FairPoint Communications 2007 Annual Report Download - page 99

Table of Contents


 
Income tax (expense) benefit from continuing operations for the years ended December 31, 2007, 2006, and 2005 consists of the
following components (in thousands):
  
Current:
Federal $ (240) $ (1,422) $ —
State (1,317) (1,456) (1,128)
Total current income tax expense from continuing operations (1,557) (2,878) (1,128)
Investment tax credits 11 12 16
Deferred:
Federal (6,965) (15,806) 78,385
State (582) (1,186) 5,823
Total deferred income tax (expense) benefit from continuing operations (7,547) (16,992) 84,208
Total income tax (expense) benefit from continuing operations $ (9,093) $ (19,858) $83,096
Income tax expense of $0.2 million, $0.3 million and $0.2 million has also been recognized associated with income from
discontinued operations in 2007, 2006 and 2005, respectively.
Total income tax (expense) benefit from continuing operations was different than that computed by applying U.S. Federal income tax
rates to income from continuing operations before income taxes for the years ended December 31, 2007, 2006 and 2005. The reasons for
the differences are presented below (in thousands):
  
Computed “expected” Federal tax (expense) benefit from continuing operations $(5,184) $ (17,632) $ 19,090
State income tax (expense) benefit, net of Federal income tax expense (1,235) (2,251) 167
Merger transaction costs (5,543) — —
Change in FIN 48 reserve 2,725 — —
Dividends and loss on redemption on preferred stock — — (4,291)
Dividends received deduction 15 605 153
Rate change — — 1,585
Change in valuation allowance (Federal and state) — — 66,011
Other 129 (580) 381
Total income tax (expense) benefit from continuing operations $(9,093) $(19,858) $ 83,096
The Company had a valuation allowance for deferred tax assets of $66.0 million as of December 31, 2004. These deferred tax assets
primarily related to the Company’s NOL carryforwards. In assessing the realizability of the deferred tax assets, management considered
whether it was more likely than not that some portion or all of the deferred tax assets would not be realized. The ultimate realization of the
deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become
deductible. Management considered the scheduled reversal of deferred tax liabilities, future taxable income and tax planning strategies in
making this assessment, as well as all positive and negative evidence that would affect the recoverability of deferred tax assets. As a result
of the offering (as described in Note 3), the Company had reduced its aggregate long term debt with a corresponding significant reduction
in its annual interest expense. When considered together with the Company’s history of producing positive operating results and other
evidence affecting recoverability of deferred tax assets, the Company expects that future taxable income would more likely than not be
sufficient to recover deferred tax assets. Therefore, the valuation allowance was reversed in 2005, concurrent with the offering.
97