Mercury Insurance 2010 Annual Report Download - page 99

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
There was a $2.8 million net decrease to the total amount of unrecognized tax benefits related to tax
uncertainties during 2010. The decrease was the result of a change in management’s assessment of the technical
merits of tax positions taken in an earlier period based on management’s best judgment given the facts,
circumstances, and information available at the reporting date. The Company does not expect any further changes
in unrecognized tax benefits to have a significant impact on its consolidated financial statements within the next
12 months.
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 2005 through 2009 for federal
taxes and 2001 through 2009 for California state taxes. Tax years 2005 through 2009 are currently under
examination by the Internal Revenue Service.
The Company is currently under examination by the FTB for tax years 2001 through 2005. The taxing
authority has proposed adjustments to the Company’s California tax liabilities which have been accounted for as
unrecognized tax benefits. Management believes that the resolution will not have a material impact on the
consolidated financial statements.
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
2010 2009
(Amounts in thousands)
Balance at January 1 ................................................ $6,666 $5,897
Additions based on tax positions related to the current year .............. 387 942
Reductions for tax positions of prior years ........................... (3,230) (11)
Reductions as a result of as lapse of the applicable statute of limitations .... 0 (162)
Balance at December 31 ............................................. $3,823 $6,666
As presented above, the balances of unrecognized tax benefits were $3.8 million and $6.7 million at
December 31, 2010 and 2009, respectively. Of these totals, $3.0 million and $5.5 million represent unrecognized
tax benefits, net of federal tax benefit and accrued interest expense which, if recognized, would impact the
Company’s effective tax rate.
Management anticipates that it is reasonably possible that the Company’s total amount of unrecognized tax
benefits will increase within the next twelve months by approximately $300,000 to $500,000 related to its
ongoing California state tax apportionment factor issues.
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