Mercury Insurance 2011 Annual Report Download - page 109

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES STATEMENTS TO CONSOLIDATED FINANCIAL—(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 $0.7 million increase to the total amount of unrecognized tax benefits related to tax
uncertainties during 2011. The increase was the result of tax positions taken 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 such unrecognized tax benefits to have a significant impact on its consolidated
financial statements within the next 12 months.
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 2010 for federal
taxes and 2003 through 2010 for California state taxes. Tax years 2005 through 2009 are currently under
examination by the Internal Revenue Service.
The Company has been examined by the FTB for tax years 2003 through 2009. While the FTB has formally
withdrawn the Notices of Proposed Assessment and closed its audit for tax years 2001 and 2002, it has issued
Notices of Proposed Assessments to the Company for tax years 2003 through 2006. The Company has filed
protests with the FTB in response to these assessments. In 2011, the FTB commenced its examination of tax
years 2007 through 2009. Management believes that the resolution of these examinations and assessments 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:
2011 2010
(Amounts in thousands)
Balance at January 1 ................................................ $3,823 $ 6,666
Additions based on tax positions related to the current year .............. 1,011 387
Reductions for tax positions of prior years ........................... (267) (3,230)
Balance at December 31 ............................................. $4,567 $ 3,823
As presented above, the balances of unrecognized tax benefits were $4.6 million and $3.8 million at
December 31, 2011 and 2010, respectively. Of these totals, $3.6 million and $3.0 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 does not expect the Company’s total amount of unrecognized tax benefits to materially
increase within the next twelve months related to its ongoing California state tax apportionment factor issues.
The Company recognizes interest and penalties related to unrecognized tax benefits as a part of income
taxes. During the years ended December 31, 2011, 2010, and 2009, the Company recognized net interest and
penalty expense or (benefit), excluding refunds, of $106,000, ($872,000), and $266,000, respectively. The
Company carried an accrued interest and penalty balance of $834,000 and $728,000 at December 31, 2011 and
2010, respectively.
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