Cash America 2014 Annual Report Download - page 43

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Risks Related to the Enova Spin-off
The Company could be responsible for U.S. federal and state income tax liabilities that relate to the Enova Spin-
off.
The Enova Spin-off was conditioned on the receipt of an opinion of tax counsel that the Enova Spin-off will
be treated as a transaction that is tax-free for U.S. federal income tax purposes under Section 355(a) of the Internal
Revenue Code. An opinion of tax counsel is not binding on the IRS. Accordingly, the IRS may reach conclusions
with respect to the Enova Spin-off that are different from the conclusions reached in the opinion. The opinion was
based on certain factual statements and representations made by the Company, which, if incomplete or untrue in any
material respect, could alter tax counsel’s conclusions. If the IRS were to determine the Enova Spin-off to be
taxable, the Company would recognize a substantial tax liability.
The Company has received a private letter ruling from the IRS to the effect that the retention by the
Company of up to 20% of Enova’s stock will not be in pursuant to a plan having as one of its principal purposes the
avoidance of U.S. federal income tax within the meaning of Section 355(a)(1)(D)(ii) of the Internal Revenue Code.
The private letter ruling does not address any other tax issues related to the Enova Spin-off. Notwithstanding the
private letter ruling, the IRS could determine on audit that the retention of the Enova stock was in pursuant to a plan
having as one of its principal purposes the avoidance of U.S. federal income tax if it determines that any of the
facts, assumptions, representations or undertakings that the Company or Enova have made or provided to the IRS
are not correct. If the retention is in pursuant to a plan having as one of its principal purposes the avoidance of U.S.
federal income tax, then the distribution could ultimately be determined to be taxable, and the Company would
recognize gain in an amount equal to the excess of the fair market value of shares of Enova’s common stock
distributed to the Company’s shareholders on the distribution date over the Company’s tax basis in such shares of
Enova’s common stock. In addition, the Company agreed to certain actions in connection with the private letter
ruling, such as disposing of the Enova stock that it retained within two years following the Enova Spin-off, and if
the Company does not or is unable to follow-through with such actions, the tax-free status of the Enova Spin-off
could be jeopardized.
In connection with the Enova Spin-off, Enova and the Company have agreed to indemnify each other for certain
liabilities; if the Company is required to act on these indemnities to Enova, it may need to divert cash to meet
those obligations, and Enova’s indemnity could be insufficient or Enova could be unable to satisfy its
indemnification obligations.
Pursuant to a Separation and Distribution Agreement and certain other agreements that the Company
entered into with Enova at the time of the Enova Spin-off, including the Tax Matters Agreement, Enova has agreed
to indemnify the Company for certain liabilities that could be related to tax, regulatory, litigation or other liabilities,
and the Company has agreed to indemnify Enova for certain similar liabilities, in each case for uncapped amounts.
In addition, the Tax Matters Agreement prohibits Enova from taking any action or failing to take any action that
could reasonably be expected to cause the Enova Spin-off to be taxable or to jeopardize the conclusions of the
private letter ruling obtained in connection with the Enova Spin-off or opinions of counsel received by the Company
or Enova. Indemnities that the Company may be required to provide Enova are not subject to any cap, may be
significant and could negatively impact the Company’s business, particularly indemnities relating to the Company’s
actions that could impact the tax-free nature of the distribution. Third parties could also seek to hold the Company
responsible for any of the liabilities that Enova has agreed to assume. Further, the indemnity from Enova could be
insufficient to protect the Company against the full amount of such liabilities, or Enova may be unable to fully
satisfy its indemnification obligations. Moreover, even if the Company ultimately succeeds in recovering from
Enova any amounts for which it is held liable, the Company may be temporarily required to bear these losses and
could suffer reputational risks if the losses are related to regulatory, litigation or other matters. Each of these risks
could have a Material Adverse Effect.