Quest Diagnostics 2009 Annual Report Download - page 90

capital. The contingent liabilities for tax positions primarily relate to uncertainties associated with the realization
of tax benefits derived from certain state net operating loss carryforwards, the allocation of income and expense
among state jurisdictions, the characterization and timing of certain tax deductions associated with business
combinations and employee compensation, income and expenses associated with certain intercompany licensing
arrangements, and the deductibility of certain settlement payments.
The recognition and measurement of certain tax benefits includes estimates and judgment by management
and inherently involves subjectivity. Changes in estimates may create volatility in the Company’s effective tax
rate in future periods and may be due to settlements with various tax authorities (either favorable or unfavorable),
the expiration of the statute of limitations on some tax positions and obtaining new information about particular
tax positions that may cause management to change its estimates.
The total amount of unrecognized tax benefits as of and for the years ended December 31, 2009, 2008 and
2007 consists of the following:
2009 2008 2007
Balance, beginning of year................................ $ 70,877 $107,943 $ 91,856
Additions:
for tax positions of current year ...................... 69,219 3,775 14,341
for tax positions of prior years ....................... 22,462 3,916 14,698
Reductions:
Changes in judgment................................. (11,551) (32,684) (1,494)
Expirations of statutes of limitations . . . ............... (4,926) (2,724) (4,423)
Settlements .......................................... (19,627) (9,349) (7,035)
Balance, end of year ..................................... $126,454 $ 70,877 $107,943
The total amount of unrecognized tax benefits as of December 31, 2009, that, if recognized, would affect the
effective income tax rate from continuing operations is $44 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 $25
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. Interest expense
included in income tax expense in 2009 and 2007 was approximately $2 million and $6 million, respectively. 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. As of December 31, 2009 and 2008, the Company has
approximately $7 million and $18 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 (“IRS”) has
completed its examinations of the Company’s consolidated federal income tax returns up through and including
the 2005 tax year. In addition, the IRS is currently conducting audits of the Company’s federal tax returns for its
2006 and 2007 tax years, and certain state tax authorities are conducting audits for various years between 2004
and 2008. 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 was 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, 2009, a
summary of the tax years that remain subject to examination for the Company’s major jurisdictions are:
United States – federal ............................................ 2006–2009
United States – various states ..................................... 2005–2009
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)