Earthlink 2008 Annual Report Download - page 291

HELIO, INC. and HELIO LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
13. Income Taxes
HELIO LLC is not a taxable entity for federal income tax purposes. The allocable share of HELIO LLC’s taxable income or loss is
included in its members federal and state income tax returns based upon their respective ownership interests. The Company’
s information below
is prepared based on HELIO, Inc.’s effective ownership interest in HELIO LLC and to the extent that certain states impose income taxes upon
non-corporate legal entities these taxes are also reflected below.
The Company records a provision (benefit) for federal and state income taxes and generally recognizes deferred tax assets and liabilities
based on differences between the financial reporting and tax bases of assets and liabilities, applying enacted statutory rates. Pursuant to the
provisions of Statement of Financial Accounting Standards No. 109, Accounting For Income Taxes (“SFAS 109”), the Company provides
valuation allowances for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Pursuant to the HELIO LLC Membership Agreement (the “Membership Agreement”), losses generated by HELIO LLC are generally
allocated in the following order: (i) to holders of HELIO LLC Convertible Common Membership units up to member(s) capital account balance
(s), without creating a deficit in the member(s) capital account; and, (ii) to holders of HELIO LLC convertible preferred membership units up to
member(s) capital account balance(s) and in proportion to their respective interest, without creating a deficit in the members’ capital account.
Under the Membership Agreement, profits generated by HELIO LLC are generally allocated first to the holders of Preferred Membership Units
to the extent of prior losses, and second to the holders of Convertible Common Membership units to the extent of prior losses. As a result of the
Membership Agreement, HELIO, Inc. was allocated losses from HELIO LLC up to its investment in HELIO LLC. For the periods ended
December 31, 2005, 2006 and 2007, the Company was allocated approximately $0.0 million, $9.1 million and $0.4 million of the income tax
losses generated by HELIO LLC, respectively. The Company has not recorded any portion of the deferred taxes attributable to HELIO LLC as it
is not presently expected that any portion of such amounts will be allocated to the Company pursuant to the terms of the Membership
Agreement.
The significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
A reconciliation of the income tax provision (benefit) computed by applying the U.S. federal statutory rate of 35% to the loss before
income taxes and actual income tax expense (benefit) for the years ending December 31, 2006 and 2007 was as follows:
30
December 31,
2006
December 31,
2007
Deferred income tax assets:
Tangible and intangible assets
18
17
Net operating loss carryforwards
3,802
3,963
Less: valuation allowance
(3,820
)
(3,980
)
Total deferred income tax assets
$
—
$
—
December 31,
2006
December 31,
2007
Federal income tax rate
(35.0
)%
(35.0
)%
State taxes, net of federal benefit
(5.7
)%
(5.7
)%
Effect of partner allocations and other permanent items
38.7
%
40.6
%
Change in valuation allowance
2.0
%
0.1
%
Total
—
%
—
%