Hertz 2011 Annual Report Download - page 108

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Management does not expect that the effect of inflation on our overall operating costs will be greater for
us than for our competitors.
Income Taxes
In January 2006, we implemented a LKE Program for our U.S. car rental business. Pursuant to the
program, we dispose of vehicles and acquire replacement vehicles in a form intended to allow such
dispositions and replacements to qualify as tax-deferred ‘‘like-kind exchanges’’ pursuant to section 1031
of the Internal Revenue Code. The program has resulted in deferral of federal and state income taxes for
fiscal years 2006, 2007, 2008 and 2009 and part of 2010. A LKE Program for HERC has also been in
place for several years. The program allows tax deferral if a qualified replacement asset is acquired
within a specific time period after asset disposal. Accordingly, if a qualified replacement asset is not
purchased within this limited time period, taxable gain is recognized. Over the last few years, for strategic
purposes, such as cash management and fleet reduction, we have recognized some taxable gains in the
program. In 2009, the bankruptcy filing of an original equipment manufacturer, or ‘‘OEM,’’ also resulted
in minimal gain recognition. We had sufficient net operating losses to fully offset the taxable gains
recognized. We cannot offer assurance that the expected tax deferral will continue or that the relevant
law concerning the programs will remain in its current form. An extended reduction in our car rental fleet
could result in reduced deferrals in the future, which in turn could require us to make material cash
payments for federal and state income tax liabilities. Our inability to obtain replacement financing as our
fleet financing facilities mature would likely result in an extended reduction in the fleet. In the event of an
extended fleet reduction, we believe the likelihood of making material cash tax payments in the near
future is low because of our significant net operating losses. In August 2010, we elected to temporarily
suspend the U.S. car rental LKE Program allowing cash proceeds from sales of vehicles to be utilized for
various business purposes, including paying down existing debt obligations, future growth initiatives
and for general operating purposes. Purchases of vehicles will continue to be funded with a combination
of asset-backed securitizations, asset-based revolving credit facilities and corporate liquidity. Enacted
legislation, effective September 2010 through December 2011, will result in the LKE suspension having a
neutral effect on our taxes. The new law allows 100% bonus depreciation for qualified asset acquisitions
during the period the law is effective. Recognized tax gains on vehicle dispositions resulting from the
LKE suspension were mainly offset by 100% tax depreciation on newly acquired vehicles. Our federal net
operating loss position for U.S. tax purposes will not be adversely effected when the LKE program is
re-instated. The timing of reinstating the LKE Program is under continued analysis.
For a discussion of risks related to our reliance on asset-backed financing to purchase cars, see
‘‘Item 1A—Risk Factors’’ included in this Annual Report.
On January 1, 2009, Bank of America acquired Merrill Lynch & Co., Inc., the parent company of BAMLCP.
Accordingly, Bank of America is now an indirect beneficial owner of our common stock held by BAMLCP
and certain of its affiliates. For U.S. income tax purposes the transaction, when combined with other
unrelated transactions during the previous 36 months, resulted in a change in control as that term is
defined in Section 382 of the Internal Revenue Code. Consequently, utilization of all pre-2009 U.S. net
operating losses is subject to an annual limitation. The limitation is not expected to result in a loss of net
operating losses or have a material adverse impact on taxes.
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