America Online 2009 Annual Report Download - page 91

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jurisdictions as of December 31, 2009 and 2008, respectively. However, similar to the foreign net operating loss carryforwards, many of these tax losses are
subject to a valuation allowance because they are attributable to specific operations and may not be utilized against income of other operations of AOL. These
tax loss carryforwards will expire at various dates between 2010 and 2029. The increase in state net operating losses from 2008 to 2009 is primarily
attributable to Time Warner's allocation of consolidated Virginia net operating losses to AOL in connection with the spin-off.
U.S. federal income taxes are provided on that portion of AOL's income from foreign subsidiaries that is expected to be remitted to the United States
and be taxable. U.S. federal income and foreign withholding taxes have not been recorded on permanently reinvested earnings of certain foreign subsidiaries
aggregating approximately $22.0 million and $17.4 million, as of December 31, 2009 and 2008, respectively. Determination of the amount of unrecognized
deferred U.S. federal income tax liability with respect to such earnings is not practicable.
Accounting for Uncertainty in Income Taxes
Prior to the adoption of the accounting guidance for uncertainties in income tax provisions in 2007, AOL took positions on its tax returns that may be
challenged by domestic and foreign taxing authorities. Certain of these tax positions arose in the context of transactions involving the purchase, sale or
exchange of businesses or assets. All such transactions were subject to substantial tax due diligence and planning, in which the underlying form, substance
and structure of the transaction was evaluated. Although AOL believes it had support for the positions taken on these tax returns, AOL recorded a liability for
its best estimate of the probable loss on certain of these transactions.
On January 1, 2007, AOL adopted the new accounting guidance, which clarifies the accounting for uncertainty in income tax positions. Upon adoption,
AOL recorded an increase to equity of $379.3 million, which was due primarily to the recognition of tax benefits for positions that were previously
unrecognized. The liability for uncertain income tax positions as of January 1, 2007 was approximately $176.4 million (excluding interest) and reflected a
$110.4 million reduction to the previously recorded income tax liability resulting from the adoption of this guidance.
AOL entered into a Second Tax Matters Agreement with Time Warner that governs the respective rights, responsibilities and obligations of Time
Warner and AOL after the spin-off with respect to all tax matters. As a member of Time Warner's consolidated U.S. federal income tax group, AOL has (and
continues to have following the spin-off) joint and several liability with Time Warner to the IRS for the consolidated U.S. federal income taxes of the Time
Warner group relating to the taxable periods in which AOL was part of the group. Under the Second Tax Matters Agreement, however, Time Warner agreed
to assume this liability and any similar liability for U.S. federal, state or local income taxes that are determined on a consolidated, combined, unitary or similar
basis for each taxable period in which AOL was included in such consolidated, combined, unitary or similar group with Time Warner. AOL remains
responsible for any foreign income taxes and any income taxes (primarily state taxes) that are not determined on a consolidated, combined, unitary or similar
basis with Time Warner.
Upon the effectiveness of the Second Tax Matters Agreement, Time Warner assumed the liability for uncertain tax positions taken by Time Warner in
its consolidated, combined, unitary or similar tax returns with respect to AOL up to the date of the spin-off. As a result, at the date of the spin-off, AOL
reversed the recorded liability (including accrued interest) to Time Warner related to these tax positions, with an offsetting $368.1 million adjustment to
equity.
In certain foreign jurisdictions (including the United Kingdom) in which AOL files separately from Time Warner, various periods from 2003 through
the current period remain open to examination by the taxing authorities. For the period following the spin-off, the examination periods in all significant
jurisdictions, including the United States, Virginia, New York and the United Kingdom, remain open.
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