Charter 2006 Annual Report Download - page 50

CHARTER COMMUNICATIONS, INC. 2006 FORM 10-K
agreement with respect to such contributions. Such change obligation to reimburse Charter for taxes attributable to the
could defer the actual tax benefits to be derived by Charter with Special Profit Allocation to Charter ceases upon a subsequent
respect to the net tax losses allocated to it or accelerate the change of control of Charter.
actual taxable income to Charter with respect to the net tax As of December 31, 2006 and 2005, we have recorded net
profits allocated to it. As a result, it is possible under certain deferred income tax liabilities of $514 million and $325 million,
circumstances, that Charter could receive future allocations of respectively. Additionally, as of December 31, 2006 and 2005,
taxable income in excess of its currently allocated tax deductions we have deferred tax assets of $4.6 billion and $4.2 billion,
and available tax loss carryforwards. The ability to utilize net respectively, which primarily relate to financial and tax losses
operating loss carryforwards is potentially subject to certain allocated to Charter from Charter Holdco. We are required to
limitations as discussed below. record a valuation allowance when it is more likely than not
In addition, under their exchange agreement with Charter, that some portion or all of the deferred income tax assets will
Vulcan Cable and CII have the right at anytime to exchange not be realized. Given the uncertainty surrounding our ability to
some or all of their membership units in Charter Holdco for utilize our deferred tax assets, these items have been offset with
Charter’s Class B common stock, be merged with Charter in a corresponding valuation allowance of $4.2 billion and $3.7 bil-
exchange for Charter’s Class B common stock, or be acquired lion at December 31, 2006 and 2005, respectively.
by Charter in a non-taxable reorganization in exchange for Charter Holdco is currently under examination by the
Charter’s Class B common stock. If such an exchange were to Internal Revenue Service for the tax years ending December 31,
take place prior to the date that the Special Profit Allocation 2002 and 2003. In addition, one of our indirect corporate
provisions had fully offset the Special Loss Allocations, Vulcan subsidiaries is under examination by the Internal Revenue
Cable and CII could elect to cause Charter Holdco to make the Service for the tax year ended December 31, 2004. Our results
remaining Special Profit Allocations to Vulcan Cable and CII (excluding Charter and our indirect corporate subsidiaries, with
immediately prior to the consummation of the exchange. In the the exception of the indirect corporate subsidiary under exami-
event Vulcan Cable and CII choose not to make such election nation) for these years are subject to these examinations.
or to the extent such allocations are not possible, Charter would Management does not expect the results of these examinations
then be allocated tax profits attributable to the membership to have a material adverse effect on our consolidated financial
units received in such exchange pursuant to the Special Profit condition, results of operations, or our liquidity, including our
Allocation provisions. Mr. Allen has generally agreed to reim- ability to comply with our debt covenants.
burse Charter for any incremental income taxes that Charter
Litigation. Legal contingencies have a high degree of uncertainty.
would owe as a result of such an exchange and any resulting
When a loss from a contingency becomes estimable and
future Special Profit Allocations to Charter. The ability of
probable, a reserve is established. The reserve reflects manage-
Charter to utilize net operating loss carryforwards is potentially
ment’s best estimate of the probable cost of ultimate resolution
subject to certain limitations (see ‘‘Risk Factors — For tax
of the matter and is revised accordingly as facts and circum-
purposes, there is significant risk that we will experience an
stances change, and ultimately when the matter is brought to
ownership change resulting in a material limitation on the use of
closure. We have established reserves for certain matters and if
a substantial amount of our existing net operating loss carryfor-
any of these matters are resolved unfavorably, resulting in
wards’’). If Charter were to become subject to such limitations
payment obligations in excess of management’s best estimate of
(whether as a result of an exchange described above or
the outcome, such resolution could have a material adverse
otherwise), and as a result were to owe taxes resulting from the
effect on our consolidated financial condition, results of opera-
Special Profit Allocations, then Mr. Allen may not be obligated
tions, or our liquidity.
to reimburse Charter for such income taxes. Further, Mr. Allen’s
36