Earthlink 2014 Annual Report Download - page 93

Table of Contents EARTHLINK HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During the three months ended December 31, 2013, the Company entered into a cumulative loss position. For purposes of assessing the
realization of the deferred tax assets, this cumulative loss position is considered significant negative evidence. This cumulative loss position,
along with the evaluation of all sources of taxable income available to realize the deferred tax asset, has caused management to conclude that the
Company will not be able to fully realize its deferred tax assets in the future. During the three months ended December 31, 2013, the Company
recorded a $266.3 million , or $2.61 per share, non-
cash charge to record a valuation allowance against its deferred tax assets, which is included
in the income tax provision in the Consolidated Statement of Comprehensive Loss. As of December 31, 2013, the Company has recorded a
valuation allowance of $305.4 million against its net deferred tax asset, exclusive of its deferred tax liabilities with indefinite useful lives.
The valuation of deferred tax assets requires judgment based on the weight of all available evidence. During the fourth quarter of 2013,
management reassessed its projections of future taxable income. This change in projections, coupled with its cumulative loss position caused
management to modify its assessment of the realizability of its deferred tax asset and conclude that a full valuation allowance, exclusive of its
deferred tax liabilities with indefinite useful lives, was necessary. During 2014, the Company continued to conclude it was not more likely than
not that its deferred tax assets would be realized.
During the year ended December 31, 2014, the Company recorded $28.2 million
of valuation allowance related to its deferred tax assets. Of the
$28.2 million change in valuation allowance, $28.0 million is related to continuing operations and $0.2 million
related to discontinued
operations. As of December 31, 2014, the Company has recorded a valuation allowance of $333.6 million
against its net deferred tax assets,
exclusive of its deferred tax liabilities with indefinite useful lives.
Management will reassess the realization of the deferred tax assets each reporting period. To the extent that the financial results of the Company
improve and the deferred tax asset becomes realizable, the Company will reduce the valuation allowance through earnings.
The following table summarizes activity in the Company's valuation allowance, for both continuing and discontinued operations, for the years
ended December 31, 2012, 2013 and 2014:
NOLs and tax credits.
As of December 31, 2012, 2013 and 2014, the Company had gross NOLs for federal income tax purposes totaling
approximately $493.6 million , $620.8 million and $666.2 million
, respectively, which begin to expire in 2020. Of these federal NOLs
approximately $350.5 million , $300.9 million and $253.8 million
were limited under Internal Revenue Code Section 382 in 2012, 2013 and
2014, respectively. As of December 31, 2013 and 2014, the Company had net NOLs for state income tax purposes totaling approximately
$32.6
million and $33.9 million
, respectively, which begin to expire in 2015. Under the Tax Reform Act of 1986, the Company's ability to use its
federal and state NOLs and federal and state tax credit carry forwards to reduce future taxable income and future taxes, respectively, is subject to
restrictions attributable to equity transactions that have resulted in a change of ownership as defined in Internal Revenue Code Section 382. As a
result, the NOL amounts as of December 31, 2014 reflect the restriction on the Company's ability to use its acquired federal and state NOLs;
however, the Company continues to evaluate potential changes to the Section 382 limitations associated with acquired federal and state NOLs.
The utilization of these NOLs could be further restricted in future periods which could result in significant amounts of these NOLs expiring prior
to benefiting the Company.
Future transactions and the timing of such transactions could cause an ownership change under Section 382 of the Internal Revenue Code. Such
transactions may include our share repurchase program, additional issuances of common stock by us , and acquisitions or sales of shares by
certain holders of our shares, including persons who have held, currently hold, or may accumulate in the future five percent or more of our
outstanding stock. Many of these transactions are beyond our control.
83
Year Ended December 31,
2012 2013 2014
(in thousands)
Balance as of January 1
$
(39,943
)
$
(38,595
)
$
(305,436
)
Charges/credits to income tax (provision) benefit
1,348
(267,298
)
(29,721
)
Other adjustments
—
457
1,530
Balance as of December 31
$
(38,595
)
$
(305,436
)
$
(333,627
)