First Data 2008 Annual Report Download - page 59

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The non-taxable interest income from the IPS municipal bond portfolio significantly impacted the effective tax rate from continuing operations in the
predecessor periods, reducing the statutory rate by approximately 19 percentage points in the 2007 predecessor period compared to 15 percentage points for
2006. The increase in the effective tax rate for the 2007 predecessor period compared to 2006 resulted most significantly from: (a) non-deductible expenses
associated with the merger; (b) a net tax expense associated with the income tax return to provision true-ups for 2006; and (c) an adjustment to the income
taxes payable account pertaining to an under accrual of taxes in prior years. Offsetting most of the increase is the above noted non-taxable interest income
being a larger portion of pretax income in the 2007 predecessor period. Most of the IPS municipal bond portfolio was converted into taxable investments in
January 2008 and therefore did not have an impact on the Company's effective tax rate in 2008.
Subsequent to the merger and as part of the First Data Holdings, Inc. ("Holdings") consolidated federal group and consolidated, combined or unitary
state groups for income tax purposes, the Company has been and continues to be in a tax net operating loss position. The Company anticipates being able to
record an income tax benefit related to future operating losses due to the existence of significant deferred tax liabilities established in connection with
purchase accounting for the merger. The Company, however, may not be able to record a benefit related to losses in certain countries, requiring the
establishment of valuation allowances. Additionally, the Company and its subsidiaries will continue to incur income taxes in foreign jurisdictions. Generally,
these foreign income taxes result in a foreign tax credit in the U.S. to the extent of any U.S. income taxes on the income upon repatriation. The Company
currently anticipates being able to fully utilize its foreign tax credits in the future and, accordingly, has not established a valuation allowance against such
credits. The Company also will continue to incur income taxes in states for which it files returns on a separate entity basis.
The additional taxes recognized as part of discontinued operations in 2007 related to 2006 income tax return to provision true-ups and other tax items
associated with operations discontinued in 2006.
During the year ended December 31, 2008, the Company's liability for unrecognized tax benefits was reduced by $11 million after negotiating
settlements with certain state jurisdictions. The reduction in the liability was recorded through cash payments and a decrease to goodwill. 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 Internal Revenue Service ("IRS") completed its examination of the United States 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 in dispute, 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 Western Union. As to the disputed issues, the Company and Western
Union are contesting the asserted deficiencies in United States 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.
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