American Express 2010 Annual Report Download - page 104

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 unrecognized
tax benefits:
(Millions) 2010 2009 2008
Balance, January 1 $ 1,081 $ 1,176 $ 1,112
Increases:
Current year tax positions 182 39 81
Tax positions related to prior years 403 161 409
Effects of foreign currency translations —1—
Decreases:
Tax positions related to prior years (145) (197) (208)
Settlements with tax authorities (138) (97) (213)
Lapse of statute of limitations (6) (2) (3)
Effects of foreign currency translations —— (2)
Balance, December 31 $ 1,377 $ 1,081 $ 1,176
Included in the $1.4 billion, $1.1 billion and $1.2 billion of
unrecognized tax benefits as of December 31, 2010, 2009 and
2008, respectively, are approximately $476 million, $480 million
and $452 million, respectively, that, if recognized, would
favorably affect the effective tax rate in a future period.
The Company believes it is reasonably possible that the
unrecognized tax benefits could decrease within the next
12 months by as much as $991 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 $991 million of
unrecognized tax benefits, approximately $320 million relates
to temporary differences that, if recognized, would only impact
the effective rate due to net interest assessments and state tax
rate differentials and approximately $404 million relates to
amounts recorded to equity that, if recognized, would not
impact the effective rate. With respect to the remaining
decrease of $267 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 the income tax provision. During the years ended
December 31, 2010, 2009 and 2008, the Company recognized
approximately $31 million, $1 million and $60 million,
respectively, of interest and penalties. The Company has
approximately $226 million and $282 million accrued for the
payment of interest and penalties as of December 31, 2010 and
2009, respectively.
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AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS