Union Pacific 2009 Annual Report Download - page 78

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When appropriate, we record a valuation allowance against deferred tax assets to reflect that these tax
assets may not be realized. In determining whether a valuation allowance is appropriate, we consider
whether it is more likely than not that all or some portion of our deferred tax assets will not be realized,
based on management’ s judgments using available evidence about future events. Our total valuation
allowance at December 31, 2009 was $8 million. There was no valuation allowance at December 31,
2008.
Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon
examination by tax authorities. The amount recognized is measured as the largest amount of benefit that
is greater than 50 percent likely to be realized upon settlement. Unrecognized tax benefits are tax benefits
claimed in our tax returns that do not meet these recognition and measurement standards.
A reconciliation of changes in unrecognized tax benefits liabilities/(assets) from the beginning to the end
of the reporting period is as follows:
Millions of Dollars 2009 2008
Unrecognized tax benefits at January 1 $ 26 $ 161
Increases for positions taken in current year 18 10
Increases for positions taken in prior years 50 1
Decreases for positions taken in prior years (28) (23)
Settlements with taxing authorities (3) (55)
Increases (decreases) for interest and penalties 3 (68)
Lapse of statutes of limitations (5) -
Unrecognized tax benefits at December 31 $ 61 $ 26
A portion of our unrecognized tax benefits would, if recognized, reduce our effective tax rate. The
remaining unrecognized tax benefits relate to tax positions for which only the timing of the benefit is
uncertain. Recognition of these tax benefits would reduce our effective tax rate only through a reduction
of accrued interest and penalties. The unrecognized tax benefits that would reduce our effective tax rate
are as follows:
Millions of Dollars 2009 2008
Unrecognized tax benefits that would reduce the effective tax rate
$
86 $ 79
Unrecognized tax benefits that would not reduce the effective tax rate (25) (53)
Total unrecognized tax benefits
$
61 $ 26
We recognize interest and penalties as part of income tax expense. Total accrued liabilities for interest
and penalties were $13 million and $10 million at December 31, 2009 and 2008, respectively. Total
interest and penalties recognized as part of income tax expense (benefit) were $(11) million for 2009, $(9)
million for 2008, and $3 million for 2007.
Internal Revenue Service (IRS) examinations have been completed and settled for all years prior to 1999,
and the statute of limitations bars any additional tax assessments. Some interest calculations remain open
back to 1986. The IRS has completed its examinations and issued notices of deficiency for tax years
1999 through 2006. We disagree with many of their proposed adjustments, and we are at IRS Appeals for
these years. The IRS is examining the Corporation’ s federal income tax returns for 2007 and 2008.
Several state tax authorities are examining our state income tax returns for tax years 2003 through 2006.