Quest Diagnostics 2007 Annual Report Download - page 90

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The total amount of unrecognized tax benefits as of and for the year ended December 31, 2007 consists of
the following (in thousands):
December 31,
2007
Balance at January 1, 2007 . . ................................................ $ 91,856
Additions:
for tax positions of current year . . ....................................... 14,341
for tax positions of prior years . . . ....................................... 14,698
Reductions:
Changes in judgment . . . ................................................ (1,494)
Expirations of statutes of limitations ..................................... (4,423)
Settlements ............................................................. (7,035)
Balance at December 31, 2007............................................... $107,943
The total amount of unrecognized tax benefits as of December 31, 2007, that, if recognized, would affect the
effective tax rate is $45 million. Based upon the expiration of statutes of limitations, settlements and/or the
conclusion of tax examinations, the Company believes it is reasonably possible that the total amount of
unrecognized tax benefits for the items previously discussed may decrease by up to $33 million within the next
twelve months.
Accruals for interest expense on contingent tax liabilities are classified in income tax expense in the
consolidated statements of operations. Accruals for penalties have historically been immaterial. The total amount
of interest charged to earnings for the year ended December 31, 2007 was approximately $6 million. As of
December 31, 2007, the Company has approximately $23 million accrued, net of the benefit of a federal and
state deduction, for the payment of interest on uncertain tax positions. The Company does not consider this
interest part of its fixed charges.
In the regular course of business, various federal, state and local and foreign tax authorities conduct
examinations of the Company’s income tax filings and the Company generally remains subject to examination
until the statute of limitations expires for the respective jurisdiction. After reaching an agreement at the appeals
level of the Internal Revenue Service (“IRS”), the Company settled the 2000 and 2001 tax year audits in April
2007. The IRS has recently completed their examination of the 2002 and 2003 income tax returns. The Company
has prepared protests for several of the 2002 and 2003 proposed tax adjustments and anticipates that the appeals
process will be completed over the next two years. Certain state tax authorities are conducting audits for various
years between 2000 and 2004. At this time, the Company does not believe that there will be any material
additional payments beyond its recorded contingent liability reserves that may be required as a result of these tax
audits. As of December 31, 2007, a summary of the tax years that remain subject to examination for the
Company’s major jurisdictions are:
United States – federal ............................................ 2002–2006
United States – various states ..................................... 2000–2006
In conjunction with its acquisition of SmithKline Beecham Clinical Laboratories, Inc. (“SBCL”), which
operated the clinical testing business of SmithKline Beecham plc (“SmithKline Beecham”), the Company entered
into a tax indemnification arrangement with SmithKline Beecham that provides the parties with certain rights of
indemnification against each other.
F-20
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)