Earthlink 2015 Annual Report Download - page 90

Table of Contents
EARTHLINK HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Each reporting period, the Company assesses available positive and negative evidence and estimates if sufficient future taxable income will be generated to utilize
the existing deferred tax assets. The Company has maintained a cumulative loss position since the period ended December 31, 2013. 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 it is not more likely than not that the
Company will not be able to fully realize its deferred tax assets in the future. As a result, a full valuation allowance, exclusive of its deferred tax liabilities with
indefinite useful lives, continues to be maintained against the Company’s net deferred tax assets.
During the year ended December 31, 2015, the Company recorded $15.2 million of valuation allowance related to its deferred tax assets. As of December 31, 2015,
the Company has recorded a valuation allowance of $348.8 million against its net deferred tax assets, exclusive of its deferred tax liabilities with indefinite useful
lives.
Management assesses 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,
2013, 2014 and 2015 :
Year Ended December 31,
2013
2014
2015
(in thousands)
Balance as of January 1
$ (38,595)
$ (305,436)
$ (333,627)
Charges/credits to income tax (provision) benefit
(267,298)
(29,721)
(15,164)
Other adjustments
457
1,530
—
Balance as of December 31
$ (305,436)
$ (333,627)
$ (348,791)
NOLs and tax credits. As of December 31, 2013, 2014 and 2015 , the Company had gross NOLs for federal income tax purposes totaling approximately $620.8
million , $666.2 million and $681.0 million , respectively, which begin to expire in 2020. Of these federal NOLs approximately $300.9 million , $253.8 million and
$207.3 million were limited under Internal Revenue Code Section 382 in 2013, 2014 and 2015, respectively. As of December 31, 2014 and 2015, the Company had
net NOLs for state income tax purposes totaling approximately $33.9 million and $32.6 million , respectively, which began 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.
As of December 31, 2014 and 2015, the Company had alternative minimum tax credits of approximately $15.0 million . These credits do not have an expiration
date. As of December 31, 2014 and 2015, the Company had capital loss carryforwards of approximately $1.5 million which will expire as of December 31, 2018 if
unused.
Uncertain tax positions. The Company has identified its federal tax return and its state tax returns in Alabama, Georgia, California, Massachusetts , New York,
North Carolina, Pennsylvania and Texas as material tax jurisdictions for purposes of calculating its uncertain tax positions. Periods extending back to 1997 are still
subject to examination for all material jurisdictions. The Company believes that its income tax filing positions and deductions through the period ended December
31, 2015 will not result in a material adverse effect on the Company’s financial condition, results of operations or cash flow. The Company’s policy for recording
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