SecProbe.io

CORRESP
1
filename1.htm

corresp

[WASTE MANAGEMENT LETTERHEAD]

June 6, 2006

Via EDGAR and Facsimile (202) 772-9369

Mr. John Hartz

Senior Assistant Chief Accountant

Securities and Exchange Commission

Division of Corporation Finance

100 F Street, N.E.

Washington, D.C. 20549-7010

     Re: Comment Letter dated May 16, 2006 relating to Form 10-K for the fiscal year ended December
31, 2005 (the “Form 10-K”) of Waste Management, Inc. (the “Company”), filed February 21, 2006, File
No. 001-12154

Dear Mr. Hartz:

     In connection with your review of the Company’s Form 10-K, we submit the following response to
your letter of May 16, 2006 addressed to David Steiner. The response below includes the original
comments from your letter (in italics), followed by our responses. Please note there is some
overlap in our responses to your comments and, therefore, we respectfully request that you consider
our responses in the aggregate, as we believe the format in which we have responded gives the most
comprehensive explanations and answers to your questions.

     We understand that you will be reviewing our response and may have additional comments. We
welcome any questions you may have and thank you for your attention devoted to our filing. Please
feel free to contact the Company at the telephone number listed at the end of this letter.

Tax Matters

1. We note that the settlement of tax audits resulted in a reduction in income tax expense of $398
million in 2005, $101 million in 2004 and $6 million in 2003. Were it not for the reversals of the
reserves you established for these tax exposures your net income in 2005 would have fallen 6%
rather than increased 26%, as reported. In order for us to better understand these reserves please
provide us with the following:

    -

    Explain the underlying material tax position(s) you have taken which you
believe may be challenged and potentially disallowed;

Mr. John Hartz

Senior Assistant Chief Accountant

June 6, 2006

    -

    Tell us whether you consider the position to be specific tax “shelters” as defined by tax authorities, or whether they
represent tax uncertainties entered into in the ordinary course of business;

    -

    Describe the uncertainties surrounding such position(s) and what factors would impact whether they would be potentially
disallowed;

    -

    Quantify in all respects the surrounding accounting for such tax positions;

    -

    Quantify the activity of the reserves from inception, or at least provide adequate historical perspective concerning the
last three years reversals and their original reserve dates;

    -

    Identify where, in both the income statement and balance sheet, the reserve activity was originally recorded;

    -

    Quantify and identify any current reserves and their underlying purpose;

    -

    Regarding any current reserves, describe the uncertainties surrounding such position(s) and what factors would impact
whether they would be potentially disallowed

    -

    Indicate in the activity any actual disallowances;

     The Company acknowledges that, were it not for the reversals of the tax reserves in 2005, the
Company’s net income would have decreased rather than increased. However, the Company respectfully
notes that the tax benefits included in net income recognized by the Company were due not only to
the reversal of the reserves, but also other benefits arising as a result of the audit settlements
(for an example see reference to the sale of assets transaction and generation of additional
capital losses in the “Fiscal 2004” section below). Additionally, the Company notes that it made a
concerted effort to inform investors that the comparability of its net income for 2005 as compared
with 2004 was affected by the reversals. For example, the Company disclosed in the “Margin
Improvement” section of the Management’s Discussion and Analysis Overview in its Form 10-K that the
Company’s improved net income as a percentage of revenues as compared to the prior year was
“largely due to a tax benefit resulting from tax audit settlements.” Similar language was included
in the Company’s earnings press releases and Forms 10-Q for the quarters in which reversals were
recorded.

General

     In the normal course of accounting for income taxes, the Company records and maintains
reserves related to tax return filing positions in compliance with Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies. The majority of the current reserve
amounts are included in the Company’s accrued income taxes, which the Company tracks by individual
matter. The remaining balance, which represents 5.5% of the total reserves for uncertain tax
matters as of January 1, 2006 and relates to Canadian reserve items, is included in
non-current deferred income taxes and is also tracked by individual matter. The reserve
balances as of January 1, 2003 related to tax exposure items identified for tax periods dating back
to 1988. Reserve amounts, the accounting for which is described in detail in response to Comment
#2, are recorded as debits to the tax provision on the income statement and credits to accrued
income taxes on the balance sheet. Once established, the Company generally will not adjust a tax
reserve (aside from the annual accrual of interest expense) unless and until there has been a
discrete event requiring an adjustment, such as a change in the tax law, the issuance of
regulations, the closing or settlement of an audit or the running of the statute of limitations.
If a

2

Mr. John Hartz

Senior Assistant Chief Accountant

June 6, 2006

reduction is necessary or required, the reserves plus the related interest accrued on such
amounts are reversed from accrued income taxes into the tax provision line of the income statement,
where the charge(s) was (were) originally recorded.

