Quest Diagnostics 2008 Annual Report Download - page 93

The total amount of unrecognized tax benefits as of and for the years ended December 31, 2008 and 2007
consists of the following:
2008 2007
Balance, beginning of year . . ......................................... $107,943 $ 91,856
Additions:
for tax positions of current year. . ................................ 3,775 14,341
for tax positions of prior years. . . ................................ 3,916 14,698
Reductions:
Changes in judgment . . . ......................................... (32,684) (1,494)
Expirations of statutes of limitations ............................. (2,724) (4,423)
Settlements . . ................................................... (9,349) (7,035)
Balance, end of year ................................................. $ 70,877 $107,943
The total amount of unrecognized tax benefits as of December 31, 2008, that, if recognized, would affect the
effective tax rate is $51 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 $34 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. As a result of
changes in judgment and favorable resolutions of uncertain tax positions, $5 million of net interest was credited
to income tax expense in 2008. Interest expense included in income tax expense in 2007 was approximately $6
million. As of December 31, 2008 and 2007, the Company has approximately $18 million and $23 million,
respectively, 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. The Internal Revenue Service has completed
its examinations of the Company’s consolidated federal income tax returns up through and including the 2004 tax
year. The Company is currently appealing an issue with regards to its 2005 tax year. Certain state tax authorities
are conducting audits for various years between 2004 and 2007. In December 2008, the Company reached a
settlement agreement to pay a state tax authority approximately $44 million in taxes, penalties and interest ($26
million, net of federal and state benefits) for certain tax positions associated with intercompany licensing
arrangements. This settlement is expected to be paid in 2009. 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, 2008, a summary of the tax years that remain
subject to examination for the Company’s major jurisdictions are:
United States – federal ............................................ 2004–2008
United States – various states ..................................... 2004–2008
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.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)