First Data 2011 Annual Report Download - page 34

Despite the net operating loss position discussed above, the Company 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 would result in a foreign tax
credit in the U.S. to the extent of any U.S. income taxes on the income upon repatriation. However, the Company does not generate
sufficient foreign source income to be able to fully utilize its foreign tax credits. As a result, the Company has established valuation
allowances, including $182 million in 2010 upon enactment of federal legislation which changed tax law, against that portion of the
credits for which it is likely that no benefit will be realized in the future.
During the year ended December 31, 2011, the Company's liability for unrecognized tax benefits was reduced by $25 million
after negotiating settlements with the IRS regarding specific contested issues in the 2003-2006 federal tax years. The reduction in
liabilities was recorded through a decrease to tax expense. As of December 31, 2011, the Company anticipates it is reasonably
possible that its liability for unrecognized tax benefits may decrease by approximately $163 million within the next twelve months as
the result of the possible closure of its 2003-2007 federal tax years, potential settlements with certain states and foreign countries and
the lapse of the statute of limitations in various state and foreign jurisdictions. The potential decrease relates to various federal, state
and foreign tax benefits including research and experimentation credits, transfer pricing adjustments and certain amortization and loss
deductions.
Under the Tax Allocation Agreement executed at the time of the spin-off of The Western Union Company ("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. 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, 2011, the
Company had approximately $18 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, which is included
as a long-term account receivable in the "Other long-term assets" line of the Company's Consolidated Balance Sheets, reflecting the
indemnification obligation. During the year ended December 31, 2011 the uncertain income tax liabilities related to Western Union
decreased by approximately $112 million as a result of agreements reached with the IRS regarding specific contested issues in the
2003-2006 federal tax years. As of December 31, 2011, the Company anticipates it is reasonably possible that the uncertain tax
liabilities related to Western Union may decrease by approximately $18 million within the next twelve months as the result of the
possible closure of its 2003-2007 federal tax years. 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 Company's liability for unrecognized tax benefits discussed above.
The 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 agreed with several of the adjustments in the Notice, and during 2010, the
IRS conceded certain of the adjustments. During the fourth quarter of 2011, the Company and Western Union reached agreements
with the IRS resolving all remaining disputed adjustments in the Notice. As a result, the Company's liability for unrecognized tax
benefits and the uncertain income tax liabilities related to Western Union on these previously disputed items were reduced to zero and
an income taxes payable of $114 million was recorded, reflecting the agreements reached with the IRS related to the Western Union
issues in the 2003 through 2006 federal tax years. The Company also recorded a corresponding account receivable from Western
Union, reflecting its indemnification obligation with respect to these adjustments.
Equity earnings in affiliates. Equity earnings in affiliates increased in 2011 compared to 2010 due mostly to the 2011
correction of cumulative depreciation and amortization errors related to purchase accounting associated with the Company's 2007
merger with an affiliate of KKR as well as volume growth associated with the Company's merchant alliances. The error corrections,
which totaled a $11.0 million benefit in "Equity earnings in affiliates" (the correction of such errors totaled a $58.5 million benefit in
aggregate) and occurred over a four year period, benefited the equity earnings in affiliates growth rate compared to the prior year by 9
percentage points. Equity earnings in affiliates increased in 2010 compared to 2009 due to volume growth associated with the
Company's merchant alliances.
Net income attributable to noncontrolling interests. Most of the net income attributable to noncontrolling interests relates to
the Company's consolidated merchant alliances. Net income attributable to noncontrolling interests increased in 2010 compared to
2009 due to the formation of the BAMS alliance in June 2009.
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