First Data 2012 Annual Report Download - page 114

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 U.S. federal consolidated income tax returns of the Company for 2005-2007 and
issued a 30-Day letter on October 31, 2012. The 30-Day letter claims that the Company and its subsidiaries, which included Western
Union during some of the years at issue, owe additional taxes with respect to a variety of adjustments. The Company and Western
Union agree with several of the adjustments in the 30-Day letter, such adjustments representing tax due of approximately $40 million.
This undisputed tax and associated interest due (pretax) of approximately $16 million through December 31, 2012, have been fully
reserved. The undisputed tax for which Western Union would be required to indemnify the Company is greater than the total tax due,
such that settlement of the undisputed tax would result in a net refund to the Company. As to the adjustments that are disputed, such
issues represent total taxes allegedly due of approximately $59 million, of which $40 million relates to the Company and $19 million
relates to Western Union. The Company estimates that total interest due (pretax) on the disputed amounts is approximately $16
million through December 31, 2012, of which $9 million relates to the Company and $7 million relates to Western Union. As to the
disputed issues, the Company and Western Union have contested the adjustments by filing a protest with the IRS. The IRS has
prepared a rebuttal to the protest and has forwarded the case to Appeals. The Company believes that it has adequately reserved for the
disputed issues in its liability for unrecognized tax benefits described above and that final resolution of those issues will not have a
material adverse effect on its financial position or results of operations.
Note 18: Investment in Affiliates
Operating results include the Company’s proportionate share of income from affiliates, which consist of unconsolidated
investments accounted for under the equity method of accounting. The most significant of these affiliates are related to the Company’s
merchant bank alliance program.
A merchant alliance, as it pertains to investments accounted for under the equity method, is an agreement between FDC and a
financial institution that combines the processing capabilities and management expertise of the Company with the visibility and
distribution channel of the bank. The alliance acquires credit and debit card transactions from merchants. The Company provides
processing and other services to the alliance and charges fees to the alliance primarily based on contractual pricing. These fees have
been separately identified on the face of the Consolidated Statements of Operations.
In November 2011, the Company formed an alliance, TCH LLC, by contributing the assets of its transportation business (a
controlling interest in a business) to the alliance in exchange for a noncontrolling 30% interest in TCH, LLC. The alliance is
accounted for as an equity method investment by the Company. The Company recognized a pretax gain of $59.1 million in the “Other
income (expense)” line item of the Consolidated Statement of Operations upon deconsolidation of the Company’s assets associated
with its transportation business and contribution of those assets to the alliance.
In the fourth quarter of 2011, the Company funded $160.0 million to one of its merchant alliance partners for referrals from
bank branches contributed to the alliance as called for by the agreement that extended the term of the alliance in 2008.
At December 31, 2012, there were ten affiliates accounted for under the equity method of accounting, comprised of five
merchant alliances and five strategic investments in companies in related markets.
A summary of unaudited financial information for the merchant alliances and other affiliates accounted for under the equity
method of accounting is presented below.
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As of December 31,
(in millions) 2012 2011
Total assets $2,834.8 $2,820.3
Total liabilities 2,467.9 2,514.7