Waste Management 2006 Annual Report Download - page 128

actions or proceedings that may be brought against its former or current officers, directors and employees in the
future.
We are involved in routine civil litigation and governmental proceedings, including litigation involving former
employees and competitors arising in the ordinary course of our business. We do not believe that any such matters
will ultimately have a material adverse impact on our consolidated financial statements.
Tax matters — We are currently under audit by the IRS and from time to time are audited by other taxing
authorities. We fully cooperate with all audits, but defend our positions vigorously. Our audits are in various stages
of completion. We have concluded several audits in the last two years. During the second quarter of 2006, we
concluded the IRS audit for the years 2002 and 2003. The current period financial statement impact of concluding
various audits is discussed in Note 8. In addition, we are in the examination phase of an IRS audit for the years 2004
and 2005. We expect this audit to be completed within the next 12 months. To provide for certain potential tax
exposures, we maintain an allowance for tax contingencies, the balance of which management believes is adequate.
Results of audit assessments by taxing authorities could have a material effect on our quarterly or annual cash flows
as audits are completed, although we do not believe that current tax audit matters will have a material adverse
impact on our results of operations.
As discussed in Note 7, we have approximately $2.8 billion of tax-exempt financings as of December 31, 2006.
Tax-exempt financings are structured pursuant to certain terms and conditions of the Internal Revenue Code of
1986, as amended (the “Code”), which exempts from taxation the interest income earned by the bondholders in the
transactions. The requirements of the Code can be complex, and failure to comply with these requirements could
cause certain past interest payments made on the bonds to be taxable and could cause either outstanding principal
amounts on the bonds to be accelerated or future interest payments on the bonds to be taxable. Some of the
Company’s tax-exempt financings have been, or currently are, the subject of examinations by the IRS to determine
whether the financings meet the requirements of the Code and applicable regulations. It is possible that an adverse
determination by the IRS could have a material adverse effect on the Company’s cash flows and results of
operations.
Unclaimed property audits — We are currently undergoing unclaimed property audits, which are being
conducted by various state authorities. The property subject to review in this audit process generally includes
unclaimed wages, vendor payments and customer refunds. State escheat laws generally require entities to report and
remit abandoned and unclaimed property. Failure to timely report and remit the property can result in assessments
that include substantial interest and penalties, in addition to the payment of the escheat liability itself. During 2006,
we submitted unclaimed property filings with all states. As a result of our findings, we determined that we had
estimated unrecorded obligations associated with unclaimed property of approximately $20 million for escheatable
items for various periods between 1980 and 2004. Our “Selling, general and administrative” expenses for the year
ended December 31, 2006 include the charge required to record these obligations. During 2006, we also recognized
$1 million of estimated interest obligations associated with our findings, which has been included in “Interest
expense” in our Consolidated Statement of Operations. We have determined that the impact of these adjustments is
not material to current or prior periods’ results of operations. Although we cannot currently estimate the potential
financial impacts that any remaining audit findings may have, we do not expect any resulting obligations to have a
material adverse effect on our consolidated results of operations or cash flows.
11. Restructuring
2005 Restructuring and Workforce Reduction — During the third quarter of 2005, we reorganized and
simplified our management structure by reducing our Group and corporate office staffing levels. This reorgani-
zation increases the accountability and responsibility of our Market Areas and allows us to streamline business
decisions and to reduce costs at the Group and Corporate offices. Additionally, as part of our restructuring, the
responsibility for the management of our Canadian operations has been assumed by our Eastern, Midwest and
Western Groups, thus eliminating the Canadian Group. See discussion at Note 20.
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WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)