Pizza Hut 2010 Annual Report Download - page 133

36
Internal Revenue Service Proposed Adjustment
On June 23, 2010, the Company received a Revenue Agent Report (“RAR”) from the Internal Revenue Service (the
“IRS”) relating to its examination of our U.S. federal income tax returns for fiscal years 2004 through 2006. The IRS has
proposed an adjustment to increase the taxable value of rights to intangibles used outside the U.S. that Yum transferred to
certain of its foreign subsidiaries. The proposed adjustment would result in approximately $700 million of additional
taxes plus net interest to date of approximately $150 million. Furthermore, if the IRS prevails it is likely to make similar
claims for years subsequent to fiscal 2006. The potential additional taxes for these later years, through 2010, computed on
a similar basis to the 2004-2006 additional taxes, would be approximately $320 million plus net interest to date of
approximately $20 million.
We believe that the Company has properly reported taxable income and paid taxes in accordance with applicable laws and
that the proposed adjustment is inconsistent with applicable income tax laws, Treasury Regulations and relevant case law.
We intend to defend our position vigorously and have filed a protest with the IRS. As the final resolution of the proposed
adjustment remains uncertain, the Company will continue to provide for its position in this matter based on the tax benefit
that we believe is the largest amount that is more likely than not to be realized upon settlement of this issue. There can be
no assurance that payments due upon final resolution of this issue will not exceed our currently recorded reserve and such
payments could have a material adverse effect on our financial position. Additionally, if increases to our reserves are
deemed necessary due to future developments related to this issue, such increases could have a material, adverse effect on
our results of operations as they are recorded. The Company does not expect resolution of this matter within twelve
months and cannot predict with certainty the timing of such resolution.
Taco Bell Beef Issue
In late January 2011 a lawsuit was filed alleging a violation of consumer protection statutes and deceptive business
practices by Taco Bell through its advertising that the beef served in its products is “seasoned beef”. Though the
Company denies all claims within the lawsuit and intends to vigorously defend its position, the resulting negative
publicity regarding its food quality has adversely impacted Taco Bell sales in both company and franchise stores. While
we do not anticipate a sustained negative impact on Taco Bell’s sales, it is difficult for us to predict if there will be any
significant impact on our 2011 Revenues and Operating Profit given the recent nature of the adverse publicity.
Sale of Long John Silver’s and A&W
Subsequent to the end of our fourth quarter, we decided to place our Long John Silver’s and A&W All-American Food
Restaurants brands for sale and began the process to identify a buyer. In the first quarter of 2011, we anticipate that we
will recognize a non-cash pre-tax impairment loss in Special Items as a result of our decision to sell. The amount of the
expected pre-tax loss as well as the related tax impact will be dependent upon indications we receive as to potential sales
prices and structures. We do not expect the eventual sale to have a material impact to our ongoing earnings or cash
flows.
Form 10-K