Notes to Consolidated Financial Statements

Note 13

Income Taxes

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

Years Ended December 31,	2010		2009		2008
(dollars in millions)
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:

Years Ended December 31,	2010			2009			2008
(dollars in millions)
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,
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:

At December 31,	2010			2009
(dollars in millions)
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:

	2010			2009			2008
(dollars in millions)
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.