     Although the Company has referenced certain percentages of its total reserves in its
discussion below, it is not implying that the percentages are necessarily indicative of whether the
Company considers the tax position and related reserve material. The Company assesses the
materiality of its positions and the amounts of its reserves in accordance with the guidance
provided in Staff Accounting Bulletin No. 99, Materiality, and Statement of Financial Accounting
Concepts No. 2, Qualitative Characteristics of Accounting Information. Instead, the Company has
provided this information to assist the Staff in its understanding of the number of items, as well
as the significance of those items, that are contained in the Company’s reserves for uncertain tax
positions.

Last Three Fiscal Years

     The Company has described its reserves for uncertain tax positions and the activity related to
those reserves for the past three fiscal years in the response below. Since 2003, we have closed
17 audits by the Internal Revenue Service and one by an international taxing authority covering 14
years. As a result of the number of years under audit, the number of uncertain tax positions
included in the Company’s reserves has been substantial. The Company believes that its general
discussion of its reserves and an explanation of the activity within those reserves best explains
why the Company reversed reserves for tax exposures in the last three fiscal years. The Company
has attached as Exhibit A a “roll-forward” showing the activity of its uncertain tax positions
since January 1, 2003, which tracks the discussion below, to assist the Staff in its review. The
Company has also attached as Exhibit B a summary of tax audits closed in the last three fiscal
years.

Fiscal 2005

     The Company’s tax reserves balance as of January 1, 2005 included 23 separate exposure items.
Of these items, three were “asserted,” meaning a taxing authority had identified and challenged the
Company’s position regarding the item. The remaining 20 items were “unasserted,” meaning that,
although no taxing authority had identified and challenged the Company’s position with respect to
the item, the Company assumed that the item would be identified by a taxing authority and that the
Company’s position would be challenged. As of January 1, 2005, of the 23 separate reserve amounts,
only six items individually constituted over
five percent of the total reserve. Each of the remaining 17 reserves amounted to less than
five percent of the total reserve amount; of which seven equaled less than one percent of the total
reserve and 10 were between one and five percent of the total reserve. It should be noted that
two of the 23 exposure items relate to reserves established for state tax return positions.
Although these state items have been aggregated into two single reserves, one classified as
asserted and one classified as unasserted, there are 39 specific exposure issues that are
individually tracked and quantified and make up the total state asserted and unasserted reserve
items.

3

Mr. John Hartz

Senior Assistant Chief Accountant

June 6, 2006

     All but one of the tax positions included in the reserves as of January 1, 2005 represented
tax uncertainties entered into in the ordinary course of business. This one matter related to
contingent liabilities transactions entered into in 1997 by certain subsidiaries of Waste
Management Holdings, Inc. (f/k/a Waste Management, Inc.) prior to their acquisition by the Company.
The transactions were identified as “listed transactions” pursuant to the IRS’ Notice 2001-17
(January 18, 2001). The Company established a tax reserve for the deductions for the capital
losses claimed by the subsidiaries in 1997, which was disclosed to the IRS at the inception of the
1997 audit. The Company filed under Revenue Procedure 2002-67 for fixed concession settlement
procedure, which was accepted by the IRS, and as a result, in the second quarter of 2005, when the
audit for the tax years involving the transactions closed, the Company utilized the majority of
this reserve in settling the issue. This reserve matter was one of the single largest items
included in the balance of uncertain tax position reserves as of January 1, 2005. It represents
the only asserted tax position included in the reserves in the year that represented more than five
percent of the total reserves at the beginning of the year. It is also the only material tax
position for which a deduction has been disallowed in the past three fiscal years.1

