Earthlink 2011 Annual Report Download - page 120

Table of Contents
EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company maintains a valuation allowance of $39.9 million against certain deferred tax assets. Of this amount, $31.6 million relates to
net operating losses generated by the tax benefits of stock-
based compensation. The valuation allowance will be removed upon utilization of
these net operating losses by the Company as an adjustment to additional paid-in-
capital. A valuation allowance of $7.9 million relates to net
operating losses in certain jurisdictions where the Company believes they are not more-likely-than-
not to be realized in future periods. In
addition, a valuation allowance of $0.4 million was established in 2010 relating to stock compensation deferred tax assets.
Deferred tax assets and NOLs.
As a result of the acquisition of ITC^DeltaCom, EarthLink increased its net deferred tax assets by
$87.6 million. Included in this amount is $127.7 million of deferred tax assets relating to federal and state net operating losses. These amounts
also include a valuation allowance of $6.7 million for certain jurisdictions. As a result of the acquisition of One Communications, EarthLink
recorded net deferred tax assets of $3.6 million. Included in these amounts are $16.8 million of deferred tax assets relating to federal and state
net operating losses. As a result of the acquisition of STS Telecom and other acquisitions, EarthLink recorded net deferred tax liabilities of
$6.6 million and $0.6 million, respectively. All amounts were recorded under acquisition accounting.
As of December 31, 2010 and 2011, the Company had NOLs for federal income tax purposes totaling approximately $515.9 million and
$494.0 million, respectively, which begin to expire in 2019. Of these federal NOLs approximately $399.5 million were limited under Internal
Revenue Code Section 382 in 2010 and $406.3 million were limited in 2011. As of December 31, 2010 and 2011, the Company had NOLs for
state income tax purposes totaling approximately $776.6 million and $796.5 million, respectively, which started to expire in 2011. The increase
in the amount of net operating losses for 2011 is due to both adjustments of net operating losses from the ITC^DeltaCom acquisition that were
recorded under acquisition accounting, along with the inclusion of net operating losses from the One Communications acquisition. Under the
Tax Reform Act of 1986, the Company's ability to use its federal and state NOLs and federal and state tax credit carry forwards to reduce future
taxable income and future taxes, respectively, is subject to restrictions attributable to equity transactions that have resulted in a change of
ownership as defined in Internal Revenue Code Section 382. As a result, the NOL amounts as of December 31, 2011 reflect the restriction on the
Company's ability to use its acquired federal and state NOLs; however, the Company continues to evaluate potential changes to the Section 382
limitations associated with acquired federal and state NOLs. The utilization of these NOLs could be further restricted in future periods which
could result in significant amounts of these NOLs expiring prior to benefiting the Company.
Future transactions and the timing of such transactions could cause an ownership change under Section 382 of the Internal Revenue Code.
Such transactions may include our share repurchase program, additional issuances of common stock by us, and acquisitions or sales of shares by
certain holders of our shares, including persons who have held, currently hold, or may accumulate in the future five percent or more of our
outstanding stock. Many of these transactions are beyond our control.
As of December 31, 2010 and 2011, the Company had alternative minimum tax credits of approximately $13.3 million and $14.8 million,
respectively. These credits do not have an expiration date.
Uncertain tax positions.
The Company has identified its federal tax return and its state tax returns in California, Florida, Georgia, Illinois,
New York and Pennsylvania as material tax jurisdictions, for purposes of calculating its uncertain tax positions. Periods extending back to 1994
are still subject to examination for all material jurisdictions. The Company believes that its income tax filing positions and deductions through
the year ended December 31, 2011 will not result in a material adverse effect on the Company's financial condition, results of operations or cash
flow. The Company's policy for recording interest and penalties
113