Charter 2007 Annual Report Download - page 46

governing Regulatory Allocations, as described below. Subject to
the Curative Allocation Provisions described below, the LLC
Agreement further provides that, beginning at the time Charter
Holdco generates net tax profits, the net tax profits that would
otherwise have been allocated to Charter based generally on its
percentage ownership of outstanding common membership units,
will instead generally be allocated to Vulcan Cable and CII (the
“Special Profit Allocations”). The Special Profit Allocations to
Vulcan Cable and CII will generally continue until the cumulative
amount of the Special Profit Allocations offsets the cumulative
amount of the Special Loss Allocations. The amount and timing
of the Special Profit Allocations are subject to the potential
application of, and interaction with, the Curative Allocation
Provisions described in the following paragraph. The LLC
Agreement generally provides that any additional net tax profits
are to be allocated among the members of Charter Holdco based
generally on their respective percentage ownership of Charter
Holdco common membership units.
Because the respective capital account balances of each of
Vulcan Cable and CII were reduced to zero by December 31,
2002, certain net tax losses of Charter Holdco that were to be
allocated for 2002, 2003, 2004 and 2005, to Vulcan Cable and
CII, instead have been allocated to Charter (the “Regulatory
Allocations”). As a result of the allocation of net tax losses to
Charter in 2005, Charter’s capital account balance was reduced
to zero during 2005. The LLC Agreement provides that once
the capital account balances of all members have been reduced
to zero, net tax losses are to be allocated to Charter, Vulcan
Cable and CII based generally on their respective percentage
ownership of outstanding common units. Such allocations are
also considered to be Regulatory Allocations. The LLC Agree-
ment further provides that, to the extent possible, the effect of
the Regulatory Allocations is to be offset over time pursuant to
certain curative allocation provisions (the “Curative Allocation
Provisions”) so that, after certain offsetting adjustments are made,
each member’s capital account balance is equal to the capital
account balance such member would have had if the Regulatory
Allocations had not been part of the LLC Agreement. The
cumulative amount of the actual tax losses allocated to Charter
as a result of the Regulatory Allocations in excess of the amount
of tax losses that would have been allocated to Charter had the
Regulatory 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 contributions. Such change could defer the actual tax
benefits 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 carryfor-
wards. The ability to utilize net operating loss carryforwards is
potentially 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 (see “Risk Factors – For tax purposes, there is a risk
that we will experience a deemed ownership change resulting in
a material limitation on our future ability to use a substantial
amount of our existing net operating loss carryforwards, our
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CHARTER COMMUNICATIONS, INC. 2007 FORM 10-K