Sprint - Nextel 2005 Annual Report Download - page 140

SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In 2005, we acquired approximately $2.8 billion of potential income tax benefits related to net operating loss
carryforwards, capital loss carryforwards and tax credit carryforwards in the Nextel and PCS Affiliates
acquisitions. In 1999 we acquired approximately $193 million of potential tax benefits related to net operating
loss carryforwards in the acquisitions of broadband fixed wireless companies. In 1998, we acquired
approximately $229 million of potential tax benefits related to net operating loss carryforwards in the controlling
interest acquisition of our wireless joint venture, which we call the PCS Restructuring. The benefits from these
acquisitions are subject to certain realization restrictions under various tax laws. As of December 31, 2005, a
valuation allowance of $820 million remains on these deferred tax benefits. If the benefits for which a valuation
allowance has been provided are subsequently recognized, they will first reduce goodwill or intangibles resulting
from the application of the purchase method of accounting for these transactions. If goodwill and intangibles
related to the acquisition are reduced to zero, any additional tax benefits recognized would reduce tax expense.
In connection with the PCS Restructuring, we are required to reimburse the former cable company partners of the
joint venture for net operating loss and tax credit carryforward benefits generated before the PCS Restructuring if
realization by us produces a cash benefit that would not otherwise have been realized. The reimbursement will
equal 60% of the net cash benefit received by us and will be made to the former cable company partners in shares
of our stock. The unexpired carryforward benefits subject to this requirement total $202 million.
As of December 31, 2005, we had federal operating loss carryforwards of approximately $7.0 billion and state
operating loss carryforwards of approximately $12.7 billion. Related to these loss carryforwards are federal tax
benefits of $2.5 billion and state tax benefits of $872 million. In addition, we had available, for income tax
purposes, federal alternative minimum tax net operating loss carryforwards of $5.5 billion and state alternative
minimum tax net operating loss carryforwards of $1.1 billion. The loss carryforwards expire in varying amounts
through 2025. We also had available capital loss carryforwards of approximately $1.2 billion. Related to these
capital loss carryforwards are tax benefits of $431 million. Included in the capital loss carryforward amount is $966
million which expires in 2006. The remaining capital loss carryforward expires in varying amounts through 2009.
We also had available $556 million of federal and state income tax credit carryforwards as of December 31,
2005. Included in this amount are $350 million of income tax credits which expire in varying amounts through
2025. The remaining $206 million do not expire.
The valuation allowance related to deferred income tax assets increased $401 million in 2005 and increased
$50 million in 2004. The 2005 increase is primarily related to the Nextel and PCS Affiliate acquisitions.
Management believes it is more likely than not that these deferred income tax assets, net of the valuation
allowance, will be realized based on current income tax laws and expectations of future taxable income
stemming from the reversal of existing deferred tax liabilities or ordinary operations. Uncertainties surrounding
income tax law changes, shifts in operations between state taxing jurisdictions and future operating income levels
may, however, affect the ultimate realization of all or some of these deferred income tax assets. When we
evaluated these and other qualitative factors and uncertainties concerning our industry, we found that they
provide continuing evidence requiring the valuation allowance which we currently recognize related to the
realization of the tax benefit of our net operating loss and tax credit carryforwards as of December 31, 2005.
Additionally, we establish reserves when, despite our belief that our tax return positions are fully supportable,
certain positions could be challenged, and the positions may not be fully sustained.
Note 14. Discontinued Operations
In 2002, we reached a definitive agreement to sell our directory publishing business, held in the Local segment,
to R.H. Donnelley for $2.2 billion in cash. The sale closed on January 3, 2003. The pretax gain recognized in
2003 was $2.1 billion, $1.3 billion after tax. In accordance with SFAS No. 144, Accounting for the Impairment or
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