First Data 2009 Annual Report Download - page 52

FIRST DATA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
continues to be in a tax net operating loss position. The Company, however, continues to incur income taxes in
states for which it files returns on a separate entity basis and in certain foreign countries. 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 utilize in the future most of its existing federal and
state net operating loss carryforwards and its existing foreign tax credits due to the existence of significant
deferred tax liabilities established in connection with purchase accounting for the merger. Accordingly, the
Company has not established valuation allowances against most of such loss carryforwards nor against such
foreign tax credits. The Company, however, may not be able to record a benefit related to losses in certain states
and foreign countries, requiring the establishment of valuation allowances. 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, 2009, the Company’s liability for unrecognized tax benefits was
reduced by $5 million after negotiating settlements with certain state jurisdictions. The reduction in the liability
was recorded through cash payments and a decrease to tax expense. As of December 31, 2009, the Company
anticipates it is reasonably possible that its liability for unrecognized tax benefits may decrease by approximately
$49 million within the next twelve months as the result of the possible closure of its 2002 federal tax year, the
possible resolutions of specific contested issues in the 2003 and 2004 federal tax years, and the lapse of the
statute of limitations in various state jurisdictions. The potential decrease relates to various federal and state tax
benefits including research and experimentation credits and certain amortization, loss and stock warrant
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 $49 million through December 31, 2009, of which
$6 million relates to the Company and $43 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.
Under the Tax Allocation Agreement executed at the time of the spin-off of Western Union on
September 29, 2006, 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. 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 account receivable of equal amount from Western Union,
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