First Data 2009 Annual Report Download - page 141

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The 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 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 $49 million through December 31, 2009, of which $6 million relates to the Company and $43
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 its spin-off, 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,
2009, the Company had approximately $137 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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