Chili's 2006 Annual Report Download - page 71

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F-25
13. CONTINGENCIES
As of June 28, 2006, we guaranteed lease payments totaling $86.0 million as a result of the sale of
certain brands and the sale of restaurants to franchisees. This amount represents the maximum potential
liability of future payments under the guarantees. These leases have been assigned to the buyers and expire
at the end of the respective lease terms, which range from fiscal 2007 through fiscal 2017. We remain
secondarily liable for the leases; however, no liability has beenrecordedas the likelihood of the buyers
defaulting on the leases is considered negligible.
Certain current and former hourly restaurant employees filed a lawsuit against us in California
Superior Court alleging violations of California labor laws with respect to meal and rest breaks. The
lawsuit seeks penalties and attorney’s fees and was certified as a class action in July 2006. Discovery is
under way and we intend to vigorously defend our position. It is not possible at this time to reasonably
estimate the possible loss or range of loss, if any.
In January 1996, we entered into a Tip Reporting Alternative Commitment (“TRAC”) agreement
with the IRS. The agreement required us, among other things, to implement tip reporting educational
programs for our hourly restaurantemployees and to establish tip reporting procedures, although
employees remain ultimately responsible for accurately reporting their tips. The IRS alleged that we did
not meet the requirements of the TRAC agreement and retroactively and unilaterally revoked it. As a
result of the revocation, the IRS commenced an examination of our 2000 through 2002 calendar years for
payroll tax purposes. In December 2004, we paid an assessment of $17.3 million for employer-only FICA
taxes on unreported cash tips for the examination period. We recorded the $17.3 million payment in
restaurant expenses and recorded a related income tax benefit of approximately $16.9 million, consisting of
federal income tax credits related to the additional FICA taxes paid. We continue to believe that we were
in full compliance with the TRAC agreement and thatthe IRS’ retroactive revocation was unjustified,
particularly in light of compliance reviews conducted by the IRS prior to the revocation. Nevertheless, we
agreed to the resolution to avoid potentially costly and protracted litigation.
We are engaged in various other legal proceedings and have certain unresolved claims pending. The
ultimate liability, if any, for the aggregate amounts claimed cannot be determined at this time. However,
management, based upon consultation with legal counsel, is of the opinion that there are no matters
pending or threatened which are expected to have a material adverse effect, individually or in the
aggregate, on our consolidated financial condition or results of operations.