Union Pacific 2010 Annual Report Download - page 70

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A reconciliation of changes in unrecognized tax benefits liabilities/(assets) from the beginning to the end
of the reporting period is as follows:
Millions 2010 2009 2008
Unrecognized tax benefits at January 1 $ 61 $ 26 $ 161
Increases for positions taken in current year 38 18 10
Increases for positions taken in prior years 11 50 1
Decreases for positions taken in prior years (22) (28) (23)
Settlements with taxing authorities (4) (3) (55)
Increases/(decreases) for interest and penalties 5 3 (68)
Lapse of statutes of limitations (3) (5) -
Unrecognized tax benefits at December 31 $ 86 $ 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 2010 2009 2008
Unrecognized tax benefits that would reduce the effective tax rate $ 90 $ 86 $ 79
Unrecognized tax benefits that would not reduce the effective tax rate (4) (25) (53)
Total unrecognized tax benefits $ 86 $ 61 $ 26
We recognize interest and penalties as part of income tax expense. Total accrued liabilities for interest
and penalties were $19 million and $13 million at December 31, 2010 and 2009, respectively. Total
interest and penalties recognized as part of income tax expense (benefit) were $6 million for 2010, $(11)
million for 2009, and $(9) million for 2008.
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. We anticipate a partial settlement of the tax years 1999-2004 during 2011. 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.
In 2008, we signed a closing agreement resolving all tax matters at IRS Appeals for tax years 1995
through 1998. In connection with the settlement, we paid the IRS $52 million of tax and $67 million of
interest in 2008. We filed interest refund claims in 2009 for years 1995-1998, and received refunds of
$17 million in October of 2009. The audit settlement and interest refund claims had only immaterial
effects on our income tax expense for 2008 and 2009.
We expect our unrecognized tax benefits to decrease significantly in the next 12 months. Of the $86
million balance at December 31, 2010, $68 million is classified as current in the Consolidated Statement
of Financial Position, in anticipation of a partial settlement of the 1999-2004 tax years, as well as a
reasonable possibility that some state tax disputes will be resolved in 2011.