Charter 2006 Annual Report Download - page 110

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2006 FORM 10-K
Notes to Consolidated Financial Statements (continued)
CII instead have been allocated to Charter (the ‘‘Regulatory agreement with respect to such contribution. Such change could
Allocations’’). As a result of the allocation of net tax losses to defer the actual tax benefits to be derived by Charter with
Charter in 2005, Charter’s capital account balance was reduced respect to the net tax losses allocated to it or accelerate the
to zero during 2005. The LLC Agreement provides that once actual taxable income to Charter with respect to the net tax
the capital account balances of all members have been reduced profits allocated to it. As a result, it is possible under certain
to zero, net tax losses are to be allocated to Charter, Vulcan circumstances, that Charter could receive future allocations of
Cable and CII based generally on their respective percentage taxable income in excess of its currently allocated tax deductions
ownership of outstanding common units. Such allocations are and available tax loss carryforwards. The ability to utilize net
also considered to be Regulatory Allocations. The LLC Agree- operating loss carryforwards is potentially subject to certain
ment further provides that, to the extent possible, the effect of limitations as discussed below.
the Regulatory Allocations is to be offset over time pursuant to In addition, under their exchange agreement with Charter,
certain curative allocation provisions (the ‘‘Curative Allocation Vulcan Cable and CII have the right at anytime to exchange
Provisions’’) so that, after certain offsetting adjustments are some or all of their membership units in Charter Holdco for
made, each member’s capital account balance is equal to the Charter’s Class B common stock, be merged with Charter in
capital account balance such member would have had if the exchange for Charter’s Class B common stock, or be acquired
Regulatory Allocations had not been part of the LLC Agree- by Charter in a non-taxable reorganization in exchange for
ment. The cumulative amount of the actual tax losses allocated Charter’s Class B common stock. If such an exchange were to
to Charter as a result of the Regulatory Allocations through the take place prior to the date that the Special Profit Allocation
year ended December 31, 2006 is approximately $4.1 billion. provisions had fully offset the Special Loss Allocations, Vulcan
As a result of the Special Loss Allocations and the Cable and CII could elect to cause Charter Holdco to make the
Regulatory Allocations referred to above (and their interaction remaining Special Profit Allocations to Vulcan Cable and CII
with the allocations related to assets contributed to Charter immediately prior to the consummation of the exchange. In the
Holdco with differences between book and tax basis), the event Vulcan Cable and CII choose not to make such election
cumulative amount of losses of Charter Holdco allocated to or to the extent such allocations are not possible, Charter would
Vulcan Cable and CII is in excess of the amount that would then be allocated tax profits attributable to the membership
have been allocated to such entities if the losses of Charter units received in such exchange pursuant to the Special Profit
Holdco had been allocated among its members in proportion to Allocation provisions. Mr. Allen has generally agreed to reim-
their respective percentage ownership of Charter Holdco com- burse Charter for any incremental income taxes that Charter
mon membership units. The cumulative amount of such excess would owe as a result of such an exchange and any resulting
losses was approximately $1 billion through December 31, 2006. future Special Profit Allocations to Charter. The ability of
In certain situations, the Special Loss Allocations, Special Charter to utilize net operating loss carryforwards is potentially
Profit Allocations, Regulatory Allocations and Curative Alloca- subject to certain limitations as discussed below. If Charter were
tion Provisions described above could result in Charter paying to become subject to certain limitations (whether as a result of
taxes in an amount that is more or less than if Charter Holdco an exchange described above or otherwise), and as a result were
had allocated net tax profits and net tax losses among its to owe taxes resulting from the Special Profit Allocations, then
members based generally on the number of common member- Mr. Allen may not be obligated to reimburse Charter for such
ship units owned by such members. This could occur due to income taxes.
differences in (i) the character of the allocated income (e.g., For the years ended December 31, 2006, 2005 and 2004,
ordinary versus capital), (ii) the allocated amount and timing of the Company recorded deferred income tax expense and
tax depreciation and tax amortization expense due to the benefits as shown below. The income tax expense is recognized
application of section 704(c) under the Internal Revenue Code, through increases in deferred tax liabilities related to our
(iii) the potential interaction between the Special Profit Alloca- investment in Charter Holdco, as well as through current federal
tions and the Curative Allocation Provisions, (iv) the amount and state income tax expense and increases in the deferred tax
and timing of alternative minimum taxes paid by Charter, if any, liabilities of certain of our indirect corporate subsidiaries. The
(v) the apportionment of the allocated income or loss among income tax benefits were realized through reductions in the
the states in which Charter Holdco does business, and deferred tax liabilities related to Charter’s investment in Charter
(vi) future federal and state tax laws. Further, in the event of Holdco, as well as the deferred tax liabilities of certain of
new capital contributions to Charter Holdco, it is possible that Charter’s indirect corporate subsidiaries. However, the actual tax
the tax effects of the Special Profit Allocations, Special Loss provision calculation in future periods will be the result of
Allocations, Regulatory Allocations and Curative Allocation current and future temporary differences, as well as future
Provisions will change significantly pursuant to the provisions of operating results.
the income tax regulations or the terms of a contribution
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