Business Context and Reporting Period
Company: The Western Union Company
Filing Type: Form 8-K (Current Report)
Date of Report: December 15, 2011
Event: Entry into a Closing Agreement with the U.S. Internal Revenue Service (IRS) and First Data Corporation regarding tax disputes stemming from Western Union's 2003 International Restructuring.
Key Financial Metrics and Impact
- Additional Income Recognized: Approximately $1.18 billion in aggregate additional income recognized on U.S. tax returns for the period from Q4 2003 through 2011.
- Total Tax Liability: Approximately $470 million in additional federal and state taxes and interest, fully the responsibility of Western Union.
- Cash Payments:
- Previously deposited: $250 million (Q1 2010).
- Expected remaining payments: Approximately $220 million to the IRS and state authorities.
- One-Time Tax Benefit: Approximately $200 million expected to be recorded in 2011 due to the elimination of the related tax contingency reserve.
- Intangible Property Adjustment: The fair value of compensable intangible property transferred in 2003 is adjusted upward by $885 million compared to prior tax returns.
Material Changes and Resolution Details
The filing resolves all outstanding issues before the U.S. Tax Court regarding the 2003 and 2004 tax returns. Key terms of the resolution include:
- Trademark Royalties:
- 2.75% royalty on foreign-to-foreign money transfer revenues for the period October 1, 2003, through September 30, 2008.
- 0.5% royalty for the period October 1, 2008, through September 30, 2013.
- No royalty applies after September 30, 2013.
- Penalties: Western Union and First Data will not be subject to any understatement penalties regarding the 2003 and 2004 tax returns.
- Future Tax Treatment: The agreement specifies tax treatment for matters subsequent to 2004, including that other intangible property transferred in 2003 will not be subject to income recognition for 2003, 2004, or subsequent years.
Outlook, Risks, and Management Commentary
Management indicates that the Closing Agreement eliminates the uncertainty surrounding the tax dispute. The company expects to record a one-time tax benefit of approximately $200 million in 2011. The filing notes that the information provided is not deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934. The primary risk associated with this event has been mitigated through the settlement, though the company must fulfill the remaining cash payment obligation of approximately $220 million.
Investor Verification Checklist
- Verify the exact timing and amount of the remaining $220 million cash payment to tax authorities.
- Confirm the specific accounting treatment and quarter in which the $200 million one-time tax benefit is recorded in the 2011 financial statements.
- Review the impact of the $885 million intangible property valuation adjustment on future depreciation or amortization schedules.
- Ensure no other outstanding tax contingencies remain related to the 2003 International Restructuring.