American Express 2009 Annual Report Download - page 111

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The Company, its wholly-owned U.S. subsidiaries, and
certain non-U.S. subsidiaries file a consolidated federal
income tax return. The Company is subject to the income tax
laws of the United States, its states and municipalities and
those of the foreign jurisdictions in which the Company
operates. These tax laws are complex, and the manner in
which they apply to the taxpayer’s facts is sometimes open to
interpretation. Given these inherent complexities, the
Company must make judgments in assessing the likelihood
that a tax position will be sustained upon examination by the
taxing authorities based on the technical merits of the tax
position. A tax position is recognized only when, based on
management’s judgment regarding the application of income
tax laws, it is more likely than not that the tax position will be
sustained upon examination. The amount of benefit
recognized for financial reporting purposes is based on
management’s best judgment of the most likely outcome
resulting from examination given the facts, circumstances and
information available at the reporting date. The Company
adjusts the level of unrecognized tax benefits when there is
new information available to assess the likelihood of the
outcome.
The Company is under continuous examination by the
Internal Revenue Service (IRS) and tax authorities in other
countries and states in which the Company has significant
business operations. The tax years under examination and
open for examination vary by jurisdiction. In June 2008, the
IRS completed its field examination of the Company’s federal
tax returns for the years 1997 through 2002. In July 2009, the
IRS completed its field examination of the Company’s federal
tax returns for the years 2003 and 2004. However, all of these
years continue to remain open as a consequence of certain
issues under appeal. The Company is currently under
examination by the IRS for the years 2005 through 2007.
The following table presents changes in the unrecognized tax
benefits:
(Millions) 2009 2008 2007
Balance, January 1 $1,176 $1,112 $1,143
Increases:
Current year tax positions 39 81 165
Tax positions related to prior years 161 409 95
Effects of foreign currency translations 1—1
Decreases:
Tax positions related to prior years (197) (208) (164)
Settlements with tax authorities (97) (213) (126)
Lapse of statute of limitations (2) (3) (2)
Effects of foreign currency translations —(2) —
Balance, December 31 $1,081 $1,176 $1,112
Included in the $1.1 billion, $1.2 billion and $1.1 billion of
unrecognized tax benefits at December 31, 2009, 2008 and
2007, respectively, are approximately $480 million,
$452 million and $597 million, respectively that, if
recognized, would favorably affect the effective tax rate in a
future period. These benefits primarily relate to the
Company’s gross permanent benefits and corresponding
foreign tax credits and federal tax effects.
The Company believes it is reasonably possible that the
unrecognized tax benefits could decrease within the next
12 months by as much as $580 million principally as a result
of potential resolutions of prior years’ tax items with various
taxing authorities. The prior years’ tax items include
unrecognized tax benefits relating to the timing of recognition
of certain gross income, the deductibility of certain expenses
or losses, and the attribution of taxable income to a particular
jurisdiction or jurisdictions. Of the $580 million of
unrecognized tax benefits, approximately $318 million are
temporary differences that, if recognized, would only impact
the effective rate due to net interest assessments and state tax
rate differentials. With respect to the remaining decrease of
$262 million, it is not possible to quantify the impact that the
decrease could have on the effective tax rate and net income
due to the inherent complexities and the number of tax years
open for examination in multiple jurisdictions. Resolution of
the prior years’ items that comprise this remaining amount
could have an impact on the effective tax rate and on net
income, either favorably (principally as a result of settlements
that are less than the liability for unrecognized tax benefits) or
unfavorably (if such settlements exceed the liability for
unrecognized tax benefits).
Interest and penalties relating to unrecognized tax benefits
are reported in income tax provision. During the years ended
December 31, 2009, 2008 and 2007, the Company recognized
approximately $1 million, $60 million and $17 million,
respectively, of interest and penalties. The Company has
approximately $282 million and $285 million accrued for the
payment of interest and penalties as of December 31, 2009
and 2008, respectively.
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