American Express 2011 Annual Report Download - page 91

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
foreign earnings intended to be permanently reinvested outside
the United States. Accordingly, federal taxes, which would have
aggregated approximately $2.3 billion as of December 31, 2011,
have not been provided on those earnings.
Net income taxes paid by the Company (including amounts
related to discontinued operations) during 2011, 2010 and 2009,
were approximately $0.7 billion, $0.8 billion and $0.4 billion,
respectively. These amounts include estimated tax payments and
cash settlements relating to prior tax years.
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 largest amount of benefit
that is more likely than not to be realized on ultimate settlement
with the taxing authority 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. The IRS has completed its
field examination of the Company’s federal tax returns for years
through 2004, and in April 2011, unagreed issues for 1997
through 2004 were resolved at IRS Appeals. Additional refund
claims for those years continue to be reviewed by the IRS. In
addition, 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) 2011 2010 2009
Balance, January 1 $ 1,377 $ 1,081 $ 1,176
Increases:
Current year tax positions 77 182 39
Tax positions related to prior years 247 403 161
Effects of foreign currency translations ––1
Decreases:
Tax positions related to prior years (457) (145) (197)
Settlements with tax authorities (2) (138) (97)
Lapse of statute of limitations (19) (6) (2)
Balance, December 31 $ 1,223 $ 1,377 $ 1,081
Included in the $1.2 billion, $1.4 billion and $1.1 billion of
unrecognized tax benefits as of December 31, 2011, 2010 and
2009, respectively, are approximately $440 million, $476 million
and $480 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 $867 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 deductibility of certain expenses or losses
and the attribution of taxable income to a particular jurisdiction
or jurisdictions. Of the $867 million of unrecognized tax
benefits, approximately $640 million relates to amounts recorded
to equity that, if recognized, would not impact the effective tax
rate. With respect to the remaining $227 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, 2011, 2010 and 2009, the Company recognized
approximately $(63) million, $31 million and $1 million,
respectively, of interest and penalties. The Company has
approximately $163 million and $226 million accrued for the
payment of interest and penalties as of December 31, 2011 and
2010, respectively.
Discontinued operations for 2011 included the impact of a $36
million tax benefit related to the favorable resolution of certain
prior years’ tax items related to American Express Bank, Ltd.,
which was sold to Standard Chartered PLC during the quarter
ended March 31, 2008.
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