Charter 2007 Annual Report Download - page 106

The Company’s effective tax rate differs from that derived
by applying the applicable federal income tax rate of 35%, and
average state income tax rate of 5.3% for the year ended
December 31, 2007 and 5% for the years ended December 31,
2006 and 2005 as follows:
2007 2006 2005
December 31,
Statutory federal income taxes $ 493 $ 407 $ 298
Statutory state income taxes, net 74 58 43
Franchises (198) (202) (109)
Valuation allowance provided and other (578) (472) (347)
(209) (209) (115)
Less: discontinued operations —22 3
Income tax expense $(209) $(187) $(112)
The tax effects of these temporary differences that give rise
to significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 2007 and 2006 which are included in
long-term liabilities are presented below.
2007 2006
December 31,
Deferred tax assets:
Net operating loss carryforward $ 3,155 $ 2,689
Investment in Charter Holdco 1,888 1,955
Other 19 5
Total gross deferred tax assets 5,062 4,649
Less: valuation allowance (4,786) (4,200)
Deferred tax assets $ 276 $ 449
Deferred tax liabilities:
Investment in Charter Holdco $ (707) $ (737)
Indirect Corporate Subsidiaries:
Property, plant & equipment (29) (31)
Franchises (205) (195)
Deferred tax liabilities (941) (963)
Net deferred tax liabilities $ (665) $ (514)
As of December 31, 2007, the Company has deferred tax
assets of $5.1 billion, which include $1.9 billion of financial losses
in excess of tax losses allocated to Charter from Charter Holdco.
The deferred tax assets also include $3.2 billion of tax net
operating loss carryforwards (generally expiring in years 2008
through 2027) of Charter and its indirect corporate subsidiaries.
Valuation allowances of $4.8 billion exist with respect to these
deferred tax assets of which $2.9 billion relate to the tax net
operating loss carryforwards.
The amount of any benefit from the Company’s tax net
operating losses is dependent on: (1) Charter and its subsidiaries’
ability to generate future taxable income and (2) the unexpired
amount of net operating loss carryforwards available to offset
amounts payable on such taxable income. Any future “ownership
changes” of Charter’s common stock, as defined in the applicable
federal income tax rules, would place significant limitations, on
an annual basis, on the use of such net operating losses to offset
any future taxable income the Company may generate. Such
limitations, in conjunction with the net operating loss expiration
provisions, could effectively eliminate the Company’s ability to
use a substantial portion of its net operating losses to offset future
taxable income. Although the Company has adopted the Rights
Plan as an attempt to protect against an “ownership change,”
certain transactions and the timing of such transactions could
cause an ownership change including, but not limited to, the
following: The issuance of shares of common stock upon future
conversion of Charter’s convertible senior notes; reacquisition of
the shares borrowed under the share lending agreement by
Charter (of which 24.8 million were outstanding as of Decem-
ber 31, 2007); or acquisitions or sales of shares by certain holders
of Charter’s shares, including persons who have held, currently
hold, or accumulate in the future five percent or more of
Charter’s outstanding stock (including upon an exchange by
Mr. Allen or his affiliates, directly or indirectly, of membership
units of Charter Holdco into CCI common stock). Many of the
foregoing transactions, including whether Mr. Allen exchanges
his Charter Holdco units, are beyond management’s control.
The deferred tax liability for Charter’s investment in Charter
Holdco is largely attributable to the characterization of franchises
for financial reporting purposes as indefinite lived. If certain
exchanges, as described above, were to take place, Charter would
likely record for financial reporting purposes additional deferred
tax liability related to its increased interest in Charter Holdco
and the related underlying indefinite lived franchise assets.
The total valuation allowance for deferred tax assets as of
December 31, 2007 and 2006 was $4.8 billion and $4.2 billion,
respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
Because of the uncertainties in projecting future taxable income
of Charter Holdco, valuation allowances have been established
except for deferred benefits available to offset certain deferred tax
liabilities that will reverse over time.
Charter and Charter Holdco are currently under examina-
tion by the Internal Revenue Service for the tax years ending
December 31, 2004 and 2005. Management does not expect the
results of these examinations to have a material adverse effect on
the Company’s consolidated financial condition or results of
operations.
In January 2007, the Company adopted FIN 48, Accounting
for Uncertainty in Income Taxes – an Interpretation of FASB State-
ment No. 109, which provides criteria for the recognition, mea-
surement, presentation and disclosure of uncertain tax positions.
A tax benefit from an uncertain position may be recognized only
if it is “more likely than not” that the position is sustainable
based on its technical merits. The adoption of FIN 48 resulted in
a deferred tax benefit of $56 million related to a settlement with
Mr. Allen regarding ownership of the CC VIII preferred mem-
bership interests, which was recognized as a cumulative
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CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2007 FORM 10-K
Notes to Consolidated Financial Statements (continued)