FORM 10-K
94
MDU RESOURCES G ROUP, INC.
PART II
Total income tax expense differs from the amount computed by applying the statutory federal income tax rate to income before taxes. The
reasons for this difference were as follows:
Years ended December 31,
2007
2006
2005
Amount
%
Amount
%
Amount
%
(Dollars in thousands)
Computed tax at federal statutory rate
$179,484
35.0
$165,861
35.0
$144,039
35.0
Increases (reductions) resulting from:
State income taxes, net of federal income tax benefit
17,121
3.3
17,786
3.8
15,064
3.7
Deferred taxes associated with unrepatriated
foreign earnings
9,368
1.8
--
--
--
--
Domestic production activities deduction
(4,787)
(.9)
(2,324)
(.5)
(2,219)
(.5)
Depletion allowance
(4,073)
(.8)
(4,784)
(1.0)
(4,381)
(1.1)
Resolution of tax matters
208
--
(3,660)
(.8)
--
--
Foreign operations
235
--
136
--
(4,225)
(1.0)
Other items
(7,532)
(1.3)
(6,904)
(1.4)
(2,029)
(.6)
Total income tax expense
$190,024
37.1
$166,111
35.1
$146,249
35.5
Prior to the sale of the domestic independent power production assets on July 10, 2007, as discussed in Note 3, the Company considered
earnings (including the gain from the sale of its foreign equity method investment in a natural gas-fired electric generating facility in Brazil in
2005) to be reinvested indefinitely outside of the United States and, accordingly, no U.S. deferred income taxes were recorded with respect
to such earnings. Following the sale of these assets, the Company reconsidered its long-term plans for future development and expansion
of its foreign investment and has determined that it has no immediate plans to explore or invest in additional foreign investments at this
time. Therefore, in accordance with SFAS No. 109, in the third quarter of 2007, deferred income taxes were accrued with respect to the
temporary differences which had not been previously recorded. The cumulative undistributed earnings at December 31, 2007, were
approximately $36 million. The amount of deferred tax liability, net of allowable foreign tax credits, associated with the undistributed
earnings and recognized during 2007 was approximately $9.4 million. Future earnings will also be subject to additional U.S. taxes, net of
allowable foreign tax credits.
On January 1, 2007, the Company adopted FIN 48 as discussed in Note 1. The Company and its subsidiaries file income tax returns in the
U.S. federal jurisdiction, and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S.
federal, state and local, or non-U.S. income tax examinations by tax authorities for years ending prior to 2004.
Upon the adoption of FIN 48, the Company recognized a decrease in the liability for unrecognized tax benefits, which was not material and
was accounted for as an increase to the January 1, 2007, balance of retained earnings. At the date of adoption, the amount of unrecognized
tax benefits was $4.5 million.
A reconciliation of the unrecognized tax benefits (excluding interest) for the year ended December 31, 2007, was as follows:
2007
(In thousands)
Balance at beginning of year
$ 4,241
Additions based on tax positions related to the current year
373
Additions for tax positions of prior years
588
Lapse of statute of limitations
(1,467)
Balance at end of year
$ 3,735
Included in the balance of unrecognized tax benefits at December 31, 2007, were $1.6 million of 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 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. The amount of unrecognized tax benefits that, if
recognized, would affect the effective tax rate at December 31, 2007, was $2.6 million, including approximately $441,000 for the payment
of interest and penalties.
The Company does not anticipate the amount of unrecognized tax benefits to significantly increase or decrease within the next 12 months.
