America Online 2011 Annual Report Download - page 91

Table of Contents
AOL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company accrues interest and penalties where there is an underpayment of taxes, based on management's best estimate of the amount ultimately to
be paid, in the same period that 1) the interest would begin accruing or 2) the penalties would first be assessed. Our policy on the classification of interest and
penalties is to record both as part of income tax expense. Interest expense recorded through the income tax provision (benefit) related to uncertain tax
positions was $0.1 million, $0.4 million, and $14.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011
and 2010, the amount of accrued interest in the consolidated balance sheet associated with uncertain tax positions was $0.6 million and $0.7 million,
respectively. As of December 31, 2011 and 2010, no penalties were accrued.
The statute of limitations of certain foreign jurisdictions in which AOL filed separately from Time Warner have not expired and therefore, the periods
from 2003 through the current period remain open to examination by the taxing authorities. For the periods following the spin-off, the examination periods in
all significant jurisdictions remain open and subject to examination by the taxing authorities.
The Company's liabilities for unrecognized tax benefits, which include interest, were $0.6 million and $2.3 million as of December 31, 2011 and 2010,
respectively. The remainder, if recognized, would affect deferred taxes. As of December 31, 2011, the amount of unrecognized tax benefits, net of the federal
tax benefit of state tax deductions, which, if recognized, would affect our effective tax rate is $143.1 million. A number of years may elapse before an
uncertain tax position is finally resolved. It is difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position. We
reevaluate and adjust our reserves for income taxes, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular
position would usually require the use of cash and result in the reduction of the related liability. The resolution of a matter would be recognized as an
adjustment to the provision for income taxes and the effective tax rate in the period of resolution. We do not expect our unrecognized tax benefits to
significantly change in the next twelve months.
NOTE 7—STOCKHOLDERS' EQUITY
AOL is authorized to issue up to 660.0 million shares of all classes of stock, consisting of 60.0 million shares of preferred stock, par value $0.01 per
share ("Preferred Stock"), and 600.0 million shares of common stock, par value $0.01 per share. Rights and privileges associated with shares of Preferred
Stock are subject to authorization by the Company's Board of Directors and may differ from those of any and all other series at any time outstanding. All
shares of common stock will be identical and will entitle the holders thereof to the same rights and privileges.
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