Union Pacific 2007 Annual Report Download - page 64

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through 1994, which may be disputed by the IRS. The IRS has completed its examinations and issued notices
of deficiency for tax years 1995 through 2004, and we are in different stages of the IRS appeals process for
these years. The IRS is examining our tax returns for tax years 2005 and 2006. In the third quarter of 2007, we
believe that we reached an agreement in principle with the IRS to resolve all of the issues, except interest,
related to tax years 1995 through 1998, including the previously reported dispute over certain donations of
property. We anticipate signing a closing agreement in 2008. Once formalized, we anticipate that this
agreement will result in an immaterial reduction of income tax expense.
Upon resolution of the federal income tax examinations described above, we will report any changes to our
taxable income to state and local taxing authorities in compliance with state and local requirements.
Additionally, several state taxing authorities are currently examining our state income tax returns for tax years
2001 through 2005.
In the third quarter of 2007, the State of Illinois enacted new tax legislation that changed how we determine
the amount of our income subject to Illinois tax. This legislation caused an increase to our deferred tax
expense by $27 million in the third quarter. In addition, because the legislation reduced uncertainty about
determining future income subject to Illinois tax, $41 million pre-tax ($26 million after-tax) of deferred taxes
are no longer considered part of unrecognized tax benefits. In January of 2008, Illinois enacted technical
corrections legislation that made additional changes in how we determine the amount of our income subject
to Illinois tax. This technical corrections legislation will result in a reduction of deferred tax expense of
approximately $14 million in the first quarter of 2008.
We expect that the amount of unrecognized tax benefits will change significantly during the next 12 months.
Of the $161 million balance at December 31, 2007, $140 million is classified as current in the Consolidated
Statement of Financial Position, primarily due to the anticipated settlement for tax years 1995 through 1998
described above. It is also reasonably possible that we may resolve the interest claims for 1986 through 1994
described above, which would likely result in an immaterial change to unrecognized tax benefits.
5. Debt
Total debt as of December 31, 2007 and 2006, net of interest rate swaps designated as hedges, is summarized
below:
Millions of Dollars 2007 2006
Notes and debentures, 3.0% to 7.4% due through 2054 [a].................................... $5,968 $4,803
Capitalized leases, 4.7% to 9.3% due through 2026 ................................................. 1,219 1,236
Medium-term notes, 9.2% to 10.0% due through 2020 .......................................... 61 362
Equipment obligations, 6.2% to 8.1% due through 2031 ........................................ 291 232
Mortgage bonds, 4.8% due through 2030................................................................. 59 59
Tax-exempt financings, 5.0% to 5.7% due through 2026........................................ 188 191
Unamortized discount ............................................................................................... (104) (103)
Total debt [a] .............................................................................................................. $7,682 $6,780
Less current portion [b] ............................................................................................. (139) (780)
Total long-term debt .................................................................................................. $7,543 $6,000
[a] 2007 included a write-up of $2 million while 2006 included a collective write-down of $14 million due to market value adjustments for
debt with qualifying hedges that are recorded on the Consolidated Statements of Financial Position.
[b] 2006 included a write-down of $4 million due to short-term market value adjustments for debt with qualifying hedges that are recorded
on the Consolidated Statements of Financial Position.