Charter 2004 Annual Report Download - page 138

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2004 FORM 10-K
Notes to Consolidated Financial Statements (continued)
effect of the Regulatory Allocations is to be offset over time taxable income in excess of its currently allocated tax deductions
pursuant to certain curative allocation provisions (the ‘‘Curative and available tax loss carryforwards. The ability to utilize net
Allocation Provisions’’) so that, after certain offsetting adjust- operating loss carryforwards is potentially subject to certain
ments are made, each member’s capital account balance is equal limitations as discussed below.
to the capital account balance such member would have had if In addition, under their exchange agreement with Charter,
the Regulatory Allocations had not been part of the LLC Vulcan Cable and Charter Investment may exchange some or all
Agreement. The cumulative amount of the actual tax losses of their membership units in Charter Holdco for Charter’s
allocated to Charter as a result of the Regulatory Allocations Class B common stock, be merged with Charter, or be acquired
through the year ended December 31, 2004 is approximately by Charter in a non-taxable reorganization. If such an exchange
$4.0 billion. were to take place prior to the date that the Special Profit
As a result of the Special Loss Allocations and the Allocation provisions had fully offset the Special Loss Alloca-
Regulatory Allocations referred to above, the cumulative amount tions, Vulcan Cable and Charter Investment could elect to cause
of losses of Charter Holdco allocated to Vulcan Cable and Charter Holdco to make the remaining Special Profit Alloca-
Charter Investment is in excess of the amount that would have tions to Vulcan Cable and Charter Investment immediately prior
been allocated to such entities if the losses of Charter Holdco to the consummation of the exchange. In the event Vulcan
had been allocated among its members in proportion to their Cable and Charter Investment choose not to make such election
respective percentage ownership of Charter Holdco common or to the extent such allocations are not possible, Charter would
membership units. The cumulative amount of such excess losses then be allocated tax profits attributable to the membership
was approximately $2.1 billion through December 31, 2003 and units received in such exchange pursuant to the Special Profit
$1.0 billion through December 31, 2004. Allocation provisions. Mr. Allen has generally agreed to reim-
In certain situations, the Special Loss Allocations, Special burse Charter for any incremental income taxes that Charter
Profit Allocations, Regulatory Allocations and Curative Alloca- would owe as a result of such an exchange and any resulting
tion Provisions described above could result in Charter paying future Special Profit Allocations to Charter. The ability of
taxes in an amount that is more or less than if Charter Holdco Charter to utilize net operating loss carryforwards is potentially
had allocated net tax profits and net tax losses among its subject to certain limitations as discussed below. If Charter were
members based generally on the number of common member- to become subject to certain limitations (whether as a result of
ship units owned by such members. This could occur due to an exchange described above or otherwise), and as a result were
differences in (i) the character of the allocated income (e.g., to owe taxes resulting from the Special Profit Allocations, then
ordinary versus capital), (ii) the allocated amount and timing of Mr. Allen may not be obligated to reimburse Charter for such
tax depreciation and tax amortization expense due to the income taxes.
application of section 704(c) under the Internal Revenue Code, For the years ended December 31, 2004, 2003 and 2002,
(iii) the potential interaction between the Special Profit Alloca- the Company recorded deferred income tax benefits as shown
tions and the Curative Allocation Provisions, (iv) the amount below. The income tax benefits were realized through reduc-
and timing of alternative minimum taxes paid by Charter, if any, tions in the deferred tax liabilities related to Charter’s investment
(v) the apportionment of the allocated income or loss among in Charter Holdco, as well as the deferred tax liabilities of
the states in which Charter Holdco does business, and certain of Charter’s indirect corporate subsidiaries. In 2003,
(vi) future federal and state tax laws. Further, in the event of Charter received tax loss allocations from Charter Holdco.
new capital contributions to Charter Holdco, it is possible that Previously, the tax losses had been allocated to Vulcan Cable
the tax effects of the Special Profit Allocations, Special Loss and Charter Investment in accordance with the Special Loss
Allocations, Regulatory Allocations and Curative Allocation Allocations provided under the Charter Holdco amended and
Provisions will change significantly pursuant to the provisions of restated limited liability company agreement. The Company
the income tax regulations or the terms of a contribution does not expect to recognize a similar benefit related to its
agreement with respect to such contribution. Such change could investment in Charter Holdco after 2003 due to limitations on
defer the actual tax benefits to be derived by Charter with its ability to offset future tax benefits against the remaining
respect to the net tax losses allocated to it or accelerate the deferred tax liabilities. However, the actual tax provision
actual taxable income to Charter with respect to the net tax calculation in future periods will be the result of current and
profits allocated to it. As a result, it is possible under certain future temporary differences, as well as future operating results.
circumstances, that Charter could receive future allocations of
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