America Online 2010 Annual Report Download - page 98

Table of Contents
AOL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
than not to be realized. Management believes that the remaining deferred tax assets are more likely than not to be realized based upon consideration of all
positive and negative evidence, including AOL's operating results and forecast of future taxable income, on a jurisdiction by jurisdiction basis.
On June 16, 2010, the Company sold substantially all the assets of Bebo, resulting in a pre-tax loss of approximately $1.8 million. The Company
expects to treat the common stock of Bebo as worthless for U.S. income tax reporting purposes in its 2010 consolidated U.S. federal income tax return. The
Company's current estimated U.S. income tax basis in Bebo is $759.3 million. As a result of the worthless stock deduction for the common stock of Bebo
under U.S. income tax law, the Company recorded a deferred tax asset and corresponding income tax benefit of $300.0 million in 2010. During 2010, the
Company utilized $141.6 million of this deferred tax asset to offset federal and state income tax obligations.
U.S. federal income taxes are provided on the portion of AOL's income from certain foreign subsidiaries that is expected to be remitted to the United
States. We have recorded deferred income taxes and foreign withholding taxes on unremitted earnings from foreign subsidiaries in the amount of $8.9 million
and $9.2 million, as of December 31, 2010 and 2009, respectively. For AOL's other foreign subsidiaries, we have not provided for U.S. income and foreign
withholding taxes on approximately $15.7 million of certain foreign subsidiaries' undistributed earnings, because such earnings have been retained and are
intended to be indefinitely reinvested by the subsidiaries. It is currently not practicable to determine the amount of unrecorded deferred tax liability for AOL's
investment in these subsidiaries.
Accounting for Uncertainty in Income Taxes
Changes in unrecognized tax benefits, excluding the related accrual for interest, from January 1 to December 31 are set forth below (in millions):
Years Ended December 31,
2010 2009 2008
(recast) (recast)
Beginning balance $ 154.7 $ 657.6 $ 638.6
Additions for current year tax positions 6.1 11.1 19.0
Reductions for prior year tax positions (3.0) — —
Unrecognized tax benefits retained by Time Warner following spin-off — (512.5) —
Reductions as a result of expiration of statute of limitations (7.2) (1.5) —
Total $ 150.6 $ 154.7 $ 657.6
AOL entered into a Second Tax Matters Agreement with Time Warner, effective December 9, 2009, that governs the respective post spin-off rights,
responsibilities and obligations of Time Warner and AOL with respect to tax matters for the pre spin-off tax periods. 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,
including liability for uncertain income tax positions taken by Time Warner with respect to AOL, 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. As a result, at
the date of the spin-off, AOL reversed the recorded liability (including accrued interest) to Time Warner related to these uncertain tax positions, with an
offsetting $368.1 million adjustment to equity. AOL remains responsible for any foreign income taxes and any other income taxes (primarily state taxes) that
are not determined on a consolidated, combined, unitary or similar basis with Time Warner.
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