America Online 2010 Annual Report Download - page 68

Table of Contents
AOL INC.
PART II—ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
any difference between GAAP and tax reporting. Deferred income taxes reflect expected future tax benefits (i.e., assets) and future tax costs (i.e., liabilities).
The tax effect of net operating losses, capital losses and general business credit carryovers result in deferred tax assets. The net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial statement and the basis amount for income tax purposes, as determined based
upon currently-enacted tax laws and rates, result in deferred tax assets and liabilities. Significant judgments are made in computing our income tax provision
and deferred income taxes. Valuation allowances are established when management determines it is "more likely than not" that some portion or all of the
deferred tax asset will not be realized. We consider all positive and negative evidence in evaluating our ability to realize our deferred income tax assets,
including our operating results, ongoing tax planning, and forecast of future taxable income, on a jurisdiction by jurisdiction basis. Significant judgment is
required with respect to the determination of whether or not a valuation allowance is required for certain of our deferred tax assets. We performed an analysis
of the recoverability of our net deferred tax assets as of December 31, 2010, which took into consideration our historical operating results, including the
effects of goodwill impairment charges recorded in 2010 and 2008, as well as our projections of future operating results and taxable income. Certain deferred
tax assets related to capital losses, certain state net operating losses, the majority of the foreign net operating losses and certain other foreign temporary
differences did not reach the "more likely than not" realizability criteria and accordingly, were already subject to a valuation allowance. We analyzed the
remaining net deferred tax assets using all positive and negative evidence to determine whether we met the "more likely than not" criteria. We considered the
fact that we have reported a cumulative loss in recent years, which generally provides negative evidence regarding realizability of deferred tax assets.
However, such losses resulted from the goodwill impairment charges recorded in 2010 and 2008, a substantial majority of which had no impact on taxable
income, as these charges primarily related to non-deductible goodwill. Our conclusion that such remaining net deferred tax assets were "more likely than not"
realizable relied primarily on the weight of positive evidence related to projecting future taxable income based on management's financial projections and
based on our historical results of operations (excluding impairment charges related to non-deductible goodwill). As a result of this analysis, we concluded that
our net deferred tax assets, other than those for which a valuation allowance was previously recorded, continued to be more likely than not to be realized.
However, in the circumstance that the financial projections are not achieved, our ability to realize these net deferred tax assets may be significantly impacted.
From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty. Examples of such transactions include
business acquisitions and dispositions, including dispositions designed to be tax-free, issues related to consideration paid or received and certain financing
transactions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We prepare and file tax returns based on
interpretation of tax laws and regulations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such
examinations may result in future tax and interest assessments by these taxing authorities. In determining our tax provision for financial reporting purposes,
we establish a reserve for uncertain tax positions unless such positions are determined to be "more likely than not" of being sustained upon examination, based
on their technical merits. That is, for financial reporting purposes, we only recognize tax benefits taken on the tax return that we believe are "more likely than
not" of being sustained. We record a liability for the difference between the benefit recognized and measured pursuant to the accounting guidance for income
taxes and the tax position taken on our tax return. There is considerable judgment involved in determining whether positions taken on the tax return are "more
likely than not" of being sustained. Actual results could differ from the judgments and estimates made, and we may be exposed to losses or gains that could be
material. Further, to the extent we prevail in matters for which a liability has been established, or are required to pay amounts in excess of the liability
established, our effective income tax rate in a given financial statement period could be materially affected.
64