S.
Supreme Court for a writ of certiorari to review the U.S. Court of
Appeals for the Third Circuit decision. On October 29, 2012, the
U.S. Supreme Court granted PPL Corp.’s petition for certiorari. The
Solicitor General’s petition for writ of certiorari in Entergy’s case is
currently on hold pending the disposition of the PPL case. Entergy’s
case will be determined consistent with the U.S. Supreme Court’s
decision in the PPL proceeding. Oral argument in PPL’s case was
heard on February 20, 2013.
The total tax at issue on the U.K. Windfall Tax credit matter is $152
million, and interest on the underpayment of such tax is estimated to
be $102 million resulting in total exposure of $254 million.
In February 2008 the IRS issued a Statutory Notice of Deficiency
for the year 2000. The deficiency resulted from a disallowance of
foreign tax credits (the same issue discussed above) as well as the
disallowance of depreciation deductions on non-utility nuclear plants.
Entergy filed a Tax Court petition in May 2008, challenging the IRS
treatment of these issues. In June 2010 a trial on the depreciation issue
was held in Washington, D.C. In February 2011, a joint stipulation
of settled issues was filed under which the IRS conceded its position
with respect to the depreciation issue. The outcome of the foreign
tax credit matter for the year 2000 will also be determined consistent
with the U.S. Supreme Court’s decision in the PPL proceeding.
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 2005.
2002 - 2003 IRS AUDIT
In September 2009, Entergy entered into a partial agreement with the
IRS for the years 2002 and 2003. In the partial agreement, 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
discussed above, the IRS did not appeal the Tax Court ruling on the
street lighting depreciation. The U.K. Windfall tax credit issue will
be governed by the U.S. Supreme Court’s decision in the PPL Corp.
proceeding as explained in “Income Tax Litigation”, above.
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 Inclusion of nuclear decommissioning liabilities in cost of goods
sold for the nuclear power plants owned by the Utility resulting
from an Application for Change in Accounting Method for tax
purposes (the “2004 CAM”).
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