Time Warner Cable 2010 Annual Report Download - page 38

valuations, and any successful challenge by the IRS or state or local tax authorities could materially adversely affect
TWC’s tax profile, significantly increase TWC’s future cash tax payments and significantly reduce TWC’s future
earnings and cash flow.
The acquisition by TW NY Cable and Comcast of assets comprising in aggregate substantially all of the cable assets
of Adelphia (the “Adelphia Acquisition”) was designed to be a fully taxable asset sale, the redemption by TWC of
Comcast’s interests in TWC (the “TWC Redemption”) was designed to qualify as a tax-free split-off under section 355 of
the Internal Revenue Code of 1986, as amended (the “Tax Code”), the redemption by TWE of Comcast’s interests in TWE
(the “TWE Redemption” and collectively with the TWC Redemption, the “Redemptions”) was designed as a redemption
of Comcast’s partnership interest in TWE, and the exchange between TW NY Cable and Comcast immediately after the
Adelphia Acquisition (the “Exchange”) was designed as an exchange of designated cable systems. There can be no
assurance, however, that the Internal Revenue Service (the “IRS”) or state or local tax authorities (collectively with the
IRS, the “Tax Authorities”) will not challenge one or more of such characterizations or TWC’s related valuations. Such a
successful challenge by the Tax Authorities could materially adversely affect TWC’s tax profile (including TWC’s ability
to recognize the intended tax benefits from the Adelphia/Comcast transactions), significantly increase TWC’s future cash
tax payments and significantly reduce TWC’s future earnings and cash flow. The tax consequences of the Adelphia
Acquisition, the Redemptions and the Exchange are complex and, in many cases, subject to significant uncertainties,
including, but not limited to, uncertainties regarding the application of federal, state and local income tax laws to various
transactions and events contemplated therein and regarding matters relating to valuation.
If the Separation Transactions (as defined below), including the Distribution (as defined below), do not qualify as
tax-free, either as a result of actions taken or not taken by TWC or as a result of the failure of certain representations by
TWC to be true, TWC has agreed to indemnify Time Warner for its taxes resulting from such disqualification, which
would be significant.
As part of TWC’s separation from Time Warner in March 2009 (the “Separation”), Time Warner received a private
letter ruling from the IRS and Time Warner and TWC received opinions of tax counsel confirming that the transactions
undertaken in connection with the Separation, including the transfer by a subsidiary of Time Warner of its 12.43% non-
voting common stock interest in TW NY to TWC in exchange for 80 million newly issued shares of TWC’s Class A
common stock, TWC’s payment of a special cash dividend to holders TWC’s outstanding Class A and Class B common
stock, the conversion of each share of TWC’s outstanding Class A and Class B common stock into one share of TWC
common stock, and the pro-rata dividend of all shares of TWC common stock held by Time Warner to holders of record of
Time Warner’s common stock (the “Distribution” and, together with all of the transactions, the “Separation
Transactions”), should generally qualify as tax-free to Time Warner and its stockholders for U.S. federal income tax
purposes. The ruling and opinions rely on certain facts, assumptions, representations and undertakings from Time Warner
and TWC regarding the past and future conduct of the companies’ businesses and other matters. If any of these facts,
assumptions, representations or undertakings are incorrect or not otherwise satisfied, Time Warner and its stockholders
may not be able to rely on the ruling or the opinions and could be subject to significant tax liabilities. Notwithstanding the
private letter ruling and opinions, the IRS could determine on audit that the Separation Transactions should be treated as
taxable transactions if it determines that any of these facts, assumptions, representations or undertakings are not correct or
have been violated, or for other reasons, including as a result of significant changes in the stock ownership of Time Warner
or TWC after the Distribution.
Under the tax sharing agreement among Time Warner and TWC, TWC generally would be required to indemnify
Time Warner against its taxes resulting from the failure of any of the Separation Transactions to qualify as tax-free as a
result of (i) certain actions or failures to act by TWC or (ii) the failure of certain representations made by TWC to be true.
In addition, even if TWC bears no contractual responsibility for taxes related to a failure of the Separation Transactions to
qualify for their intended tax treatment, Treasury regulation section 1.1502-6 imposes on TWC several liability for all
Time Warner federal income tax obligations relating to the period during which TWC was a member of the Time Warner
federal consolidated tax group, including the date of the Separation Transactions. Similar provisions may apply under
foreign, state or local law. Absent TWC causing the Separation Transactions to not qualify as tax-free, Time Warner has
indemnified TWC against such several liability arising from a failure of the Separation Transactions to qualify for their
intended tax treatment.
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