First Data 2013 Annual Report Download - page 113

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approximately $161 million, $163 million, and $172 million, respectively, of tax positions that, if recognized, would affect the effective tax rate.
During the year ended December 31, 2012, the Company’s liability for unrecognized tax benefits was reduced by $52 million upon closure of the 2003
and 2004 federal tax years and the resolution of certain state audit issues. The reduction in liabilities was recorded through a decrease to tax expense and an
increase to deferred tax liabilities.
During the year ended December 31, 2011, the Company’s liability for unrecognized tax benefits was reduced by $25 million after negotiating
settlements with the Internal Revenue Service (“IRS”) regarding specific contested issues in the 2003 through 2006 federal tax years. The reduction in liabilities
was recorded through a decrease to tax expense.
The Company recognizes interest and penalties related to unrecognized tax benefits in the “Income tax expense (benefit)” line item of the Consolidated
Statements of Operations. Cumulative accrued interest and penalties (net of related tax benefits) are not included in the ending balances of unrecognized tax
benefits. Cumulative accrued interest and penalties are included in the “Other long-term liabilities” line of the Consolidated Balance Sheets while the related tax
benefits are included in the “Long-term deferred tax liabilities” line of the Consolidated Balance Sheets. The following table presents the approximate amounts
associated with accrued interest expense and the cumulative accrued interest and penalties:
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  
Current year accrued interest expense (net of related tax benefits) $ 5 $ 4$ 9
Cumulative accrued interest and penalties (net of related tax benefits) $ 45 $ 47 $69
As of December 31, 2013, the Company anticipates it is reasonably possible that its liability for unrecognized tax benefits may decrease by
approximately $160 million within the next twelve months as a result of the possible closure of federal tax audits, potential settlements with certain states and
foreign countries and the lapse of the statute of limitations in various state and foreign jurisdictions.
The Company or one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of
December 31, 2013, the Company was no longer subject to income tax examination by the U.S. federal jurisdiction for years before 2005. State and local
examinations are substantially complete through 2005. Foreign jurisdictions generally remain subject to examination by their respective authorities from 2006
forward, none of which are considered major jurisdictions.
Under the Tax Allocation Agreement executed at the time of the spin-off of The Western Union Company (“Western Union”) on September 29, 2006,
Western Union is responsible for and must indemnify the Company against all taxes, interest and penalties that relate to Western Union for periods prior to the
spin-off date. If Western Union were to agree to or be finally determined to owe any amounts for such periods but were to default in its indemnification
obligation under the Tax Allocation Agreement, the Company as parent of the tax filing group during such periods generally would be required to pay the
amounts to the relevant tax authority, resulting in a potentially material adverse effect on the Company’s financial position and results of operations. As of
December 31, 2013, the Company had approximately $113 million of income taxes payable, including approximately $4 million of uncertain income tax
liabilities, recorded related to Western Union for periods prior to the spin-off date. The Company has recorded a corresponding account receivable of equal
amount from Western Union, which is included as a long-term account receivable in the “Other long-term assets” line of the Company’s Consolidated Balance
Sheets, reflecting the indemnification obligation. The uncertain income tax liabilities and corresponding receivable are based on information provided by
Western Union regarding its tax contingency reserves for periods prior to the spin-off date. There is no assurance that a Western Union-related issue raised by
the IRS or other tax authority will be finally resolved at a cost not in excess of the amount reserved and reflected in the Company’s uncertain income tax
liabilities and corresponding receivable from Western Union. The Western Union contingent liability is in addition to the Company’s liability for
unrecognized tax benefits discussed above.
The IRS completed its examination of the U.S. federal consolidated income tax returns of the Company for 2005 through 2007 and issued a 30-Day letter
in October 2012. The 30-Day letter claims that the Company and its subsidiaries, which included Western Union during some of the years at issue, owe
additional taxes with respect to a variety of adjustments. The Company and Western Union agree with several of the adjustments in the 30-Day letter, such
adjustments representing tax due of approximately $40 million. This undisputed tax and associated interest due (pretax) of approximately $17 million through
December 31, 2013, have been fully reserved. The undisputed tax for which Western Union would be required to indemnify the Company is greater than the
total tax due, such that settlement of the undisputed tax would result in a net refund to the Company. As to the adjustments that are disputed, such issues
represent total taxes allegedly due of approximately $59 million, of which $40 million relates to the Company and $19 million
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