CVS 2009 Annual Report Download - page 69

There are no material reserves established at December 31,
2009 for income tax positions for which the ultimate deduct-
ibility is highly certain but for which there is uncertainty about
the timing of such deductibility. If present, such items would
impact deferred tax accounting, not the annual effective income
tax rate, and would accelerate the payment of cash to the
taxing authority to an earlier period.
The total amount of unrecognized tax benefits that, if
recognized, would affect the effective income tax rate is
approximately $41 million, after considering the federal
benefit of state income taxes.
Note 12 Commitments and Contingencies
Between 1991 and 1997, the Company sold or spun off a
number of subsidiaries, including Bob’s Stores, Linens ’n
Things, Marshalls, Kay-Bee Toys, Wilsons, This End Up and
Footstar. In many cases, when a former subsidiary leased a
store, the Company provided a guarantee of the store’s lease
obligations. When the subsidiaries were disposed of, the
Company’s guarantees remained in place, although each
initial purchaser has indemnified the Company for any lease
obligations the Company was required to satisfy. If any of the
purchasers or any of the former subsidiaries were to become
insolvent and failed to make the required payments under
a store lease, the Company could be required to satisfy
these obligations.
As of December 31, 2009, the Company guaranteed approxi-
mately 70 such store leases (excluding the lease guarantees
related to Linens ’n Things, which are discussed in Note 1
previously in this document), with the maximum remaining
lease term extending through 2018. Management believes the
ultimate disposition of any of the remaining guarantees will not
have a material adverse effect on the Company’s consolidated
financial condition, results of operations or future cash flows.
Caremark’s subsidiary Caremark Inc. (now known as “Caremark,
L.L.C.”) is a defendant in a qui tam lawsuit initially filed by
a relator on behalf of various state and federal government
agencies in Texas federal court in 1999. The case was unsealed
in May 2005. The case seeks monetary damages and alleges
that Caremark’s processing of Medicaid and certain other
government claims on behalf of its clients (which allegedly
resulted in underpayments from our clients to the applicable
government agencies) violates applicable federal or state false
claims acts and fraud statutes. The United States and the States
of Texas, Tennessee, Florida, Arkansas, Louisiana and California
intervened in the lawsuit, but Tennessee and Florida withdrew
from the lawsuit in August 2006 and May 2007, respectively.
The following table is a summary of the activity in the
Company’s income tax reserve as of December 31:
in millions 2009 2008
Beginning Balance $ 257 $ 234
Additions based on tax positions related
to the current year 1 6
Additions based on tax positions related
to prior years 12 48
Reductions for tax positions of prior years (6) (8)
Expiration of statute of limitations (155) (9)
Settlements (48) (14)
Ending Balance $ 61 $ 257
The Company and its subsidiaries are subject to U.S. federal
income tax as well as income tax of numerous state and local
jurisdictions. Substantially all material income tax matters have
been concluded for fiscal years through 2001. The Company
and its subsidiaries anticipate that a number of income tax
examinations will conclude and statutes of limitation for open
years will expire over the next twelve months, which may
cause a utilization or reduction of the Company’s reserve for
uncertain tax positions of up to approximately $38 million.
During 2009, the Internal Revenue Service (the “IRS”) completed
examinations of the Company’s 2007 and 2008 consolidated
U.S. income tax returns pursuant to the Compliance Assurance
Process (“CAP”) program. The CAP program is a voluntary
program under which taxpayers seek to resolve all or most
issues with the IRS prior to or soon after the filing of their
U.S. income tax returns, in lieu of being audited in the
traditional manner.
The IRS is currently examining the Company’s 2009 consoli-
dated U.S. income tax year pursuant to the CAP program. The
Company and its subsidiaries are also currently under income
tax examinations by a number of state and local tax authori-
ties. Additionally, the Company has filed a Protest with the
IRS Appeals Office regarding various assessments made in
connection with the IRS examinations of Caremark’s consoli-
dated U.S. income tax returns for 2006 and for its short tax
year-ended March 22, 2007. As of December 31, 2009, no
examination has resulted in any proposed adjustments that
would result in a material change to the Company’s results
of operations, financial condition or liquidity.
The Company recognizes interest accrued related to unrecog-
nized tax benefits and penalties in income tax expense. During
the fiscal year-ended December 31, 2009, the Company recog-
nized interest of approximately $5 million. The Company had
approximately $17 million accrued for interest and penalties as
of December 31, 2009.
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