United Airlines 2012 Annual Report Download - page 107

Table of Contents
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 $883 million unrecorded tax benefit at December 31, 2012, 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 $10.3 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): $1.5 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 $196 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 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. Although the Company was no longer in a three-year cumulative loss position at the
end of 2012, management determined that the loss in 2012, the overall modest level of cumulative pretax income in the three years ended December 31, 2012 of
0.4% of total revenues in that period and the uncertainty associated with projecting future taxable income supported the conclusion that the valuation allowance
was still necessary on net deferred assets. As a result of the loss sustained in 2012 and the need to complete final integration activities that produce synergies
and overcome cost increases from new labor agreements, management’s position is that sufficient positive evidence to support a reversal of the remaining
valuation allowance does not exist and has retained a full valuation allowance on its deferred tax assets. Management will continue to evaluate future financial
performance, as well as the impacts of special charges on such performance, to determine whether such performance provides sufficient evidence to support
reversal of the valuation allowance.
The December 31, 2012 valuation allowances of $4.6 billion, $3.1 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 increases from December 31, 2011 of $466 million, $454 million and
$1 million for UAL, United and Continental, respectively, including amounts charged directly to other comprehensive income.
UAL’s unrecognized tax benefits related to uncertain tax positions were $19 million, $24 million and $32 million at 2012, 2011 and 2010, respectively.
Included in the ending balance at 2012 is $17 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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