Windstream 2008 Annual Report Download - page 139

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies and Changes, Continued:
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years
ended December 31:
(Millions) 2008 2007
Beginning balance $ 7.4 $ 1.3
Additions based on CTC acquisition - 7.2
Additions based on tax positions related to current year 0.7 -
Additions based on tax positions of prior years - 0.7
Reductions for tax positions of prior years (1.2) (0.2)
Reduction as a result of a lapse of the applicable statute of limitations (0.8) (0.2)
Settlements - (1.4)
Ending balance $ 6.1 $ 7.4
The Company does not expect or anticipate a significant increase or decrease over the next twelve months in the
unrecognized tax benefits reported above. The total amount of unrecognized tax benefits, if recognized, that
would affect the effective tax rate is $1.9 million and $0.8 million, net of indirect benefits, for years ended
December 31, 2008 and 2007, respectively.
Included in the balance at December 31, 2008 and 2007 are $3.4 million and $3.7 million of gross tax positions
for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of the deferred tax accounting, other than interest and penalties, the
disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate
the payment of cash to the taxing authority to an earlier period. These unrecognized tax benefits are included in
other long term liabilities in the accompanying consolidated balance sheets for the years ended December 31,
2008 and 2007, respectively.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states.
With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations
by tax authorities for years prior to 2004. The Company has identified Arkansas, Florida, Georgia, Kentucky,
Nebraska, North Carolina and Texas as “major” state taxing jurisdictions. During the year ended December 31,
2007, the Company and the Internal Revenue Service (“IRS”) reached a settlement related to the IRS’s
examination of the U.S. income tax returns for CTC for the tax years ended December 31, 2000 through 2003. As
a result of the settlement, the Company made payments to the IRS for the tax position claimed for the treatment of
Universal Service Fund (“USF”) subsidies. The Company had previously recognized a FIN 48 liability for the
entire amount of the tax position of $1.4 million, and therefore, the payment did not materially change its financial
position.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax
expense. At the date of adoption, the Company had accrued approximately $0.2 million of interest expense and
penalties related to uncertain tax positions. During the years ended December 31, 2008 and 2007, the Company
recognized approximately $0.5 million and $0.4 million, respectively, in interest and penalties. Furthermore, the
Company had approximately $1.3 million and $1.5 million for the payment of interest and penalties accrued as of
December 31, 2008 and 2007, respectively.
Adoption of SFAS No. 158 - As of December 31, 2006, the Company adopted the provisions of SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R)”. SFAS No. 158 required implementation in two steps. Step one was
effective for Windstream beginning with the fiscal year ended on December 31, 2006 and required the Company
to recognize in its consolidated balance sheet the funded status of its defined benefit pension and postretirement
plans. The funded status is defined as the difference between the fair value of plan assets and the related benefit
obligation. SFAS No. 158 also required the Company to recognize as a component of accumulated other
comprehensive income (loss), net of taxes, the actuarial gains and losses and the prior service costs and credits
that had arisen but were not previously recognized as components of net periodic benefit cost. Accumulated other
comprehensive income (loss) is adjusted in subsequent periods as these amounts are recognized into income as
components of net periodic benefit cost. The adoption of SFAS No. 158 resulted in a reduction of prepaid pension
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