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Table of Contents
HSN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
an adjustment with respect to a pre-spin-off period for which IAC is responsible results in a tax benefit to HSNi in a post-spin-off period, HSNi
will be required to pay such tax benefit to IAC. In general, IAC controls all audits and administrative matters and other tax proceedings relating
to the consolidated federal income tax return of the IAC group and any other tax returns for which the IAC group is responsible. The provisions
set forth in the Tax Sharing Agreement could subject HSNi to future tax contingencies.
The IRS has begun an examination of one of HSNi’s subsidiary entities for the post-spin period ended December 31, 2008. We do not
anticipate any material adjustments to our tax liability resulting from this examination.
The IRS is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2006, which includes the
operations of HSNi. The statute of limitations for these years has been extended to December 31, 2011, but is expected to be extended further.
These examinations are expected to be completed in 2011. Various IAC consolidated tax returns filed with state, local and foreign jurisdictions
are currently under examination, the most significant of which are California, New York and New York City, for various tax years after
December 31, 2003. These examinations are expected to be completed in 2011. By virtue of the Tax Sharing Agreement with IAC, HSNi is
indemnified with respect to additional tax liabilities for consolidated or combined federal tax returns prepared and filed by IAC prior to the spin-
off, but is liable for any additional tax liabilities for HSNi separately filed state income tax returns.
NOTE 14—COMMITMENTS AND CONTINGENCIES
In January 2010, one of HSNi’s direct-to-consumer subsidiaries received a preliminary notification from a state taxing authority alleging
that the subsidiary was required to collect and remit sales taxes for the period from September 2002 through August 2009. In October 2010, the
state presented the subsidiary with an assessment relating to this matter. Additionally during the year, the same taxing authority notified two
other direct-to-consumer subsidiaries of its intent to conduct sales tax audits for period from 2004 through 2010. HSNi does not believe that any
of these subsidiaries were obligated to collect and remit such taxes, and intends to vigorously defend its position. At this time, no contingent
liability has been recorded and no assurances can be given as to the outcome of this situation.
In the ordinary course of business, HSNi is a party to various audits and lawsuits. These audits or litigation may relate to claims involving
property, personal injury, contract, intellectual property (including patent infringement), sales tax, regulatory compliance and other claims. HSNi
establishes reserves for specific legal or tax compliance matters when it determines that the likelihood of an unfavorable outcome is probable and
the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not
probable and, therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against
HSNi, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on its liquidity, results of
operations, financial condition or cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may
change in the future and an unfavorable resolution of such a proceeding could have such a material impact. Moreover, any claims or regulatory
actions against HSNi, whether meritorious or not, could be time-consuming, result in costly litigation, require significant amounts of
management time and result in the diversion of significant operational resources.
HSNi leases satellite transponders, computers, warehouse and office space, equipment and services used in connection with its operations
under various operating leases, many of which contain escalation clauses.
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