Western Union 2010 Annual Report Download - page 50

and therefore taxed at lower rates than our combined federal and state tax rates in the United States. In addition,
during 2010, we have also benefitted from cumulative and ongoing tax planning benefits, including benefits related
to certain previous foreign acquisitions, and from certain IRS settlements related to 2002 through 2004.
We have established contingency reserves for material, known tax exposures, including potential tax audit
adjustments with respect to our international operations restructured in 2003. As of December 31, 2010, the total
amount of tax contingency reserves was $607.9 million, including accrued interest and penalties, net of related
benefits. Our reserves reflect our judgment as to the resolution of the issues involved if subject to judicial review.
While we believe that our reserves are adequate to cover reasonably expected tax risks, there can be no assurance
that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed our
related reserve. With respect to these reserves, our income tax expense would include (i) any changes in tax reserves
arising from material changes during the period in facts and circumstances (i.e. new information) surrounding a tax
issue and (ii) any difference from our tax position as recorded in the financial statements and the final resolution of a
tax issue during the period. Such resolution could materially increase or decrease income tax expense in our
consolidated financial statements in future periods and could impact our operating cash flows.
The IRS completed its examination of the United States federal consolidated income tax returns of First Data for
2003 and 2004, of which we are a part, and issued a Notice of Deficiency in December 2008. The Notice of
Deficiency alleges significant additional taxes, interest and penalties owed with respect to a variety of adjustments
involving us and our subsidiaries, and we generally have responsibility for taxes associated with these potential
Western Union-related adjustments under the tax allocation agreement with First Data executed at the time of the
spin-off. We agree with a number of the adjustments in the Notice of Deficiency; however, we do not agree with the
Notice of Deficiency regarding several substantial adjustments representing total alleged additional tax and
penalties due of approximately $114 million. As of December 31, 2010, interest on the alleged amounts due for
unagreed adjustments would be approximately $36 million. A substantial part of the alleged amounts due for these
unagreed adjustments relates to our international restructuring, which took effect in the fourth quarter 2003, and,
accordingly, the alleged amounts due related to such restructuring largely are attributable to 2004. On March 20,
2009, we filed a petition in the United States Tax Court contesting those adjustments with which we do not agree. In
September 2010, IRS Counsel referred the case to the IRS Appeals Division for possible settlement. We believe our
overall reserves are adequate, including those associated with adjustments alleged in the Notice of Deficiency. If the
IRS’ position in the Notice of Deficiency is sustained, our tax provision related to 2003 and later years would
materially increase, which could materially impact our financial position, results of operations and cash flows.
In 2010, we made a $250 million refundable tax deposit relating to potential United States federal tax liabilities,
including those arising from our 2003 international restructuring, which have been previously accrued in our
financial statements. Making the deposit limits the further accrual of interest charges with respect to such potential
tax liabilities, to the extent of the deposit. The $250 million refundable tax deposit is recorded as a reduction to
“Income taxes payable” in the consolidated balance sheets as of December 31, 2010.
Earnings per share
During the years ended December 31, 2010, 2009 and 2008, basic earnings per share were $1.37, $1.21 and
$1.26, respectively, and diluted earnings per share were $1.36, $1.21 and $1.24, respectively. Unvested shares of
restricted stock are excluded from basic shares outstanding. Diluted earnings per share reflects the potential dilution
that could occur if outstanding stock options at the presented dates are exercised and shares of restricted stock have
vested. As of December 31, 2010, 2009 and 2008, there were 34.0 million, 37.5 million and 8.0 million, respectively,
of outstanding options to purchase shares of Western Union stock excluded from the diluted earnings per share
calculation under the treasury stock method as their effect was anti-dilutive. The increase in anti-dilutive shares in
2010 and 2009 compared to 2008 was primarily due to the majority of our outstanding options having an exercise
price higher than our average market price for the years ended December 31, 2010 and 2009.
Of the 37.5 million, 42.8 million and 43.6 million outstanding options to purchase shares of our common stock as
of December 31, 2010, 2009 and 2008, respectively, approximately 35%, 40% and 47%, respectively, were held by
employees of First Data.
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