Notes to Consolidated Financial Statements

Note 13

Income Taxes

The components of income before provision (benefit) for income taxes are as follows:

(dollars in millions)

Years Ended December 31,

2010

 

2009

 

2008

 

Domestic

$

11,921

 

$

12,625

 

$

722

 

Foreign

 

763

 

 

895

 

 

921

 

Total

$

12,684

 

$

13,520

 

$

1,643

 

The components of the provision (benefit) for income taxes are as follows:

(dollars in millions)

Years Ended December 31,

2010

 

2009

 

2008

 

Current

 

 

 

 

 

 

 

 

 

Federal

$

(705

)

$

(611

)

$

365

 

Foreign

 

(19

)

 

73

 

 

240

 

State and Local

 

(42

)

 

364

 

 

544

 

Total

 

(766

)

 

(174

)

 

1,149

 

Deferred

 

 

 

 

 

 

 

 

 

Federal

 

2,945

 

 

1,616

 

 

(2,411

)

Foreign

 

(24

)

 

(35

)

 

(91

)

State and Local

 

316

 

 

518

 

 

(960

)

Total

 

3,237

 

 

2,099

 

 

(3,462

)

Investment tax credits

 

(4

)

 

(6

)

 

(6

)

Total income tax provision (benefit)

$

2,467

 

$

1,919

 

$

(2,319

)

The following table shows the principal reasons for the difference between the effective income tax rate and the statutory federal income tax rate:

Years Ended December 31,

2010

 

2009

 

2008

 

Statutory federal income tax rate

 

35.0

%

 

35.0

%

 

35.0

%

State and local income tax rate, net of federal tax benefits

 

1.4

 

 

1.5

 

 

(16.5

)

Distributions from foreign investments

 

 

 

 

 

(4.3

)

Medicare Part D subsidy charge

 

6.9

 

 

 

 

 

Equity in earnings from unconsolidated businesses

 

(1.6

)

 

(1.6

)

 

(14.0

)

Noncontrolling interest

 

(19.5

)

 

(16.0

)

 

(119.4

)

Other, net

 

(2.8

)

 

(4.7

)

 

(22.0

)

Effective income tax rate

 

19.4

%

 

14.2

%

 

(141.2

)%

The effective income tax rate in 2010 increased to 19.4% from 14.2% in 2009. The increase was primarily driven by a one-time, non-cash income tax charge of $1.0 billion. The one-time non-cash income tax charge was a result of the enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, both of which became law in March 2010 (collectively the Health Care Act). Under the Health Care Act, beginning in 2013, Verizon and other companies that receive a subsidy under Medicare Part D to provide retiree prescription drug coverage will no longer receive a federal income tax deduction for the expenses incurred in connection with providing the subsidized coverage to the extent of the subsidy received. Because future anticipated retiree prescription drug plan liabilities and related subsidies were already reflected in Verizon’s financial statements, this change required Verizon to reduce the value of the related tax benefits recognized in its financial statements in the period during which the Health Care Act was enacted. The increase was partially offset by higher earnings attributable to the noncontrolling interest.

During 2008, we recorded a pension and postretirement benefit plan remeasurement loss rendering the 2008 effective tax rate not meaningful. Excluding the tax impact of this actuarial loss in 2008, the effective income tax rate decreased in 2009 primarily driven by higher earnings attributable to the noncontrolling interest. Included within the (4.7)% 'Other net’ above is the impact of lower federal taxes, net of higher state taxes attributable to prior year adjustments to tax balances that were not material to the overall effective income tax rate.

Excluding the tax impact of the actuarial loss in 2008, the state and local income tax rate decreased due to tax benefits recognized after statutes of limitations in multiple jurisdictions lapsed and the impact of earnings attributable to the noncontrolling interest.

Deferred taxes arise because of differences in the book and tax bases of certain assets and liabilities. Significant components of deferred taxes are shown in the following table:

(dollars in millions)

At December 31,

2010

 

2009

 

Employee benefits

$

11,499

 

$

13,204

 

Tax loss and credit carry forwards

 

3,907

 

 

2,786

 

Uncollectible accounts receivable

 

248

 

 

303

 

Other – assets

 

951

 

 

1,269

 

 

 

16,605

 

 

17,562

 

Valuation allowances

 

(3,421

)

 

(2,942

)

Deferred tax assets

 

13,184

 

 

14,620

 

 

 

 

 

 

 

 

Former MCI intercompany accounts receivable basis difference

 

1,489

 

 

1,633

 

Depreciation

 

11,758

 

 

10,296

 

Leasing activity

 

1,980

 

 

2,081

 

Wireless joint venture including wireless licenses

 

19,514

 

 

18,249

 

Other – liabilities

 

1,152

 

 

1,012

 

Deferred tax liabilities

 

35,893

 

 

33,271

 

Net deferred tax liability

$

22,709

 

$

18,651

 

At December 31, 2010, undistributed earnings of our foreign subsidiaries indefinitely invested outside of the United States amounted to approximately $1.2 billion. We have not provided deferred taxes on these 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, 2010, we had net after tax loss and credit carry forwards for income tax purposes of approximately $4.2 billion. Of these net after tax loss and credit carry forwards, approximately $3.5 billion will expire between 2011 and 2030 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 $0.6 billion at December 31, 2010 and 2009, due to federal and state tax law limitations on utilization of net operating losses.

During 2010, the valuation allowance increased approximately $0.5 billion. The balance at December 31, 2010 and the 2010 activity is primarily related to state and foreign tax losses and credit carry forwards.

Unrecognized Tax Benefits

A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows:

(dollars in millions)

 

2010

 

2009

 

2008

 

Balance at January 1,

$

3,400

 

$

2,622

 

$

2,883

 

Additions based on tax positions related to the current year

 

231

 

 

288

 

 

251

 

Additions for tax positions of prior years

 

476

 

 

1,128

 

 

344

 

Reductions for tax positions of prior years

 

(569

)

 

(477

)

 

(651

)

Settlements

 

(256

)

 

(27

)

 

(126

)

Lapses of statutes of limitations

 

(40

)

 

(134

)

 

(79

)

Balance at December 31,

$

3,242

 

$

3,400

 

$

2,622

 

Included in the total unrecognized tax benefits at December 31, 2010, 2009 and 2008 is $2.1 billion, $2.1 billion and $1.6 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)

2010

$

29

 

2009

 

14

 

2008

 

55

 

The after-tax accrual for the payment of interest and penalties in the balance sheets are as follows:

At December 31,

(dollars in millions)

2010

$

527

 

2009

 

552

 

Verizon and/or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state, local and foreign jurisdictions. The Internal Revenue Service (IRS) is currently examining the Company’s U.S. income tax returns for the years 2004 through 2006. As a large taxpayer, we are under continual audit by the IRS and multiple state and foreign jurisdictions on numerous open tax positions. Significant tax examinations and litigation are ongoing in Massachusetts, New York, Canada, Australia and Italy for tax years as early as 2002. It is reasonably possible 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.