Verizon Wireless 2011 Annual Report Download - page 78

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nOtEs tO cOnsOlidatEd Financial statEMEnts continued
Unrecognized Tax Benefits
A reconciliation of the beginning and ending balance of unrecognized
tax benefits is as follows:
(dollars in millions)
2011 2010 2009
Balance at January 1, $ 3,242 $ 3,400 $ 2,622
Additions based on tax positions related to
the current year 111 231 288
Additions for tax positions of prior years 456 476 1,128
Reductions for tax positions of prior years (644) (569) (477)
Settlements (56) (256) (27)
Lapses of statutes of limitations (31) (40) (134)
Balance at December 31, $ 3,078 $ 3,242 $ 3,400
Included in the total unrecognized tax benefits at December 31, 2011,
2010 and 2009 is $2.2 billion, $2.1 billion and $2.1 billion, respectively,
that if recognized, would favorably affect the effective income tax rate.
We recognized the following net after tax benefits related to interest and
penalties in the provision for income taxes:
Years Ended December 31, (dollars in millions)
2011 $ 60
2010 29
2009 14
The after-tax accruals for the payment of interest and penalties in the
consolidated balance sheets are as follows:
At December 31, (dollars in millions)
2011 $ 470
2010 527
Verizon and/or its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various state, local and foreign jurisdictions. As a large
taxpayer, we are under audit by the Internal Revenue Service (IRS) and
multiple state and foreign jurisdictions on numerous open tax positions.
The IRS completed its examination of the Company’s U.S. income tax
returns for tax years 2004 through 2006 in the third quarter of 2011 and
we filed a protest with respect to certain tax adjustments proposed by the
IRS. In 2011, we also settled income tax audits in Italy and Massachusetts.
Significant tax examinations and litigation are also ongoing in New York,
Canada, and Australia for tax years as early as 2002. It is reasonably pos-
sible that the amount of the liability for unrecognized tax benefits could
change by a significant amount during the next twelve-month period.
An estimate of the range of the possible change cannot be made until
issues are further developed or examinations close.
Deferred taxes arise because of differences in the book and tax bases
of certain assets and liabilities. Significant components of deferred tax
assets and liabilities are as follows:
(dollars in millions)
At December 31, 2011 2010
Employee benefits $ 13,119 $ 11,499
Tax loss and credit carry forwards 5,170 3,907
Uncollectible accounts receivable 224 248
Other – assets 952 951
19,465 16,605
Valuation allowances (2,376) (3,421)
Deferred tax assets 17,089 13,184
Former MCI intercompany accounts receivable
basis difference 1,435 1,489
Depreciation 13,743 11,758
Leasing activity 1,569 1,980
Wireless joint venture including wireless licenses 21,778 19,514
Other – liabilities 1,233 1,152
Deferred tax liabilities 39,758 35,893
Net deferred tax liability $ 22,669 $ 22,709
At December 31, 2011, undistributed earnings of our foreign subsidiaries
indefinitely invested outside of the United States amounted to approxi-
mately $1.5 billion. The majority of Verizon’s cash flow is generated from
domestic operations and we are not dependent on foreign cash or earn-
ings to meet our funding requirements. Furthermore, a portion of these
undistributed earnings represent amounts that legally must be kept in
reserve and are unavailable for distribution. As a result, we have not pro-
vided deferred taxes on these undistributed earnings because we intend
that they will remain indefinitely invested outside of the United States.
Determination of the amount of unrecognized deferred taxes related to
these undistributed earnings is not practical.
At December 31, 2011, we had net after tax loss and credit carry for-
wards for income tax purposes of approximately $5.1 billion. Of these
net after tax loss and credit carry forwards, approximately $4.4 billion will
expire between 2012 and 2031 and approximately $0.7 billion may be
carried forward indefinitely. The amount of net after tax loss and credit
carry forwards reflected as a deferred tax asset above has been reduced
by approximately $0.1 billion and $0.6 billion at December 31, 2011 and
2010, respectively, due to federal and state tax law limitations on utiliza-
tion of net operating losses.
During 2011, the valuation allowance decreased approximately $1.0 bil-
lion. The balance of the valuation allowance at December 31, 2011 and
the 2011 activity is primarily related to state and foreign tax losses and
credit carry forwards.