First Data 2014 Annual Report Download - page 97

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As of December 31, 2014, the Company anticipates it is reasonably possible that its liability for unrecognized tax benefits may decrease by approximately
$122 million within the next 12 months as a result of the possible closure of federal tax audits, potential settlements with certain states and foreign countries,
and the lapse of the statute of limitations in various state and foreign jurisdictions.
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, 2014, the Company was no longer subject to income tax examination by the U.S. federal jurisdiction for years before 2005. State and local
examinations are substantially complete through 2006. Foreign jurisdictions generally remain subject to examination by their respective authorities from
2008 forward, none of which are considered major jurisdictions.
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 filing 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,
2014, the Company had approximately $116 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. 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 U.S. federal consolidated income tax returns of the Company for 2005 through 2007 and issued a 30-Day letter in
October 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 $19 million
through December 31, 2014, 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 $20 million through December 31, 2014, of which
$11 million relates to the Company and $9 million relates to Western Union. As to the disputed issues, the Company and Western Union are contesting the
asserted deficiencies with the Appeals Office of the IRS. 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.
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Segment 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.
As of December 31, 2014, there were eight affiliates accounted for under the equity method of accounting, comprised of five merchant alliances and three
strategic investments in companies in related markets.
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