Verizon Wireless 2012 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)
2012 2011 2010
Balance at January 1, $ 3,078 $ 3,242 $ 3,400
Additions based on tax positions related to
the current year 131 111 231
Additions for tax positions of prior years 92 456 476
Reductions for tax positions of prior years (415) (644) (569)
Settlements 100 (56) (256)
Lapses of statutes of limitations (43) (31) (40)
Balance at December 31, $ 2,943 $ 3,078 $ 3,242
Included in the total unrecognized tax benefits at December 31, 2012,
2011 and 2010 is $2.1 billion, $2.2 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)
2012 $ 82
2011 60
2010 29
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)
2012 $ 386
2011 470
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 for various open tax years. The IRS
commenced its examination of the Company’s U.S. income tax returns for
tax years 2007-2009 in the third quarter of 2012. Significant tax examina-
tions are ongoing in Italy and New York City for tax years as early as 2000.
The amount of unrecognized tax benefits will change in the next twelve
months due to the resolution of various income tax matters, including
the resolution of tax litigation in Canada in the first quarter of 2013. An
estimate of the range of the possible change cannot be made until these
tax matters are further developed or resolved. The impacts of the favor-
able resolution of the Canada litigation will be accounted for in the first
quarter of 2013.
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, 2012 2011
Employee benefits $ 13,644 $ 13,119
Tax loss and credit carry forwards 4,819 5,170
Uncollectible accounts receivable 206 224
Other – assets 1,050 952
19,719 19,465
Valuation allowances (2,041) (2,376)
Deferred tax assets 17,678 17,089
Former MCI intercompany accounts receivable basis
difference 1,275 1,435
Depreciation 13,953 13,743
Leasing activity 1,208 1,569
Wireless joint venture including wireless licenses 22,171 21,778
Other – liabilities 1,320 1,233
Deferred tax liabilities 39,927 39,758
Net deferred tax liability $ 22,249 $ 22,669
At December 31, 2012, undistributed earnings of our foreign subsidiaries
indefinitely invested outside of the United States amounted to approxi-
mately $1.8 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, nor do we intend to repatriate
these undistributed foreign earnings to fund U.S. operations. Furthermore,
a portion of these undistributed earnings represents amounts that legally
must be kept in reserve in accordance with certain foreign jurisdictional
requirements and are unavailable for distribution or repatriation. As a
result, we have not provided U.S. deferred taxes on these undistributed
earnings because we intend that they will remain indefinitely reinvested
outside of the United States and therefore unavailable for use in funding
U.S. operations. Determination of the amount of unrecognized deferred
taxes related to these undistributed earnings is not practicable.
At December 31, 2012, we had net after tax loss and credit carry forwards
for income tax purposes of approximately $4.6 billion. Of these net after
tax loss and credit carry forwards, approximately $4.0 billion will expire
between 2013 and 2032 and approximately $0.6 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 at December 31, 2012 and 2011, respectively,
due to federal and state tax law limitations on utilization of net operating
losses.
During 2012, the valuation allowance decreased approximately $0.3 bil-
lion. The balance of the valuation allowance at December 31, 2012 and
the 2012 activity is primarily related to state and foreign tax losses and
credit carry forwards.