Sprint - Nextel 2007 Annual Report Download - page 121

SPRINT NEXTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
earnings as of January 1, 2007. The total unrecognized tax benefits attributable to uncertain tax positions as of
January 1, 2007 were $606 million. Upon adoption of FIN 48, we reclassified the majority of our liability for
unrecognized tax benefits from deferred tax liabilities to other liabilities with the remainder being netted against
our deferred tax assets. Upon adoption, the total unrecognized tax benefits included items that would favorably
affect the income tax provision by $89 million, if recognized. The total unrecognized tax benefits attributable to
uncertain tax positions as of December 31, 2007 were $654 million. At December 31, 2007, the total
unrecognized tax benefits included items that would favorably affect the income tax provision by $108 million, if
recognized. We recognize interest related to unrecognized tax benefits in interest expense or interest income. We
recognize penalties as additional income tax expense. As of December 31, 2007, the accrued liability for income
tax related interest was $71 million and the accrued liability for penalties was $13 million.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in millions)
Balance at January 1, 2007 $606
Additions based on current year tax positions ........................... 44
Additions based on prior year tax positions ............................. 18
Reductions for prior year tax positions ................................. (11)
Reductions for settlements .......................................... (3)
Balance at December 31, 2007 $654
We file income tax returns in the U.S. federal jurisdiction and each state jurisdiction which imposes an
income tax. We also file income tax returns in a number of foreign jurisdictions. However, our foreign income
tax activity has been immaterial. The Internal Revenue Service, or IRS, is currently examining our 2005 and
2006 consolidated federal income tax returns and other 2005 returns of certain of our subsidiaries. They have
effectively completed the examination of our consolidated returns related to years prior to 2005.
We have reached settlement agreements with the Appeals division of the IRS for our examination issues in
dispute following the IRS exam for the years 2000-2002. The unresolved disputed issues from the 2003-2004
IRS examination are awaiting consideration by the Appeals division of the IRS; however, they are immaterial to
our consolidated financial statements. The IRS is also examining the 2001 through pre-merger 2005 consolidated
income tax returns of our subsidiary, Nextel Communications, Inc. We are also involved in multiple state income
tax examinations related to various years beginning with 1995, which are in various stages of the examination,
administrative review or appellate process. Based on our current knowledge of the proposed adjustments from
the aforementioned examinations, we do not anticipate the adjustments would result in a material change to our
financial position. We also do not believe it is reasonably possible that we will have significant increases or
decreases to the liability for unrecognized tax benefits during the next twelve months on our current uncertain tax
positions.
Note 8. Fair Value of Financial Instruments
We have determined the estimated fair values of financial instruments using available market information
and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data
to develop fair value estimates. As a result, the estimates presented below are not necessarily indicative of the
amounts that we could realize or be required to pay in a current market exchange. The use of different market
assumptions, as well as estimation methodologies, may have a material effect on the estimated fair value
amounts.
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