     As previously discussed, six of the 23 positions represented a reserve amount that was five
percent or more of the total reserves balance in 2005. Three of these, as well as others that were
of a lesser amount, related, albeit in some cases only tangentially, to the Company’s acquisition
of Waste Management Holdings, Inc. and the subsequent accounting and legal issues it faced in 1999
through 2002. In July 1998, the Company (then known as USA Waste Services, Inc.) acquired Waste
Management Holdings (then known as Waste Management, Inc.) in a triangular merger transaction that
was accounted for as a pooling-of-interests. As the Commission is aware, the Company had an
earnings shortfall in the second quarter of 1999, and announcements made by the Company in relation
to the shortfall led to a multitude of lawsuits against the Company, including a class action
lawsuit and the consent by the Company to the issuance by the Commission of a Cease and Desist
Order. At the direction of its Board of
Directors, the Company initiated a comprehensive accounting review of its accounting records,
systems, processes and controls during 1999, and as a result, recorded $1.2 billion (after-tax) of
charges in the third quarter of 1999.

     The reserves for uncertain tax positions related to these issues included, generally, (i) the
deductibility of certain payments in settlement of lawsuits; (ii) the deductibility of certain
professional fees, transaction and other merger related costs in connection with the July 1998
acquisition of Waste Management Holdings, Inc.; (iii) the deductibility of certain expense items

    1

    The Company entered into a nearly identical
contingent liability transaction in 1996. The Company established a tax
reserve for the deductions in 1996, which was disclosed to the IRS at the
inception of the audit for 1996. The Company also filed for fixed settlement
for this transaction. The reserve for this transaction was aggregated,
although computed and tracked separately, with the reserve for the
above-described transaction because of the similar nature of the transactions.
A portion of the reserve was reduced during 2004 when the audit for 1996
closed. Therefore, the “contingent liability transaction” reserve,
which was established in 1996, and increased for the above-described
transaction in 1997, was partially reduced in 2004 and the majority of the
remainder was reduced in 2005, as discussed above. As discussed, the reserve
is one of the 23 recorded as of January 1, 2005 that was carried over from
fiscal 2004 (but in a reduced amount because of the payments made once the
audit for 1996 closed).

4

Mr. John Hartz

Senior Assistant Chief Accountant

June 6, 2006

recorded as part of the 1999 third quarter charge referred to above; and (iv) the ability to
utilize Section 29 (n/k/a Section 45K) federal income tax credits due to potential taxable income
limitations. In the second quarter of 2005, the Company reversed a substantial amount of these
reserves, representing three separate tax positions, two of which equaled more than five percent of
the total at the beginning of the year. The reversals were made once the Company received
notification, dated June 23, 2005, that the audit for 1997 – 2000 was finalized (and the IRS had
not challenged the Company’s positions). The resolution of the remaining three reserve items
relating to these matters is described below, under “Current Year.”

     The Company also carried a reserve balance that represented more than five percent of the
total reserve as of the beginning of 2005 that related to the structure and financing of certain of
the Company’s international operations, and whether the income from these entities represented U.S.
includible taxable income to the Company on a consolidated basis. In the second quarter of 2005,
the Company reversed a substantial portion of this reserve as the audit for the majority of the
relevant tax years closed and the IRS did not challenge the Company’s position. The Company
intends to reverse the remainder of the reserve in connection with the settlement of the IRS’s
audit for 2002 – 2003, as described below, under “Current Year.”

     The final tax position included in the reserve balance during fiscal 2005 that represented
over five percent of the total reserve as of the beginning of the year relates to state tax issues.
Although a portion of this reserve was reversed in the third quarter of 2005 as state audits were
completed, a significant amount is still recorded in the Company’s financial statements, and is
described below, under “Current Year.”

Fiscal 2004

     As of January 1, 2004, the Company’s reserves balance for uncertain tax positions included 35
separate matters. Twenty-three of these matters were the same matters referenced above in fiscal
2005, which carried over from 2004. Of the 12 matters that did not carry over to 2005, eight were
asserted and four were unasserted. The four unasserted matters that did not carry over to 2005
each accounted for less than five percent of the total reserves as of the beginning of the year.
Each was reversed, in whole, during the year as the relevant statute of limitations ran or the
audit for the relevant tax years was completed and the positions were either not challenged or
ultimately not disallowed by the IRS. Of the eight matters that the IRS had identified and
challenged, but were still reversed in 2004 and therefore did not carry over into 2005, none
represented more than five percen