FairPoint Communications 2006 Annual Report Download - page 87

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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2006
and 2005 are presented below (in thousands):
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Deferred tax assets:
Federal and state tax loss carryforwards $84,934 $109,569
Employee benefits 1,756 1,865
Self insurance reserves 1,110 1,389
Restructure charges and exit liabilities —493
Allowance for doubtful accounts 697 800
Alternative minimum tax and other state credits 3,210 1,857
Total gross deferred tax assets 91,707 115,973
Deferred tax liabilities:
Property, plant, and equipment, principally due to
depreciation differences 8,967 11,996
Goodwill and other intangible assets 21,189 17,883
Change in fair market value of swaps 3,240 3,301
Basis in investments 833 6,443
Total gross deferred tax liabilities 34,229 39,623
Net deferred tax assets $57,478 $76,350
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 not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company estimates that it will need to generate future taxable
income of $165.6 million prior to the expiration of the net operating loss carryforwards in 2025. Taxable income (losses) for the years ended December 31,
2006 and 2005 were $65.0 million and $(41.0) million, respectively. Based upon the level of projections for future taxable income over the periods in which
the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences based
on facts and circumstances known as of December 31, 2006.
At December 31, 2006, the Company had federal and state net operating loss carryforwards of $235.1 million that will expire in 2019 to 2025. At
December 31, 2006, the Company has alternative minimum tax credits of $2.7 million that may be carried forward indefinitely. The Company completed an
initial public offering on February 8, 2005, which resulted in an “ownership change” within the meaning of the U.S. Federal income tax laws addressing net
operating loss carryforwards, alternative minimum tax credits, and other similar tax attributes. As a result of such ownership change, there are specific
limitations on the Company’s ability to use its net operating loss carryfowards and other tax attributes however, it is the Company’s belief that it can use the
net operating losses even with these restrictions in place because of net unrealized built in gains.
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