Sprint - Nextel 2006 Annual Report Download - page 129

As of December 31, 2006, we had federal operating loss carryforwards of $4.0 billion and state operating loss
carryforwards of $11.2 billion. Related to these loss carryforwards are federal tax benefits of $1.4 billion and
state tax benefits of $801 million. In addition, we had available, for income tax purposes, federal alternative
minimum tax net operating loss carryforwards of $3.4 billion and state alternative minimum tax net operating
loss carryforwards of $668 million. The loss carryforwards expire in varying amounts through 2026. We also
had available capital loss carryforwards of $130 million. Related to these capital loss carryforwards are tax
benefits of $45 million, which will expire in 2009.
We also had available $633 million of federal and state income tax credit carryforwards as of December 31,
2006. Included in this amount are $387 million of income tax credits which expire in varying amounts through
2026. The remaining $246 million do not expire.
The valuation allowance related to deferred income tax assets decreased $117 million in 2006 and increased
$401 million in 2005. The 2006 decrease is primarily related to the use of a capital loss carryforward on
which a valuation allowance had been previously provided and the expiration of state net operating losses for
which a valuation allowance had been provided. The 2005 increase is primarily related to the Sprint-Nextel
merger and the 2005 PCS Affiliate acquisitions.
We believe 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 company and 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, 2006.
Note 13. Commitments and Contingencies
Litigation, Claims and Assessments
In March 2004, eight purported class action lawsuits relating to the recombination of the tracking stocks were
filed against us and our directors by holders of PCS common stock. Seven of the lawsuits were consolidated in
the District Court of Johnson County, Kansas. The eighth, pending in New York, has been voluntarily stayed.
The consolidated lawsuit alleges breach of fiduciary duty in connection with allocations between the wireline
operations and the wireless operations before the recombination of the tracking stocks and breach of fiduciary
duty in the recombination. The lawsuit seeks to rescind the recombination and monetary damages. In
December 2006, the court denied defendants’ motion to dismiss the complaint and for summary judgment, and
granted a motion to certify the class. In February 2007, the court upon reconsideration dismissed a count of
the complaint related to intracompany allocations, which requires dismissal of the complaint against three of
our former directors and reconsideration of the class definition. The court has asked the parties for further
briefing on the class certification issue and the plaintiffs’ request for a jury trial. Trial is scheduled for
September 2007. All defendants have denied plaintiffs’ allegations and intend to defend this matter vigorously.
In September 2004, the U.S. District Court for the District of Kansas denied a motion to dismiss a shareholder
lawsuit alleging that our 2001 and 2002 proxy statements were false and misleading in violation of federal
securities laws to the extent they described new employment agreements with certain senior executives without
disclosing that, according to the allegations, replacement of those executives was inevitable. These allegations,
made in an amended complaint in a lawsuit originally filed in 2003, are asserted against us and certain current
and former officers and directors, and seek to recover any decline in the value of our tracking stocks during
the class period. The parties have stipulated that the case can proceed as a class action. All defendants have
denied plaintiffs’ allegations and intend to defend this matter vigorously. Allegations in the original complaint,
which asserted claims against the same defendants and our former independent auditor, were dismissed by the
court in April 2004.
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SPRINT NEXTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)