Mercury Insurance 2009 Annual Report Download - page 108

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company has a capital loss carryforward of $37.9 million which, if unused, will expire in 2015.
Uncertainty in Income Taxes
The Company recognizes tax benefits related to positions taken, or expected to be taken, on a tax return
once a “more-likely-than-not” threshold has been met. For a tax position that meets the recognition threshold, the
largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement is
recognized in the financial statements.
On July 1, 2008, the California Superior Court ruled in favor of the Company in a case filed against the FTB
for tax years 1993 through 1996, entitling the Company to a tax refund of $24.5 million, including interest. The
time period for appeal of the decision has passed and the Company received the full amount on August 15, 2008.
After providing for federal taxes, the Company recognized a net tax benefit of $17.5 million in the third quarter
2008.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states.
Tax years that remain subject to examination by major taxing jurisdictions are 2006 through 2008 for federal
taxes and 2001 through 2008 for California state taxes.
The Company is currently under examination by the FTB for tax years 2001 through 2005. For the
Company’s 2001, 2002, and 2004 tax returns, the FTB has taken exception to the state apportionment factors
used by the Company. Specifically, the FTB has asserted that payroll and property factors from MIS LLC, a
subsidiary of MCC, that are excluded from the Mercury General California Franchise tax return, should be
included in the California apportionment factors. In addition, for the 2004 tax return, the FTB has asserted that a
portion of management fee expenses paid by MIS LLC should be disallowed. Based on these assertions, the FTB
has issued notices of proposed tax assessments for the 2001, 2002, and 2004 tax years totaling approximately $5
million. The Company strongly disagrees with the position taken by the FTB and plans to formally appeal the
assessments before the California State Board of Equalization. An unfavorable ruling against the Company may
have a material impact on the Company’s results of operations in the period of such ruling. Management believes
that the issue will ultimately be resolved in favor of the Company. However, there can be no assurance that the
Company will prevail on this matter.
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
2009 2008
(Amounts in thousands)
Balance at January 1 ............................................... $5,897 $4,418
Additions based on tax positions related to the current year ............ 942 1,236
Additions for tax positions of prior years ........................... — 347
Reductions for tax positions of prior years .......................... (11) (24)
Reductions as a result of as lapse of the applicable statute of limitations . . (162) (80)
Balance at December 31 ............................................ $6,666 $5,897
As presented above, the balances of unrecognized tax benefits at December 31, 2009 and 2008 were
$6,666,000 and $5,897,000, respectively. Of these totals, $5,530,000 and $4,914,000 represent unrecognized tax
benefits, net of federal tax benefit and accrued interest expense which, if recognized, would impact the
Company’s effective tax rate.
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