Charter 2005 Annual Report Download - page 46

CHARTER COMMUNICATIONS, INC. 2005 FORM 10-K
provides that any additional net tax profits are to be allocated (vi) future federal and state tax laws. Further, in the event of
among the members of Charter Holdco based generally on their new capital contributions to Charter Holdco, it is possible that
respective percentage ownership of Charter Holdco common the tax effects of the Special Profit Allocations, Special Loss
membership units. Allocations, Regulatory Allocations and Curative Allocation
Because the respective capital account balance of each of Provisions will change significantly pursuant to the provisions of
Vulcan Cable III Inc. and CII was reduced to zero by the income tax regulations or the terms of a contribution
December 31, 2002, certain net tax losses of Charter Holdco agreement with respect to such contributions. Such change
that were to be allocated for 2002, 2003, 2004 and 2005, to could defer the actual tax benefits to be derived by Charter with
Vulcan Cable III Inc. and CII instead have been allocated to respect to the net tax losses allocated to it or accelerate the
Charter (the ‘‘Regulatory Allocations’’). As a result of the actual taxable income to Charter with respect to the net tax
allocation of net tax losses to Charter in 2005, Charter’s capital profits allocated to it. As a result, it is possible under certain
account balance was reduced to zero during 2005. The LLC circumstances, that Charter could receive future allocations of
Agreement provides that once the capital account balances of all taxable income in excess of its currently allocated tax deductions
members have been reduced to zero, net tax losses are to be and available tax loss carryforwards. The ability to utilize net
allocated to Charter, Vulcan Cable III Inc. and CII based operating loss carryforwards is potentially subject to certain
generally on their respective percentage ownership of outstand- limitations as discussed below.
ing common units. Such allocations are also considered to be In addition, under their exchange agreement with Charter,
Regulatory Allocations. The LLC Agreement further provides Vulcan Cable III Inc. and CII may exchange some or all of their
that, to the extent possible, the effect of the Regulatory membership units in Charter Holdco for Charter’s Class B
Allocations is to be offset over time pursuant to certain curative common stock, be merged with Charter, or be acquired by
allocation provisions (the ‘‘Curative Allocation Provisions’’) so Charter in a non-taxable reorganization. If such an exchange
that, after certain offsetting adjustments are made, each mem- were to take place prior to the date that the Special Profit
ber’s capital account balance is equal to the capital account Allocation provisions had fully offset the Special Loss Alloca-
balance such member would have had if the Regulatory tions, Vulcan Cable III Inc. and CII could elect to cause Charter
Allocations had not been part of the LLC Agreement. The Holdco to make the remaining Special Profit Allocations to
cumulative amount of the actual tax losses allocated to Charter Vulcan Cable III Inc. and CII immediately prior to the
as a result of the Regulatory Allocations through the year ended consummation of the exchange. In the event Vulcan Cable III
December 31, 2005 is approximately $4.1 billion. Inc. and CII choose not to make such election or to the extent
As a result of the Special Loss Allocations and the such allocations are not possible, Charter would then be
Regulatory Allocations referred to above (and their interaction allocated tax profits attributable to the membership units
with the allocations related to assets contributed to Charter received in such exchange pursuant to the Special Profit
Holdco with differences between book and tax basis), the Allocation provisions. Mr. Allen has generally agreed to reim-
cumulative amount of losses of Charter Holdco allocated to burse Charter for any incremental income taxes that Charter
Vulcan Cable III Inc. and CII is in excess of the amount that would owe as a result of such an exchange and any resulting
would have been allocated to such entities if the losses of future Special Profit Allocations to Charter. The ability of
Charter Holdco had been allocated among its members in Charter to utilize net operating loss carryforwards is potentially
proportion to their respective percentage ownership of Charter subject to certain limitations (See ‘‘Item 13. Certain Trends and
Holdco common membership units. The cumulative amount of Uncertainties — Utilization of Net Operating Loss Carryfor-
such excess losses was approximately $977 million through wards’’.) If Charter were to become subject to such limitations
December 31, 2005. (whether as a result of an exchange described above or
In certain situations, the Special Loss Allocations, Special otherwise), and as a result were to owe taxes resulting from the
Profit Allocations, Regulatory Allocations and Curative Alloca- Special Profit Allocations, then Mr. Allen may not be obligated
tion Provisions described above could result in Charter paying to reimburse Charter for such income taxes.
taxes in an amount that is more or less than if Charter Holdco As of December 31, 2005 and 2004, we have recorded net
had allocated net tax profits and net tax losses among its deferred income tax liabilities of $326 million and $216 million,
members based generally on the number of common member- respectively. Additionally, as of December 31, 2005 and 2004,
ship units owned by such members. This could occur due to we have deferred tax assets of $4.2 billion and $3.8 billion,
differences in (i) the character of the allocated income (e.g., respectively, which primarily relate to financial and tax losses
ordinary versus capital), (ii) the allocated amount and timing of allocated to Charter from Charter Holdco. We are required to
tax depreciation and tax amortization expense due to the record a valuation allowance when it is more likely than not
application of section 704(c) under the Internal Revenue Code, that some portion or all of the deferred income tax assets will
(iii) the potential interaction between the Special Profit Alloca- not be realized. Given the uncertainty surrounding our ability to
tions and the Curative Allocation Provisions, (iv) the amount utilize our deferred tax assets, these items have been offset with
and timing of alternative minimum taxes paid by Charter, if any, a corresponding valuation allowance of $3.7 billion and $3.5 bil-
(v) the apportionment of the allocated income or loss among lion at December 31, 2005 and 2004, respectively.
the states in which Charter Holdco does business, and
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