Charter 2010 Annual Report Download - page 55

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membership interest in Charter Holdco for $1,000 in cash and
907,698 shares of Charter’s Class A common stock in a fully taxable
transaction. As a result of this transaction, Charter’s deferred tax
liability increased by $100 million. Charter also received a step-
up in tax basis in Charter Holdco’s assets, under section 743 of the
Code, relative to the interest in Charter Holdco it acquired from
CII. Based upon the taxable exchange which occurred on December
28, 2009, CII fulfilled the conditions necessary to allow it to elect
a tax-free transaction at any time during the remaining term of the
Exchange Agreement. On February 8, 2010, the remaining interest
was exchanged after which Charter Holdco became 100% owned by
Charter. As a result, during 2010, Charter’s deferred tax liabilities
were increased by approximately $99 million. e $99 million is
the result of an overall increase in the gross deferred tax liability of
$221 million and a corresponding reduction of valuation allowance
of $122 million. e combined net effects of this transaction were
recorded in the financial statements as a $168 million reduction of
additional paid-in capital and a $69 million reduction of income tax
expense for the year ended December 31, 2010.
As of December 31, 2010, Charter and its indirect corporate
subsidiaries had approximately $6.9 billion of federal tax net
operating and capital loss carryforwards, resulting in a gross deferred
tax asset of approximately $2.4 billion, expiring in the years 2014
through 2030. ese losses arose from the operations of Charter
Holdco and its subsidiaries. In addition, as of December 31, 2010,
Charter and its indirect corporate subsidiaries had state tax net
operating and capital loss carryforwards, resulting in a gross deferred
tax asset (net of federal tax benefit) of approximately $228 million,
generally expiring in years 2011 through 2030. Due to uncertainties
in projected future taxable income, valuation allowances have been
established against the gross deferred tax assets for book accounting
purposes, except for future taxable income that will result from the
reversal of existing temporary differences for which deferred tax
liabilities are recognized. Such tax loss carryforwards can accumulate
and be used to offset Charter’s future taxable income.
e consummation of the Plan generated an “ownership change” as
defined in Section 382 of the Code. As a result, Charter is subject
to limitation on the use of a majority of its tax loss carryforwards.
Further, Charter’s net operating loss carryforwards have been reduced
by the amount of the cancellation of debt income resulting from
the Plan that was allocable to Charter. e limitation on Charter’s
ability to use its tax loss carryforwards, in conjunction with the loss
expiration provisions, could reduce its ability to use a portion of
Charter’s tax loss carryforwards to offset future taxable income.
As of December 31, 2010, $1.3 billion of federal tax loss
carryforwards are unrestricted and available for Charter’s immediate
use, while approximately $5.6 billion of federal tax loss carryforwards
are still subject to Section 382 restrictions. Pursuant to these
restrictions, an aggregate of $2.1 billion, in varying amounts from
2011 to 2014, and an additional $176 million annually over each
of the next 18 years of federal tax loss carryforwards, should become
unrestricted and available for Charter’s use. Both Charter’s indirect
corporate subsidiary and state tax loss carryforwards are subject to
similar but varying restrictions.
In addition to its tax loss carryforward attributes, Charter also has
$4.9 billion of tax basis in intangible assets and $4.9 billion of tax
basis in property, plant and equipment as of December 31, 2010.
e tax basis in these assets is not subject to Section 382 limitations
and therefore the related tax basis amortization and depreciation is
available and deductible for tax purposes on an annual basis.
As of December 31, 2010 and 2009, we have recorded net deferred
income tax liabilities of $762 million and $306 million, respectively.
As part of our net liability, on December 31, 2010 and 2009, we
had deferred tax assets of $3.5 billion and $3.4 billion, respectively,
which primarily relate to tax losses allocated to Charter from
Charter Holdco. 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. Due to our
history of losses, we were unable to assume future taxable income
in our analysis and accordingly valuation allowances have been
established except for deferred benefits available to offset certain
deferred tax liabilities that will reverse over time. Accordingly, our
deferred tax assets have been offset with a corresponding valuation
allowance of $2.3 billion and $2.0 billion at December 31, 2010 and
2009, respectively.
In determining our tax provision for financial reporting purposes,
Charter establishes a reserve for uncertain tax positions unless such
positions are determined to be “more likely than not” of being sustained
upon examination, based on their technical merits. In evaluating
whether a tax position has met the more-likely-than-not recognition
threshold, we presume the position will be examined by the appropriate
taxing authority that has full knowledge of all relevant information.