United Airlines 2011 Annual Report Download - page 113

Table of Contents
would be able to use those losses and tax benefits on a separate return basis. Tax liabilities between group members are settled in cash when the losses and tax
benefits of one group have been fully exhausted and the Company begins making tax payments to tax authorities. Additionally, settlement in cash is required if
a member leaves the consolidated tax group. Were a member to leave the group, its separate tax losses and benefits along with the corresponding receivable or
liability to other group members may vary significantly from tax losses and benefits ascribed to it while a member of the group.
In addition to the deferred tax assets listed in the table above, UAL has an $880 million unrecorded tax benefit at December 31, 2011, primarily attributable to
the difference between the amount of the financial statement expense and the allowable tax deduction for UAL common stock issued to certain unsecured
creditors and employees pursuant to UAL Corporation’s Chapter 11 bankruptcy protection. This unrecorded tax benefit is accounted for by analogy to
Accounting Standards Codification Topic 718 which requires recognition of the tax benefit to be deferred until it is realized as a reduction of taxes payable.
Although not recognized for financial reporting purposes, this unrecognized tax benefit is available to reduce future income and is incorporated into the
disclosed amounts of our federal and state NOL carryforwards, which are discussed below.
The federal and state NOL carryforwards relate to prior years’ NOLs, which may be used to reduce tax liabilities in future years. These tax benefits are
mostly attributable to federal pre-tax NOL carryforwards of $10.0 billion for UAL (including the NOLs discussed in the preceding paragraph). If not utilized
these federal pre-tax NOLs will expire as follows (in billions): $1.2 in 2022, $1.6 in 2023, $2.4 in 2024, $2.0 in 2025 and $2.8 after 2025. In addition, the
majority of state tax benefits of the net operating losses of $205 million for UAL expires over a five to 20-year period.
Both United and Continental experienced an “ownership change” as defined under Section 382 of the Internal Revenue Code of 1986, as amended, as a result
of the Merger. However, the Company currently expects that these ownership changes will not significantly limit its ability to use its NOL and alternative
minimum tax (“AMT”) credit carryforwards in the carryforward period because the size of the limitation exceeds our NOL and AMT credit carryforwards.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including the reversals of deferred tax liabilities)
during the periods in which those deferred tax assets will become deductible. The Company’s management assesses available positive and negative evidence
regarding the realizability of its deferred tax assets, and records a valuation allowance when it is more likely than not that all or a portion of the deferred tax
assets will not be realized. To form a conclusion, management considers positive evidence in the form of reversing temporary differences, projections of future
taxable income and tax planning strategies, and negative evidence such as recent history of losses. Prior to 2011, the Company was in a cumulative three-year
loss position, which we weighted as a significant source of negative evidence indicating the need for a valuation allowance on our net deferred tax assets.
Although the Company was no longer in a three-year cumulative loss position at the end of 2011, management determined that the size and frequency of
financial losses in recent years and the uncertainty associated with projecting future taxable income supported the conclusion that the valuation allowance was
still needed on net deferred assets. If UAL achieves significant profitability in 2012, then management will evaluate whether its recent history of profitability
constitutes sufficient positive evidence to support a reversal of a portion, or all, of the remaining valuation allowance.
The December 31, 2011 valuation allowances of $4.1 billion, $2.6 billion and $1.4 billion for UAL, United and Continental, respectively, if reversed in
future years will reduce income tax expense. The current valuation allowance reflects decreases from December 31, 2010 of $34 million and $10 million for
UAL and United, respectively, and an increase from December 31, 2010 of $50 million for Continental.
UAL’s unrecognized tax benefits related to uncertain tax positions were $24 million, $32 million and $16 million at December 31, 2011, 2010 and 2009,
respectively. Included in the ending balance at 2011 is $22 million that would affect UAL’s effective tax rate if recognized. The Company does not expect
significant increases or decreases in their unrecognized tax benefits within the next twelve months.
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