Charter 2007 Annual Report Download - page 105

Allocations not been part of the LLC Agreement through the
year ended December 31, 2007 is approximately $4.1 billion.
As a result of the Special Loss Allocations and the Regula-
tory Allocations referred to above (and their interaction with the
allocations related to assets contributed to Charter Holdco with
differences between book and tax basis), the cumulative amount
of losses of Charter Holdco allocated to Vulcan Cable and CII is
in excess of the amount that would have been allocated to such
entities if the losses of Charter Holdco had been allocated among
its members in proportion to their respective percentage owner-
ship of Charter Holdco common membership units. The cumu-
lative amount of such excess losses was approximately $1.0 billion
through December 31, 2007.
In certain situations, the Special Loss Allocations, Special
Profit Allocations, Regulatory Allocations and Curative Alloca-
tion Provisions described above could result in Charter paying
taxes in an amount that is more or less than if Charter Holdco
had allocated net tax profits and net tax losses among its
members based generally on the number of common member-
ship units owned by such members. This could occur due to
differences in (i) the character of the allocated income (e.g.,
ordinary versus capital), (ii) the allocated amount and timing of
tax depreciation and tax amortization expense due to the
application of section 704(c) under the Internal Revenue Code,
(iii) the potential interaction between the Special Profit Alloca-
tions and the Curative Allocation Provisions, (iv) the amount and
timing of alternative minimum taxes paid by Charter, if any,
(v) the apportionment of the allocated income or loss among the
states in which Charter Holdco does business, and (vi) future
federal and state tax laws. Further, in the event of new capital
contributions to Charter Holdco, it is possible that the tax effects
of the Special Profit Allocations, Special Loss Allocations, Regu-
latory Allocations and Curative Allocation Provisions will change
significantly pursuant to the provisions of the income tax regula-
tions or the terms of a contribution agreement with respect to
such contribution. Such change could defer the actual tax bene-
fits to be derived by Charter with respect to the net tax losses
allocated to it or accelerate the actual taxable income to Charter
with respect to the net tax profits allocated to it. As a result, it is
possible under certain circumstances, that Charter could receive
future allocations of taxable income in excess of its currently
allocated tax deductions and available tax loss carryforwards.
The ability to utilize net operating loss carryforwards is poten-
tially subject to certain limitations as discussed below.
In addition, under their exchange agreement with Charter,
Vulcan Cable and CII have the right at any time to exchange
some or all of their membership units in Charter Holdco for
Charter’s Class B common stock, be merged with Charter in
exchange for Charter’s Class B common stock, or be acquired by
Charter in a non-taxable reorganization in exchange for Charter’s
Class B common stock. If such an exchange were to take place
prior to the date that the Special Profit Allocation provisions had
fully offset the Special Loss Allocations, Vulcan Cable and CII
could elect to cause Charter Holdco to make the remaining
Special Profit Allocations to Vulcan Cable and CII immediately
prior to the consummation of the exchange. In the event Vulcan
Cable and CII choose not to make such election or to the extent
such allocations are not possible, Charter would then be allo-
cated tax profits attributable to the membership units received in
such exchange pursuant to the Special Profit Allocation provi-
sions. Mr. Allen has generally agreed to reimburse Charter for
any incremental income taxes that Charter would owe as a result
of such an exchange and any resulting future Special Profit
Allocations to Charter. The ability of Charter to utilize net
operating loss carryforwards is potentially subject to certain
limitations as discussed below. If Charter were to become subject
to certain limitations (whether as a result of an exchange
described above or otherwise), and as a result were to owe taxes
resulting from the Special Profit Allocations, then Mr. Allen may
not be obligated to reimburse Charter for such income taxes.
For the years ended December 31, 2007, 2006, and 2005,
the Company recorded deferred income tax expense and benefits
as shown below. The income tax expense is recognized through
increases in deferred tax liabilities related to our investment in
Charter Holdco, as well as through current federal and state
income tax expense and increases in the deferred tax liabilities of
certain of our indirect corporate subsidiaries. The income tax
benefits were realized through reductions in the deferred tax
liabilities related to Charter’s investment in Charter Holdco, as
well as the deferred tax liabilities of certain of Charter’s indirect
corporate subsidiaries. Tax provision in future periods will vary
based on current and future temporary differences, as well as
future operating results.
Current and deferred income tax benefit (expense) is as
follows:
2007 2006 2005
December 31,
Current expense:
Federal income taxes $ (3) $ (2) $ (2)
State income taxes (8) (5) (4)
Current income tax expense (11) (7) (6)
Deferred expense:
Federal income taxes (188) (177) (95)
State income taxes (10) (25) (14)
Deferred income tax expense (198) (202) (109)
Total income expense $(209) $(209) $(115)
A portion of income tax expense was recorded as a
reduction of income (loss) from discontinued operations in the
years ended December 31, 2006 and 2005. See Note 4.
F-27
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2007 FORM 10-K
Notes to Consolidated Financial Statements (continued)