Enom 2010 Annual Report Download - page 128

Table of Contents
Demand Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(In thousands, except per share amounts)
10. Income Taxes (Continued)
The Company reduces the deferred tax asset resulting from future tax benefits by a valuation allowance, if based on the weight of the available evidence,
it is more likely than not that some portion or all of these deferred taxes will not be realized. The Company has determined it is more likely than not that it
will not realize the benefit of all its deferred tax assets and accordingly a valuation allowance of $11,436 and $14,421 against its deferred taxes was required
at December 31, 2009 and 2010, respectively. The change in the valuation allowance for years ended December 31, 2008, 2009 and 2010 was an increase of
$2,693, $8,743 and $2,985 respectively. The valuation allowance is principally required as a result of the timing of the reversal of deferred tax liabilities
associated with tax deductible goodwill which is not certain and thus not available to assure the realization of deferred tax assets. Similarly, state deferred tax
liabilities in excess of state deferred tax assets are not available to ensure the realization of federal deferred tax assets. After consideration of these limitations
associated with deferred tax liabilities, the Company has deferred tax assets in excess of deferred tax liabilities at December 31, 2010. As the Company has no
history of generating book income, the ultimate future realization of these excess deferred tax assets is not more likely than not and thus subject to a valuation
allowance.
Accounting standards related to stock-based compensation exclude tax attributes related to the exercise of employee stock options from being realized in
the financial statements until they result in a decrease to taxes payable. Therefore, the Company has not included unrealized stock option tax attributes of
$263 from our deferred tax assets at December 31, 2010. The benefit of these deferred tax assets will be recorded to additional paid-in capital when they
reduce taxes payable.
The Company is subject to the accounting guidance for uncertain income tax positions. The Company believes that its income tax positions and
deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company's financial
condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to the accounting
guidance.
The Company's policy for recording interest and penalties associated with audits and uncertain tax positions is to record such items as a component of
income tax expense. There were no amounts accrued for penalties and interest related to uncertain tax positions as of or during the period for the tax years
2008, 2009 and 2010. No uncertain income tax positions were recorded during 2010, and the Company does not expect its uncertain tax position to change
during the next twelve months. The Company files a U.S. federal and many state tax returns. The tax years 2007 to 2009 remain subject to examination by the
IRS and all tax years since the Company's incorporation are subject to examination by various state authorities. The Company does not believe it is reasonably
possible that its unrecognized tax benefits would significantly change over the next twelve months.
11. Related Party Transactions
The Company's Chief Executive Officer was the Chairman of the board of iCrossing, Inc. ("iCrossing"), which provided approximately $10 and $15 in
marketing services to the Company during the years ended December 31, 2008 and 2009, respectively. No services were provided during the year ended
December 31, 2010. iCrossing was sold in June 2010 and as a result the composition of its board of directors and shareholders changed such that it was no
longer a related party of the Company from that date.
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