First Data 2008 Annual Report Download - page 152

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$6 million, respectively, of accrued interest expense (net of related tax benefits). The Company had approximately $56 million of interest and penalties
accrued at December 31, 2008 which were not included in the period ending balance of $371.5 million of unrecognized tax benefits. Accrued interest and
penalties are included in the "Other long-term liabilities" line of the Consolidated Balance Sheets.
As of December 31, 2008, the Company anticipates it is reasonably possible that its liability for unrecognized tax benefits may decrease by
approximately $35 million within the next twelve months as the result of the closure of its 2002 federal tax year. The potential decrease relates to various
federal and state tax benefits including research and experimentation credits and certain amortization and loss deductions.
The Company or one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. As of
December 31, 2008, the Company is no longer subject to income tax examination by the U.S. federal tax jurisdiction for years before 2002. State and local
examinations are substantially complete through 1998. Foreign jurisdictions generally remain subject to examination by their respective authorities from 2000
forward, none of which are considered major jurisdictions.
The Internal Revenue Service ("IRS") completed its examination of the U.S. federal consolidated income tax returns of the Company for 2003 and 2004
and issued a Notice of Deficiency (the "Notice") in December 2008. The Notice claims that the Company and its subsidiaries, which included Western Union
during the years at issue, owe significant additional taxes, interest and penalties with respect to a variety of adjustments. The Company and Western Union
agree with several of the adjustments in the Notice. As to the adjustments that are disputed, for 2003 such issues represent total taxes and penalties allegedly
due of approximately $34 million, of which $11 million relates to the Company and $23 million relates to Western Union, and for 2004 such issues represent
total taxes and penalties allegedly due of approximately $94 million, of which $2 million relates to the Company and $92 million relates to Western Union.
The Company estimates that the total interest due (pretax) on such amounts for both years is approximately $40 million through December 31, 2008, of which
$5 million relates to the Company and $35 million relates to Western Union. As to the disputed issues, the Company and Western Union are contesting the
asserted deficiencies in U.S. Tax Court. The Company believes that it has adequately reserved for its disputed issues and final resolution of those issues will
not have a material adverse effect on its financial position or results of operations.
Prior to the spin-off transaction, Western Union was part of the FDC consolidated, unitary and combined income tax returns ("combined tax returns")
through the spin-off date of September 29, 2006. Under the Tax Allocation Agreement executed at the time of the spin-off of Western Union, Western Union
is responsible for and must indemnify the Company against all taxes, interest and penalties that relate to Western Union for periods prior to the spin-off date,
including the amounts asserted in the Notice as described above. If Western Union were to agree to or be finally determined to owe any amounts for such
periods but were to default in its indemnification obligation under the Tax Allocation Agreement, the Company as parent of the tax group during such periods
generally would be required to pay the amounts to the relevant tax authority, resulting in a potentially material adverse effect on the Company's financial
position and results of operations. Accordingly, as of December 31, 2008, the Company had approximately $132 million of uncertain income tax liabilities
recorded related to Western Union for periods prior to the spin-off date. The Company has recorded a corresponding accounts receivable of equal amount
from Western Union, which is included as a long-term accounts receivable in the "Other long-term assets" line of the Consolidated Balance Sheets, to reflect
the indemnification for such liabilities. The uncertain income tax liabilities and corresponding receivable are based on information provided by Western
Union regarding its tax contingency reserves for periods prior to the spin-off date. There is no assurance that a Western Union-related issue raised by the IRS
or other tax authority will be finally resolved at a cost not in excess of the amount reserved and reflected in the Company's uncertain income tax liabilities and
corresponding receivable from Western Union. The Western Union contingent liability is in addition to the FDC liability for unrecognized tax benefits
discussed above.
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