Charter 2004 Annual Report Download - page 139

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2004 FORM 10-K
Notes to Consolidated Financial Statements (continued)
Current and deferred income tax expense (benefit) is as As of December 31, 2004, the Company has deferred tax
follows: assets of $3.5 billion, which primarily relate to financial and tax
losses allocated to Charter from Charter Holdco. The deferred
December 31, tax assets include $2.1 billion of tax net operating loss
2004 2003 2002 carryforwards (generally expiring in years 2005 through 2024) of
Current expense: Charter and its indirect corporate subsidiaries. Valuation
Federal income taxes $2 $1 $—allowances of $3.2 billion exist with respect to these deferred tax
State income taxes 412
assets.
Current income tax expense 622 The change of approximately $1.9 billion in valuation
Deferred benefit: allowance between the years ended December 31, 2004 and
Federal income taxes (175) (98) (456) 2003, presented above, includes the provision for valuation
State income taxes (25) (14) (66)
allowance, the impact of the decrease in deferred tax liabilities
Deferred income tax benefit: (200) (112) (522)
and the impact of additional losses resulting from the cumulative
Total income benefit $ (194) $(110) $(520) effect of accounting change.
The Company recorded the portion of the income tax Full realization of the Company’s tax net operating losses is
benefit associated with the adoption of EITF Topic D-108 and dependent on: (1) Charter and its indirect corporate subsidiaries’
SFAS No. 142 as a $91 million and a $60 million reduction of ability to generate future taxable income and (2) the absence of
the cumulative effect of accounting change on the accompany- certain future ‘‘ownership changes’’ of Charter’s common stock.
ing statement of operations for the years ended December 31, An ‘‘ownership change’’ as defined in the applicable federal
2004 and December 31, 2002, respectively. income tax rules, would place significant limitations, on an
The Company’s effective tax rate differs from that derived annual basis, on the use of such net operating losses to offset
by applying the applicable federal income tax rate of 35%, and any future taxable income the Company may generate. Such
average state income tax rate of 5% for the years ended limitations, in conjunction with the net operating loss expiration
December 31, 2004, 2003 and 2002 as follows: provisions, could effectively eliminate the Company’s ability to
December 31, use a substantial portion of its net operating losses to offset
2004 2003 2002 future taxable income. Future transactions and the timing of
such transactions could cause an ownership change. Such
Statutory federal income taxes $ (1,288) $(122) $(969)
State income taxes, net of federal benefit (184) (17) (138) transactions include additional issuances of common stock by
Valuation allowance provided 1,278 29 587 the Company (including but not limited the anticipated issu-
(194) (110) (520) ances of 150 million shares of common stock under the share
Less: cumulative effect of accounting lending agreement in conjunction with the issuance of
change 91 — 60 5.875% convertible senior notes in November 2004 or upon
Income tax benefit $ (103) $(110) $(460) future conversion of Charter’s convertible senior notes), reacqui-
sitions of the borrowed shares by Charter, or acquisitions or
The tax effects of these temporary differences that give rise sales of shares by certain holders of Charter’s shares, including
to significant portions of the deferred tax assets and deferred tax persons who have held, currently hold, or accumulate in the
liabilities at December 31, 2004 and 2003 which are included in future five percent or more of Charter’s outstanding stock
long-term liabilities are presented below. (including upon an exchange by Paul Allen or his affiliates,
December 31, directly or indirectly, of membership units of Charter Holdco
2004 2003 into CCI common stock). Many of the foregoing transactions
Deferred tax assets: are beyond management’s control.
Net operating loss carryforward $ 3,533 $ 1,723 The total valuation allowance for deferred tax assets as of
Other 86December 31, 2004 and 2003 was $3.2 billion and $1.3 billion,
Total gross deferred tax assets 3,541 1,729 respectively. In assessing the realizability of deferred tax assets,
Less: valuation allowance (3,151) (1,291) management considers whether it is more likely than not that
Net deferred tax assets $ 390 $ 438 some portion or all of the deferred tax assets will be realized.
Deferred tax liabilities: Because of the uncertainties in projecting future taxable income
Investment in Charter Holdco $ (365) $ (553) of Charter Holdco, valuation allowances have been established
Indirect Corporate Subsidiaries: except for deferred benefits available to offset certain deferred
Property, plant & equipment (40) (42)
Franchises (201) (260) tax liabilities.
Gross deferred tax liabilities (606) (855) The Company is currently under examination by the
Internal Revenue Service for the tax years ending December 31,
Net deferred tax liabilities $ (216) $ (417)
1999 and 2000. Management does not expect the results of this
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