Earthlink 2013 Annual Report Download - page 104

Table of Contents EARTHLINK HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During the three months ended December 31, 2013, the Company entered into a cumulative loss position. For purposes of assessing the
realization of the deferred tax assets, this cumulative loss position is considered significant negative evidence. This cumulative taxable loss
position, along with the evaluation of all sources of taxable income available to realize the deferred tax asset, has caused management to
conclude that the Company will not be able to fully realize its deferred tax assets in the future. During the three months ended December 31,
2013, the Company recorded a $266.3 million , or $2.61 per share, non-
cash charge to record a valuation allowance against its deferred tax
assets, which is included in the income tax provision in the Consolidated Statement of Comprehensive Loss. As of December 31, 2013, the
Company has recorded a valuation allowance of $305.4 million
against its net deferred tax asset, exclusive of its deferred tax liabilities with
indefinite useful lives.
The valuation of deferred tax assets requires judgment based on the weight of all available evidence. During the fourth quarter of 2013,
management reassessed its projections of future taxable income. This change in projections, coupled with its cumulative loss position caused
management to modify its assessment of the realizability of its deferred tax asset and conclude that a full valuation allowance, exclusive of its
deferred tax liabilities with indefinite useful lives, was necessary.
Management will reassess the realization of the deferred tax assets each reporting period. To the extent that the financial results of the
Company improve and the deferred tax asset becomes realizable, the Company will reduce the valuation allowance through earnings.
Deferred tax assets and NOLs.
As of December 31, 2012 and 2013, the Company had gross NOLs for federal income tax purposes
totaling approximately $493.6 million and $620.8 million
, respectively, which begin to expire in 2020. Of these federal NOLs approximately
$350.5 million
were limited under Internal Revenue Code Section 382 in 2012 and 2013. As of December 31, 2012 and 2013, the Company had
net NOLs for state income tax purposes totaling approximately $23.4 million and $32.6 million
, respectively, which started to expire in 2013.
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, 2013 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, 2012 and 2013, the Company had alternative minimum tax credits of approximately $15.0 million and
$15.0
million
. These credits do not have an expiration date. As of December 31, 2013, the Company had capital loss carryforwards of approximately
$1.9 million which will expire as of December 31, 2018 if unused.
Uncertain tax positions.
The Company has identified its federal tax return and its state tax returns in Alabama, Georgia, California,
New York, Massachusetts
,
Pennsylvania, and Texas as material tax jurisdictions for purposes of calculating its uncertain tax positions. Periods
extending back to 1997 are still subject to examination for all material jurisdictions. The Company believes that its income tax filing positions
and deductions through the period ended December 31, 2013 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 associated with uncertain tax positions is to record
such items as a component of income tax expense. As of December 31, 2012 and 2013 , $0.7 million and $0.5 million
, respectively, of interest
and $0.8 million and $0.8 million of penalties, respectively, had been accrued.
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