Union Pacific 2011 Annual Report Download - page 71

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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 2011 2010 2009
Unrecognized tax benefits at January 1 $ 86 $ 61 $ 26
Increases for positions taken in current year 9 38 18
Increases for positions taken in prior years 81 11 50
Decreases for positions taken in prior years (30) (22) (28)
Payments to and settlements with taxing authorities (27) (4) (3)
Increases/(decreases) for interest and penalties (9) 5 3
Lapse of statutes of limitations (3) (3) (5)
Unrecognized tax benefits at December 31 $ 107 $ 86 $ 61
We recognize interest and penalties as part of income tax expense. Total accrued liabilities for interest
and penalties were $10 million and $19 million at December 31, 2011 and 2010, respectively. Total
interest and penalties recognized as part of income tax expense (benefit) were $10 million for 2011, $6
million for 2010, and $(11) million for 2009.
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. Interest calculations may remain open
for years prior to 1999. In the second quarter of 2011, the IRS completed its examination and issued a
notice of deficiency for tax years 2007 and 2008. The IRS has now completed its examinations and
issued notices of deficiency for tax years 1999 through 2008. We disagree with many of their proposed
adjustments, and we are at IRS Appeals for these years. Additionally, several state tax authorities are
examining our state income tax returns for years 2003 through 2008.
In the third quarter of 2011, we reached an agreement in principle with the IRS to resolve all of the issues
related to tax years 1999 through 2004, except for calculations of interest. We anticipate signing a closing
agreement with the IRS within the next 12 months. Once formalized, this agreement should result in an
immaterial reduction of income tax expense. Based on this agreement in principle, we made a payment of
$45 million, consisting of $27 million of tax and $18 million of interest, to partially cover the amounts due
for these years.
We expect our unrecognized tax benefits to decrease significantly in the next 12 months. Of the $107
million balance at December 31, 2011, $31 million is classified as current in the Consolidated Statement
of Financial Position, in anticipation of a settlement of the 1999-2004 tax years, as well as a reasonable
possibility that some state tax disputes will be resolved in 2012.
The portion of our unrecognized tax benefits that relates to permanent changes in tax and interest would
reduce our effective tax rate, if recognized. The remaining unrecognized tax benefits relate to tax
positions for which only the timing of the benefit is uncertain. Recognition of the tax benefits with
uncertain timing 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 2011 2010 2009
Unrecognized tax benefits that would reduce the effective tax rate $ 80 $ 90 $ 86
Unrecognized tax benefits that would not reduce the effective tax rate 27 (4) (25)
Total unrecognized tax benefits $ 107 $ 86 $ 61