Cleveland Clinic Health System Obligated Group - FMSbonds.com

Cleveland Clinic Health SystemNotes to Consolidated Financial Statements (continued)10. Income TaxesThe Cleveland Clinic Foundation and most of its controlled affiliates are tax exemptorganizations described in Section 501(c)(3) of the Internal Revenue Code. These organizationsare subject to income tax on any income from unrelated business activities. The System alsoowns or controls certain taxable affiliates.The System files income tax returns in the U.S. federal jurisdiction, various states and foreignjurisdictions. With few exceptions, the System is no longer subject to U.S. federal, state andlocal, or non-U.S. income tax examinations by tax authorities for years before 2003.The System adopted the provisions of FIN 48 in 2007. As a result of the implementation ofFIN 48, the System recognized an $8.3 million increase in the liability for unrecognized taxbenefits recorded in other noncurrent liabilities with a corresponding adjustment to theunrestricted net assets, recorded as a cumulative effect of change in accounting.A reconciliation of the beginning and ending amount of the liability for unrecognized tax benefitsis as follows (in thousands):Balance at January 1, 2007 $ 10,015Additions based on tax positions related to the current year 2,659Additions for tax positions of prior years 1,100Reductions for tax positions of prior years (3,511)Balance at December 31, 2007 $ 10,263The System recognizes interest and penalties accrued related to the liability for unrecognized taxbenefits in the consolidated statement of operations and changes in net assets. In 2007, theSystem recognized approximately $0.2 million in interest and penalties. At December 31, 2007and 2006, the System has approximately $1.0 million and $1.6 million, respectively, for thepayment of interest and penalties accrued.At December 31, 2007 and 2006, the System has net operating loss carryforwards of $97.5million and $98.3 million, respectively, for federal income tax purposes. These losses expire invarying amounts from 2008 through 2027. A valuation allowance has been recorded for the fullamount of the deferred tax asset related to the net operating loss carryforwards due to theuncertainty regarding their use.24