First Data 2012 Annual Report Download - page 113

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and credit carryforwards from those periods. The unrecognized tax benefits as of December 31, 2012, 2011, and 2010 included
approximately $163 million, $172 million, and $195 million, respectively, of tax positions that, if recognized, would affect the
effective tax rate.
During the year ended December 31, 2012, the Company’s liability for unrecognized tax benefits was reduced by $52 million
upon closure of the 2003 and 2004 federal tax years and the resolution of certain state audit issues. The reduction in liabilities was
recorded through a decrease to tax expense and an increase to deferred tax liabilities.
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 Internal Revenue Service (“IRS”) regarding specific contested issues in the 2003 through 2006
federal tax years. The reduction in liabilities was recorded through a decrease to tax expense.
During the year ended December 31, 2010, the Company’s liability for unrecognized tax benefits was reduced by $39 million
upon the closure of the 2002 federal tax year and after negotiating settlements with the IRS regarding specific contested issues in the
2003 and 2004 federal tax years. The reduction in the liability was recorded through a decrease to tax expense and an increase to
deferred tax liabilities.
The Company recognizes interest and penalties related to unrecognized tax benefits in the “Income tax (benefit) expense” line
item of the Consolidated Statements of Operations. Cumulative accrued interest and penalties (net of related tax benefits) are not
included in the ending balances of unrecognized tax benefits. Cumulative accrued interest and penalties are included in the “Other
long-term liabilities” line of the Consolidated Balance Sheets while the related tax benefits are included in the “Long-term deferred
tax liabilities” line of the Consolidated Balance Sheets. The following table presents the approximate amounts associated with
accrued interest expense and the cumulative accrued interest and penalties:
As of December 31, 2012, the Company anticipates it is reasonably possible that its liability for unrecognized tax benefits may
decrease by approximately $126 million within the next twelve months as the result of the possible closure of its 2005 through 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.
The Company or one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. As of December 31, 2012, the Company was no longer subject to income tax examination by the U.S. federal
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urisdiction for years before 2005. State and local examinations are substantially complete through 2002. Foreign jurisdictions
generally remain subject to examination by their respective authorities from 2005 forward, none of which are considered major
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urisdictions.
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, 2012, the
Company had approximately $110 million of income taxes payable, including approximately $4 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, 2012, the uncertain income tax liabilities related to Western Union decreased by approximately $14 million as a result
of the closure of the 2003-2004 federal tax years. As of December 31, 2012, the Company anticipates it is reasonably possible that the
uncertain tax liabilities related to Western Union may decrease by approximately $4 million within the next twelve months as the
result of the possible closure of its 2005 and 2006 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
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Year ended December 31,
2012 2011 2010
Current year accrued interest expense (net of related tax benefits) $ 4 $ 9 $ 14
Cumulative accrued interest and penalties (net of related tax benefits) $47$69
$67