Charter 2005 Annual Report Download - page 152

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2005 FORM 10-K
Notes to Consolidated Financial Statements (continued)
include approximately $85 million, as part of a settlement of the LLC Agreement generally provides that any additional net tax
consolidated federal class action and federal derivative action profits are to be allocated among the members of Charter
lawsuits and approximately $10 million of litigation costs related Holdco based generally on their respective percentage owner-
to the settlement of a 2004 national class action suit (see ship of Charter Holdco common membership units.
Note 26). For the year ended December 31, 2004, special Because the respective capital account balance of each of
charges were offset by $3 million received from a third party in Vulcan Cable and CII was reduced to zero by December 31,
settlement of a legal dispute. For the year ended December 31, 2002, certain net tax losses of Charter Holdco that were to be
2005, special charges also include approximately $1 million allocated for 2002, 2003, 2004 and 2005, to Vulcan Cable and
related to various legal settlements. CII instead have been allocated to Charter (the ‘‘Regulatory
Allocations’’). As a result of the allocation of net tax losses to
24. INCOME TAXES Charter in 2005, Charter’s capital account balance was reduced
to zero during 2005. The LLC Agreement provides that once
All operations are held through Charter Holdco and its direct the capital account balances of all members have been reduced
and indirect subsidiaries. Charter Holdco and the majority of its to zero, net tax losses are to be allocated to Charter, Vulcan
subsidiaries are not subject to income tax. However, certain of Cable and CII based generally on their respective percentage
these subsidiaries are corporations and are subject to income ownership of outstanding common units. Such allocations are
tax. All of the taxable income, gains, losses, deductions and also considered to be Regulatory Allocations. The LLC Agree-
credits of Charter Holdco are passed through to its members: ment further provides that, to the extent possible, the effect of
Charter, Charter Investment, Inc. (‘‘CII’’) and Vulcan Cable III the Regulatory Allocations is to be offset over time pursuant to
Inc. (‘‘Vulcan Cable’’). Charter is responsible for its share of certain curative allocation provisions (the ‘‘Curative Allocation
taxable income or loss of Charter Holdco allocated to Charter Provisions’’) so that, after certain offsetting adjustments are
in accordance with the Charter Holdco limited liability com- made, each member’s capital account balance is equal to the
pany agreement (the ‘‘LLC Agreement’’) and partnership tax capital account balance such member would have had if the
rules and regulations. Regulatory Allocations had not been part of the LLC Agree-
The LLC Agreement provides for certain special allocations ment. The cumulative amount of the actual tax losses allocated
of net tax profits and net tax losses (such net tax profits and net to Charter as a result of the Regulatory Allocations through the
tax losses being determined under the applicable federal income year ended December 31, 2005 is approximately $4.1 billion.
tax rules for determining capital accounts). Under the LLC As a result of the Special Loss Allocations and the
Agreement, through the end of 2003, net tax losses of Charter Regulatory Allocations referred to above (and their interaction
Holdco that would otherwise have been allocated to Charter with the allocations related to assets contributed to Charter
based generally on its percentage ownership of outstanding Holdco with differences between book and tax basis), the
common units were allocated instead to membership units held cumulative amount of losses of Charter Holdco allocated to
by Vulcan Cable and CII (the ‘‘Special Loss Allocations’’) to the Vulcan Cable and CII is in excess of the amount that would
extent of their respective capital account balances. After 2003, have been allocated to such entities if the losses of Charter
under the LLC Agreement, net tax losses of Charter Holdco are Holdco had been allocated among its members in proportion to
to be allocated to Charter, Vulcan Cable and CII based generally their respective percentage ownership of Charter Holdco com-
on their respective percentage ownership of outstanding com- mon membership units. The cumulative amount of such excess
mon units to the extent of their respective capital account losses was approximately $977 million through December 31,
balances. Allocations of net tax losses in excess of the members’ 2005.
aggregate capital account balances are allocated under the rules In certain situations, the Special Loss Allocations, Special
governing Regulatory Allocations, as described below. Subject to Profit Allocations, Regulatory Allocations and Curative Allocation
the Curative Allocation Provisions described below, the LLC Provisions described above could result in Charter paying taxes in
Agreement further provides that, beginning at the time Charter an amount that is more or less than if Charter Holdco had
Holdco generates net tax profits, the net tax profits that would allocated net tax profits and net tax losses among its members
otherwise have been allocated to Charter based generally on its based generally on the number of common membership units
percentage ownership of outstanding common membership units owned by such members. This could occur due to differences in
will instead generally be allocated to Vulcan Cable and CII (the (i) the character of the allocated income (e.g., ordinary versus
‘‘Special Profit Allocations’’). The Special Profit Allocations to capital), (ii) the allocated amount and timing of tax depreciation
Vulcan Cable and CII will generally continue until the cumula- and tax amortization expense due to the application of sec-
tive amount of the Special Profit Allocations offsets the tion 704(c) under the Internal Revenue Code, (iii) the potential
cumulative amount of the Special Loss Allocations. The amount interaction between the Special Profit Allocations and the
and timing of the Special Profit Allocations are subject to the Curative Allocation Provisions, (iv) the amount and timing of
potential application of, and interaction with, the Curative alternative minimum taxes paid by Charter, if any, (v) the
Allocation Provisions described in the following paragraph. The apportionment of the allocated income or loss among the states
F-34