CVS 2014 Annual Report Download - page 82

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CVS Health
80
Notes to Consolidated Financial Statements
The Company and its subsidiaries are also currently under income tax examinations by a number of state and local
tax authorities. As of December 31, 2014, 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.
Substantially all material state and local income tax matters have been concluded for fiscal years through 2009. The
Company and its subsidiaries anticipate that a number of state and local income tax examinations will be concluded
and statutes of limitation for open years will expire over the next twelve months, which may result in the utilization or
reduction of the Company’s reserve for uncertain tax positions of up to approximately $11 million. In addition, it is
reasonably possible that the Company’s unrecognized tax benefits could significantly change within the next twelve
months due to the anticipated conclusion of various examinations with the IRS for various years. An estimate of the
range of the possible change cannot be made at this time.
The Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax
expense. The Company recognized interest of approximately $6 million during the year ended December 31, 2014,
and $4 million during each of the years ended December 31, 2013 and 2012. The Company had approximately
$11 million and $10 million accrued for interest and penalties as of December 31, 2014 and 2013.
There are no material uncertain tax positions as of December 31, 2014 the ultimate deductibility of which is highly
certain but for which there is uncertainty about the timing. If there were, any such items would impact deferred tax
accounting only, not the annual effective income tax rate, and would accelerate the payment of cash to the taxing
authority to a period earlier than expected.
The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is
approximately $170 million, after considering the federal benefit of state income taxes.
11 | Commitments and Contingencies
Lease Guarantees
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 agreed to
indemnify 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, 2014, the Company guaranteed approximately 72 such store leases (excluding the lease
guarantees related to Linens ‘n Things, which are discussed in Note 1), with the maximum remaining lease term
extending through 2026. 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.
Legal Matters
The Company is a party to legal proceedings, investigations and claims in the ordinary course of its business,
including the matters described below. The Company records accruals for outstanding legal matters when it believes
it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on
a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that
would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable
and estimable, the Company does not establish an accrued liability. None of the Company’s accruals for outstanding
legal matters are material individually or in the aggregate to the Company’s financial position.